Week 20: Prague, macro economy and financing strategy
Hey there! thank you for reading my newsletter! I had a good week full of new impressions.
We spend three days in Prague.
We spent Tuesday to Thursday in Prague with all FTEs of APX. We had not been together for this long for months due to the pandemic, and it was terrific. We connected again on other levels than the transactional moments we have together in on- and offline meetings, and we traveled, walked, ate, and drank together.
Macroeconomic environment
These times are weird. Our economies in Europe seem to be sliding into recession and this is happening around the world. With all systemic connections between markets and global delivery and value chains, this will most likely impact all of us on multiple levels. I read quite some articles and had conversations over the past few days on where this is going:
It would be great if I could tell you for sure, but unfortunately, neither I nor anyone else can. But there are some thoughts I can share:
I am an optimist. It is my profound conviction it is always a great time to start a company.
Getting capital to turn your idea into reality is always a challenge.
With any financing round, you add more people to the table making decisions. Make sure you let the right ones make the decisions with you.
You can gain freedom and independence by having an actual business. The more you can show that this fit between your idea and the market exists, the easier it is to raise capital to grow (I do not think this will ever change)
Valuations will most likely become “more connected” to easier to achieve new levels of reality (actual value creation). This will most likely lead to lower valuations.
For later-stage rounds, it might mean that companies can not stay private as long as they are doing today and will run into issues with their valuation and the availability of capital.
Some investors might focus on their portfolio companies to support them for longer and with more capital.
Some LPs (Limited Partners, investors of investors) might have issues with their capital allocation rules. Their commitment to their investors on how they will invest their capital between different asset classes. With the stock markets going down, their capital allocation “automatically” has moved more to venture capital for mathematical reasons. In the long run, this might lead to fewer funds available to venture funds. This will happen if the stock prices are down for longer and will take months to manifest.
I am not sure how much the earlier stages will be affected as many funds were raised within the last months and want to be invested. I do not expect fund managers to return the funds to the LPs and do something different with their time.
So what does this mean for founders and me?
Going several levels “and then” deep with planning for potential scenarios is always helpful. As a founder, I would do this regularly anyway.
As you see by reading this: I also have not figured it out. I am deep in the process of “and then” right now.
Some universally applicable concepts always help:
If you do need investment “only” to take your company to the next level and not to keep it running, this gives you a lot of freedom to make decisions and maneuver in these unclear times
You are unique (as an individual and as a company). You can build solutions to the opportunities and problems you face and make and execute plans. Others can be an inspiration or a warning, but you own what you do in your environment.
In German, we say: “Nix is fix.” (nothing is ever eternal) There will always be change, and you can plan and do what you want.
And last but not least, three sayings from Cologne, where I grew up:
Et es wie et es
Et kütt wie et kütt
Et hätt noch immer jot jejange
The others also make a lot of sense. Find a literal translation here.
Financing strategy
Over the years, I have participated in several hundred financing rounds, mainly as an investor and sometimes as a founder raising capital. Quite often, there are hectic times before the round is finally closed. And although I am a huge fan of “a sense of urgency” and momentum, I think some of the hectic is unnecessary and has negative potential for the relationships of the stakeholders involved.
Not all financing rounds are equal, but they all have specific patterns and phases.
Creation of structure and documents
Understanding
Negotiation
Alignment
Documentation/ creation
This process usually happens several times and for and with all involved stakeholders. Some thoughts on how to close your financing round easier:
“Begin with the end in mind”: create a draft timeline for yourself and share it with all stakeholders as early as possible. Agree on a general timeline.
Have a negotiation strategy
Get the significant roadblocks out of the way first.
Maximize learning during the negotiations and due diligence.
Create momentum with committed investors and a realistic closing date. (share this as early as possible and allow stakeholders to comment on it)
I might write more on this topic in the future. :-)
What I read and watched:
I have been using centered.app for the past few weeks. I like it a lot, and I am using it right now.
Terrible maps on Twitter
I am fascinated by Adam Jeppesen’s tanks I saw in London.
What is the lifetime risk of depression? by Saloni Dattani on Our World in Data
I love ravens. And I found a great picture of a raven by Tim Flach while I was at Photo London.
Thank you for reading this far, and I hope you found something meaningful!
Have a great week!
Joerg
It is always a good time for investing in value added ventures. A period of crisis is a kind of stricter selection for the best ideas. This can be applied to existing companies too.