After two years marked by COVID uncertainty, once again we are in turbulent times with economic conditions changing at a fast rate.  Inflation is high and the cost of wages, goods and interest rates are rising.  Compounding this, NZ businesses are finding it difficult to attract and retain staff. 

Since June 2022 we have been officially in a bear market and our listed portfolio is looking a little sad.  What does a bear market mean for our angel portfolio?  Startups are agile at their very core. This agility means that they can pivot and adapt quickly in changing circumstances but what kind of challenges are being thrown their way currently?  What can we do to protect our angel portfolio and should we continue to invest in new startups in this environment?

The economic climate of 2020 and 2021 saw strong valuation multiples in startups as capital competed for deals and money was cheap, but the current environment will challenge the feasibility of companies’ future revenues, which will lead to some repricing as seen in the public markets already. 

Current Challenges

Some challenges our companies are experiencing in the current environment include: clients going bankrupt, top tier US venture capital firms pulling back from investing in new companies, investors’ caution means capital raising at a premium valuation is much more difficult now (meaning greater dilution for founders and early investors) and finally with IPO valuations lower, listing may be deferred or if deferring is not feasible, a lower IPO valuation will mean a lower ‘exit’ valuation and therefore lower investment return for founders and earlier investors.

Warren Buffet,  American business magnate and one of the worlds most successful investors, said, “Widespread fear is your friend as an investor because it serves up bargain purchases.” It’s simple economics of supply and demand.  The upside of the current environment is that we are already seeing good value buying opportunities and many sectors are seeing valuation multiples halved (e.g., hardware and SaaS). Most of the “frothy” (hyped up) valuations have disappeared, allowing investors to buy into well performing companies at prices that could only be dreamed of 12 months ago. Furthermore, with the amount of dry powder (available capital to invest) that VCs in New Zealand have, companies that are achieving their milestones should have nothing to worry about but in some cases may want to either hold off raising (to avoid excessive dilution) or adjust their valuation expectations.   

Supporting your existing angel portfolio

• If the company is meeting its milestones, you may get the opportunity to invest further at a very appealing valuation, this will help reduce your dilution as well as ensure the company’s cash runway can support its growth plans.
• Connections for prospective partners, investors, staff, clients are more important than ever.
• Check in on how you can support the founder – growing a startup is stressful at the best of times.
• Consider the ongoing feasibility of the company and if you are a significant investor have open (productive) discussions with the founder as to next steps. If you are a minor investor, speak to your investment syndicate as to how they are supporting the next steps of the company.

Investment Considerations

For the angel investor with dry powder, some important aspects that are even more relevant in times of uncertainty are:

• Ensure you do appropriate due diligence – specifically consider the current macro trends – particularly important with:
  • Capital strategy – where will the company get their next round of funding and what do they need to achieve to get there?
  • Market validation – is the company providing a vitamin pill or a pain killer? Companies not solving genuine and painful problems will fail even faster. Companies solving painful problems will have customers even more motivated to use their product or service as they themselves are under pressure to do more with less.
• Think long term – an average bear market lasts 11 months whereas angel investing is a long term game; is this a company and a founder you want to support for the next 8-10 years?
• Diversify, diversify, diversify – give yourself a better risk adjusted return by backing more great founders
• Risks and challenges create opportunities – uncertainty creates opportunity and good founders will thrive in environments where mediocre ones fail. Recessions help clear the market of poor performers leaving more market share for the best companies.
• Great companies are grown in uncertain times – think AirBNB, Uber, Slack, Square and Glassdoor.

 EA Fund 4

The launch of Enterprise Angels fourth fund couldn’t come at a better time to capitalize on current market opportunities. Put your trust in proven fund managers, diversify your portfolio in this exciting asset class and be part of growing some of NZ’s most innovative companies. The fund is like previous Enterprise Angels funds in many ways, but the key differentiator is it is not a ‘side-car fund’, meaning it can access a broader range of opportunities, for example, deals that close too quickly to be considered by individual Enterprise Angels investors.  We have recently made our first close of EA Fund 4 having reached our initial target of $2m.  If you are interested in an investment parcel in EA Fund 4, click here to find out more.

Get in touch!

We welcome engagement from anyone interested or involved in the early stage investment market – Investors, Angel Members, Strategic or Corporate Partners, Founders, Incubators or Accelerators, Deal Referrers, Acquisition Partners etc.