The price people will pay 21 Apr 2016
In the 1st century BC, Publilius Syrus wrote: “Something is only worth what someone is willing to pay for it.” (Among other quotes apocryphally ascribed to him are “better late than never” and “a rolling stone gathers no moss.” Smart guy.) That’s a lesson on value that springs quickly to mind when I look at the current market for growing businesses.
What prompted the thought was the news that precisely no US tech companies had gone to IPO in the first quarter of this year. US tech is a synonym neither for growth companies generally nor businesses everywhere in the world, of course. But I’ve also seen commentaries that suggest the knock-on effect of a more general caution in public markets is that private equity backers are pumping less into start-ups or early-stage rounds and keeping their dry powder for follow-on funding in existing portfolio investments. In other words, backing the horses they already have... or keeping their best bets afloat until their markets stabilise.
Then I read this blog post from elite investor Bill Gurley and got a bit worried. Apparently, it's caused a storm in VC and PE circles, and for good reason. He's arguing that manic frothiness at the top of the market could spell doom for many investors (and their "unicorn" businesses) - and that this is trickling down to hurt financing for earlier stage and growth businesses too.
No wonder crowdfunding for growth companies is booming – and is expected to overtake conventional VC activity this year in some markets (although my mother always warned me that when the amateurs get into a market and pros get out… watch yourself).
Your reaction as a finance exec at a growth or PE-backed business will depend on where you sit in the spectrum. CFOs at pure-play digital businesses without a decent shot at profitability might be looking nervous right now. If you have overheads, an existing backer and debt, even crowdfunding probably isn’t going to help. But even those of you helping build companies with solid returns already need to watch out for volatility, nervousness in the markets and pressure to crystallise value from your backers. While you might not run out of cash, your investors might.
In a sense, a slower market for cash (and the need to demonstrate tangible value) is good news for those running a finance function. In frothier times, even the hard-nosed general partner at a PE firm will be pushing for higher risk and more options within a business, in the hope that something sticks at transaction time. It's a land-grab! But when there are fewer, cannier buyers in the market? “Ambitious entrepreneurs want to take over the world – and they need that FD on their shoulder asking questions about making those goals achievable and sustainable,” as makeitcheaper.com founder Chris Cole told the recent Comptemporary FD event hosted by EquityFD.
As Gurley writes: "By the first quarter of 2016, the late-stage financing market had changed materially. Investors were becoming nervous and were no longer willing to underwrite new Unicorn-level financings at the drop of a hat. Moreover, once high-flying startups began to struggle on the fundraising trail. In Silicon Valley boardrooms, where 'growth at all costs' had been the mantra for many years, people began to imagine a world where the cost of capital could rise dramatically, and profits could come back in vogue."
No-one hopes the markets will remain dry and "the price people are prepared to pay" sinks to zero for ambitious businesses. But when a company like Yahoo! – once a rash acquirer of fellow dot-coms itself – is struggling to get off the auction block, you know that that self-same PE partner who was gunning for options in the boom years will be pressuring you to deliver the three FD essentials laid out by former Swiftkey CFO and chair Richard Gibson: clarity, control and planning.
“The importance of planning is most obvious with cash burn,” Gibson explained at the March event. “Knowing when things might get tricky means you can have those difficult conversations sooner rather than when the crunch point is upon you.”
“Debt is the slavery of the free,” wrote Publilius Syrus. He almost certainly wasn’t talking about leveraged finance. But unless the finance function is well respected and – importantly – listened to when the markets are in this febrile state, his quote might be horribly true for PE-backed companies.
And for glamorous, thrusting digital businesses much beloved in the boom years, we can offer one more line from the Latin sage: “Fortune is like glass - the brighter the glitter, the more easily broken.”