“This is a time to play offense”- Jack Welch, addressing the Partners of Clayton, Dubilier & Rice ( September 2008 )
A European war is raging affecting food and energy prices. That is driving up inflation which, in turn, is stoking up wage-demand, impacting profits and feeding further inflation. Central bankers have reached for their one lever, increasing interest rates which has led to tumbling valuations in the public and private markets.
Subsequently, some financial institutions like Silicon Valley Bank have been caught swimming naked in the outgoing tide, further feeding concerns that we are at the start of a big economic downturn.
So, why am I bullish about early-stage technology companies?
I have a number of logical and not-so-logical reasons.
Logical Reasons
1. Valuations
The most obvious logical reason is valuations.
As I write, the technology-heavy NASDAQ has dropped from a high of 16,057 in November 2021 to 12,123 – a 25% drop. In the more opaque world of private investments, falls in many reported valuations have been more extreme.
When security prices fall many people’s instinct is to sell – and definitely not to buy any more.
But if you were buying at £100, why are you not buying at £75 or less?
If there is an area where investing should be for the long-term, that area is early-stage tech. Most of these investments will not be liquid for 5-10 years. So, who cares about the fluctuations along the way? Who cares if the frenzy doesn’t return for 18-24 months; as long as your investment is at the right price when the time comes to exit.
Human instinct is to run from investments that have dropped in price – but that is exactly when bargains are available. Remember, you need to “be greedy when others are fearful and fearful when others are greedy” (Warren Buffett). That’s what Welch was alluding to in the opening quote of this article. Notice the timing; September 2008 – Lehman’s had just gone bust and most people were beginning to panic.
My strongest piece of advice is DON’T INVEST CAPITAL WHEN THERE IS AN OVERSUPPLY OF CAPITAL, as there has been for the last 10 years.
Capital, like many other things, has a price that is set by supply and demand – and supply was too high between 2009 and 2021.
Now, while the supply of capital has shrunk and may continue to do so, demand has probably edged up. So guess what has happened to the value of any capital you have to invest now.
2. Infrastructure / Structural Changes
My second logical reason that now is the right time to invest in early stage tech companies, is that, today, it is easier, cheaper and less risky to start, run and grow technology companies than it has ever been.
In the 20+ years since I took an interest many changes have made it much easier and cheaper for small young companies to:
- Raise capital (e.g. Crowdcube, etc.)
- Find and recruit staff (Indeed)
- Find and hire contractors (Upwork)
- Find and research customers (LinkedIn)
- Manage sales (Salesforce)
- Hire offices (WeWork and its competitors)
- Skip having offices altogether (Zoom)
- Use world-class software (Google, etc.)
- Advertise (Google, Facebook, LinkedIn)
- Access world-leading technical infrastructure (AWS)
- Develop software (India, Poland, Ukraine…)
- Find cheap standardised hardware in their customers’ hands (iPhone, Pixel, etc.)
- Source good advice (dozens of incubators)
- Embed complex financial features in their products (Lerex, RailsR, etc.)
And this is a never-ending story. Yesterday I learnt about Flutter – an open source framework that, more or less automatically, ports your user-interface from one platform to another. Open source! Automatically! Not very long ago addressing a new platform would have been an expensive year-long development for half of your programming team.
The above improvements cover all the major expenditure categories for most tech start-ups: people, real-estate, customer acquisition, technical infrastructure and software development.
All this has made it easier, cheaper and less risky to launch and run new technology businesses aiming to do big things.
3. The Growth of Private Markets
My third logical reason is the growth of the private (i.e., non-listed) equity markets.
According to Pitchbook, the growth of VC-funded equity markets has vastly outpaced the growth of public markets over the last 20 years – at least 2X by value and 9X by number of funded companies.*
If you are someone who manages their own investments – why would you turn your back on this part of the market which is growing in importance – it should be part of every balanced portfolio, whether you do it directly or outsource it to a fund manager.
Not-So-Logical Reasons
1. Involvement
After a number of disappointing investments, I swerved from investing in public markets to private. I figured at the time that I would be better off investing in things where I had some influence over the outcome.
I have since learnt that I am not the business magician I thought I was and now take a more balanced approach. But I still think there is a lot to be said for direct involvement – particularly when you can make a difference – and for the additional transparency one can get from private investments.
Whilst I probably over-estimated my business abilities, I underestimated the sense of satisfaction I get from being involved in helping a new company get started.
2. The Thrill of New Ideas
I love new ideas, concepts and ways of doing things.
Throughout my career, one of my favourite things has been spending time with entrepreneurs and hearing about their insights, business models, GTM strategies, etc. I don’t know why, but I love it – so much so that, when I have the time, I do it for free.
Looking through funds on an annual basis for somewhere to park my ISA allowance is a chore but meeting entrepreneurs in the hunt for my next direct investment is an indulgence.
Is this the right time to invest in early-stage tech companies? For me, the answer is DEFINITELY. A much better time than the peak of the market in late 2021!
Roberto Rivero is Chief Operating Officer at Cosmonauts. He is also Chairman of LegalTech company, Vable and a Non-Exec at FinTech, Lerex Technology. He has been an angel investor since 2005.
This is the first in a series of guest posts from the MONEYtalks series, where we, Cosmonauts, invite those from the Cosmonauts community to share their opinions on whether now is a good (or bad) time to invest in areas they are familiar with and feel strongly about.
In our next post, Denis Potemkin of Majoto will tell us if he thinks now is the right time to invest in Legal Tech.
If you are an investor, economist or industry expert with strong views about whether this is the right time to invest in space, legal-tech, clean energy, agritech – and other areas of the economy that matter to the Cosmonauts community – please get in touch.
Categorised in: MONEYtalks