This is what we’re talking about.

(via netimperative.com:)

The collapse of major businesses and the failure of governments to stem the tide of bad news around the economy has created an environment rich in opportunity for entrepreneurs, according to business leaders meeting held in London this week.

Speaking ahead of the event, keynote speaker Ed Wray, chairman of Betfair, said: “2009 is going to be a turbulent year but it will provide an opportunity for entrepreneurs to come forward and help take the UK out of recession and into the next period of economic growth.

“The US will be the first out of recession because it has an economy built around mass entrepreneurship – the UK now needs a large slice of that same kind of creativity, innovation and entrepreneurial flair.

“Every great business must be able to survive a downturn and successful businesses forged in the current conditions will be fundamentally far stronger by nature. The pressure cooker conditions of the current economic climate will undoubtedly create some new household names of tomorrow.”

In a nutshell, when we are talking to investors, our number one message is that these tough economic times are exactly the right times to invest in the next generation of businesses and business models. That in times of falling multiples, de-leveraging, uncertain cash-flows and/or discount rates in mature companies and markets, building new businesses is a fundamentally uncorrelated risk. Furthermore, the risks and challenges for new companies and new approaches is almost always on balance lower than it is when the economy is booming: first and foremost, talented people are more available – financially and psychologically – and since this is the most important ingredient for 99% of young companies, this is incredibly important. Secondly, inertia is much easier to overcome, you don’t have the ‘if it’s not broke, don’t fix it’ apathy that can be very difficult (and extremely frustrating) to overcome; if you have a better mouse-trap, people will actually notice and act. Finally, the prevailing sentiment of caution and skepticism means that – and of course this is a generalization but a valid one I believe – everyone, including entrepreneurs, investors, customers, employees – tends to be more focused and realistic. This means that fewer flimsy or “me-too” start-ups are floating around and innovation and disruption are considered in a more sober and analytical context. Less froth.

So I can hear you saying, Sean, c’mon…stop talking your book – really now, start-ups? (private) growth-stage companies? No risk? No way! Some – many? – of these businesses won’t end up working, even if they have clever ideas and people. You can lose most or all of your investment.

Well, of course you can and of course there is risk. There is always risk. I’m just not convinced that it is bigger or harder to navigate or understand than some of the alternatives. Large cap public stocks for instance…had you bought say shares in RBS, just two years ago you would have lost 96% of your money.* Barclays – 86%. HBOS – 94%. Citigroup – 94%. Not to mention the 100%-ers. Blue chips. Yes well, the poker analogy does seem to hold! (* all are approximate numbers, not including dividends, etc.) Equally, not even the most bullish of analyst or executive at any of these firms would have suggested that there was the remotest possibility of a 10x, or even 5x return over the next few years at the prices then prevailing…and understanding the dynamics of what will drive the returns is enormously (exceedingly?) complex. Of course to be fair, you could have changed your mind and sold your shares in any of these companies on any day which is something you are unlikely to be able to do in a small private company. So clearly you can’t have all your eggs in this (illiquid) basket but on the plus side, the illiquidity focuses the mind wonderfully and helps avoid getting caught up in market “noise”.

So how does one mitigate the risks in new, entrepreneurial ventures? Well there are a number of approaches that can work and like anything it’s generally a combination of experience, analysis and hard work. Not very enlightening I know. Our particular approach puts a lot of focus on using our domain knowledge and focusing on one – albeit vast – component of the economy: financial services and markets. Also, we have developed a series of investment themes, built on a number of what we believe to be fundamental medium to long term secular trends that will drive the growth and shape of the industry and the economy in the decade to come. Indeed, these trends and themes are the basis for much of the material here on my blog since I started publishing three years ago. We then look for ideas and companies within these themes that are instrinsically aligned with these trends. Where relevant, using our knowledge of the structure and business models of the mainstream participants, we also look for ideas, companies and technologies that have the potential to fundamentally disrupt an existing market or business model by providing the same product or service in a vastly cheaper and/or improved way. Easy.

Finally the event referred to in the opening quotes is a great new (to me) website / community – entrepreneurcountry.net – developed by Julie Meyer at Ariadne Capital; and for any prospective / budding entrepreneurs out there, here is a great 10 minute video with a few tips on raising capital from Julie herself:

Related articles by Zemanta

• @ Future of Web Apps: Julie Meyer on the renaissance of entrepreneurship
• How To Get Started As A Global Entrepreneur
• Startups remain resilient despite recession
• RBS suffers biggest loss in UK history
• Going long creativity.

Tweet This Post

Permalink||Comments|Filed under 'Business, Financial Services, Risk Management, Sixth Paradigm'