Recession’s Impact on VCs (cont…)

In my post last fall I made a point on the relatively lower impact of the current macroeconomic situation on VCs vs other categories of investors. While some (entrepreneurs in particular) broadly agreed with my position I believe most others (GPs of private equity firms and LPs) smiled sarcastically (and still do) whenever I reply “not too bad” at the usual “how is business doing ?” questioning.

 

A few months of recession and bear market allowed me to rethink about the whole issue, backed by some stronger evidences provided by performance metrics of some of my new and old investments.

 

The short conclusion is that many top performing companies with strong value proposition ARE NOT suffering but are benefitting from it. Examples (from my portfolio companies):

 

- Yoox (www.yoox.com -  worldwide leader in off/on season online fashion apparel and accessories): an heated debate between investors and CEO took place in October as VCs (with different degree of cautiousness), invited to plan for a bearish scenario of minimal to negative YoY growth while CEO stated he did expect the company to maintain the forecasted 40% YoY growth. 5 month later company’s performance proved CEO’s prediction was completely accurate. Not only Xmas season was stronger than ever but also Q1 09 started on the same pace. Conclusion: ecommerce growth driven by stronger fundamentals and not connected to few points of GDP growth.  Good value for money researched more than ever by customers in recession times makes company’s outlook very bright.

 

- Mutuionline (www.mutuionline.it  - Italian leader in online mortgage and lending brokerage): with banks in deep crisis and real estate market stalling even the most optimistic investor would have expected a strong contraction in volumes of the brokerage division. Instead volumes of new applications keeps raising since October very strongly on a YoY basis. Reasons ?: familiarity with web based instrument of the relevant age groups, word of mouth, banks not able anymore to match competitors’ offers.

 

Companies having more difficult times are those serving the B2B market where in many case Capex decisions are often delayed thus extending already long sales cycles. Nevertheless I keep believing  that their ultimate success will depend more on them being able to make a very solid investment case for themselves. If they do, then, sooner or later, they’ll fund a budget pocket. If they don’t it would be very unlikely that a return to positive growth will translate in a market opening for them.

 

The above of course doesn’t imply that we and our LPs will be better off if we remain for long in a deep recession. In an uncertain scenario M&A activity is reduced, as general willingness of corporate buyer to pay high multiples on targets. Besides appetite for IPO is low to nil and those few stories remaining appealing to investors are such at lower price than 1 or 2 years ago.

 

However I maintain the view that, for those who have the possibility and the patience to wait for better exit markets, possibilities to achieve superior returns remain intact.

 

 

 

 

 

 

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