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Always look on the bright side 6 Sep 2011

I've been chatting to angel investors and VCs for a story over the past fortnight, and many seem quite bullish about the start-up scene - and PE investing generally. Why? After all, there's talk of a great depression, the euro is heading for the knacker's yard and billions are wiped off shares every other day. Why would PE - and early-stage in particular - look attractive?

Well, one reason is the economic downturn itself. Alex van Someren, serial entrepreneur-turned-VC at Amadeus, reckons that the economy can't get much worse - and if you're trying to grow a business, it's quite good when the only way is up.

But I also liked two other comments. Alex White at BDO pointed out: "Fear [of uncertainty in the economy] is infectious and prevents people from taking decisions. But that's the opportunity for entrepreneurs. While others fret and prevaricate, the winners for the next decade will be those that take the plunge.” That's pretty upbeat - and although corporate balance sheets remain in pretty good order, the kind of economic upheaval we're in for is bound to disrupt markets. And if there's one thing PE firms love to see - especially from young companies - it's disruption of the status quo.

The other comment came from Anthony Clarke at the British Business Angels Association. He thinks more high net-worth individuals might be tempted in to angel right now. “The recession has made everyone more focused, more realistic, more sensible about valuations,” he says. “Early-stage and seed funding is still an attractive option – especially when property and the stock markets are actually quite risky.” But, of course, there's also an updraft from that sentiment into larger buy-out funds. When real returns on gilts and even equities are negative, and property and gold remain pricey, why not take a punt? Even the risk-averse institutional investors have nothing to lose.

That view is borne out by two other datapoints. First, many VC funds are adding development capital into the mix. They like early stage for its growth potential - but they need to bulk up their funds (and their fees) with bigger deals. So if you're looking for mid-market action, there are likely to be more players right now. And according to Prequin, LPs in the US are far more turned on by small and mid-market deals (49%) than any other PE opportunity. (The next closest was distressed businesses at 23%; LBOs scored a tiny 9% among institutional investors.)

Conclusion? Take a risk. Get involved with a business or an entrepreneur who's got some manic idea to make a difference. Sure, as FD or FC you need to be challenging recklessness in any business you're involved with - PE backers expect nothing less.

But there's a heady mix at work in mid-market PE right now. Investors are pumping in the capital. There's plenty of dry powder still in funds. Many market incumbents are suffering. Technology is still revolutionising almost every sector. And with the economy this bad, if you survive the next 18 months, at the very least you'll benefit from rivals disappearing. And at best, things will pick up - and a rising tide lifts all boats.