Written by Jason Bermont-Penn
It’s September 15, 2008. Lehman Brothers have filed for bankruptcy. There’s a 4.4% one-day drop in the Dow Jones Industrial Average, the largest single day decline seen since September 11, 2001. An international banking crisis is about to ensue, with a devasting impact on the global economy. Unemployment is beginning to rise, equity markets are volatile and uncertain, and we’re facing a protracted global financial crisis.
Now, you wouldn’t think this would be the kind of environment to start a successful business.
But you’d be wrong.
WhatsApp, AirBnB, Instagram, Uber and Zoopla (a company Octopus backed) were all founded – and funded – during the last downturn in 2008. Why is it some entrepreneurs find success in such harsh environments?
Opportunities can often evolve out of market corrections and global crises.
Innovation and talent pool
They say that necessity is the mother of invention. It’s not surprising, then, that we can see technology and innovation flourish against a difficult economic backdrop. Much like we saw innovation in the rebuild of 2009/10, we were given an incentive to move the world forward when the pandemic took hold. Today, technology continues to advance, with particular breakthroughs in AI, automation, gene therapy, crypto and the cloud.
Something few people consider is the unprecedented access to talent in downturns. These are periods marked by hiring freezes and layoffs from some of the biggest businesses. While this is unfortunate, in these times it’s not unusual to find a surplus of talented, high-quality people who are willing to work for an early-stage businesses. Equally, redundancy can be a trigger for highly skilled individuals to finally follow their dream of setting up a business.
Venture capital and the macroeconomy
It isn’t all positive news. The economic and geopolitical issues we have today are not the same as in 2008. As interest rates have risen, capital has become more expensive, and inflation is back to levels not seen in decades. The resulting pressure on listed debt and equity, stemming from fears of a recession, rising interest rates and a challenging political backdrop, has seen investors pause for thought before deploying into private markets.
However, we should remember that VC is about exceptionally talented people changing the world by utilising technology that can blow new markets wide open. As we have seen earlier, this can be achievable regardless of macro conditions, and in fact some opportunities can often be broader in times of market stress. As such, it is important to return to fundamentals to get a temperature check on VC: some of the critical things to consider are the availability of talented people, drivers for new technology or change, and the availability of capital.
The current environment allows for that abundance of talent and provides opportunities for growth. On availability of capital, despite the current “wait and see” mentality among some investors, it remains available and it is coupled with a much deeper ecosystem. The market (Atomico report) estimates there is around $50 billion of dry powder needing to be deployed into venture capital. Due to investment periods, this will need to be deployed in the near future.
Europe itself is also in a much stronger position than it was back in 2008. Investment last year into European venture capital hit $109 billion versus $4.3 billion in 2008. Available venture funds in Europe have grown from $50 billion in 2008 to $240 billion today (source: Pitchbook database). This capital growth has exponentially grown the European ecosystem. Significant government support (for example, French tax credits and the UK
British business bank) has also grown the research and development ability of the continent. In fact, 43 of the top 100 life-science universities in the world are in Europe.
Think long term
Whilst some may agree that the current macro environment is actually supportive of VC, most will rightly note that the exit value – which comes further up the chain – and closer to listed markets – can be impacted, as broader valuations across PE drop.
On this, it is worth stressing the importance of long-term investment. The nature of venture capital is that it invests over ten-year horizons or longer. So consistent, regular allocation toward the sector can help mitigate economic cycles over the long term.
In the shorter term, the strength and depth of the European venture capital space should reassure us – from education, R&D and talent availability, through to the technological jumps fuelled by necessity over the past few years. We believe we are in an environment awash with opportunity for new high-growth markets. For the patient investor, this means that while we could well be on the edge of an economic precipice, we could be about to ride an inflection point in VC.
Call me to learn more about VC at Octopus
Director of Institutional Business