The ‘Hot-Crazy-Matrix’: How winter times look like from an investors perspective
„so what do you think about the upcoming time ahead? “ — I was asked yesterday by entrepreneurs during lunch.
Here is what I answered — and then I started to think about it all night long.
I answered, that I share the concerns about the downturn oft he capital markets due to the crash at the Chinese stock exchanges. That I be worried that investors are more easily scared than motivated. That a Hype is easily created in good times but it will be a very hard to do for turning a negative opinion back into confidence. Following this assumption my advice was to be more careful about the current cash reserves. That is will be harder to raise funds again. That after startups get scared also big clients could switch to cost saving mode and that this will again impact the sales pipes of startups. Even event organizers should rethink their agendas in terms of what topic on the list and who to invite and make to pay for participation. Looking down the road that might result in more M&A activities, early exits and mergers among friendly companies and founders.
That all seams logical and easy to predict.
But than I started thinking after reading more Tweets and blog posts from fellow investors. I came across certain trends which made me wonders about our investment outlook and communication strategies.
“It’s all about the others — but we are fine”
Suddenly fellow VCs become more active on blogs and Twitter and facebook. They all have a word about the general trend and the industry. But I haven’t notice someone expressing his concerns about their own portfolio. Maybe that is common practice and it seams obvious from the outside. But I believe it is awkward to see that rain comes down everywhere in the city but not in my own backyard. So whenever an investor is denying threads for his own companies or finger pointing to everywhere else its just tactics. Usually all investors have investments within the hot topic fields of the recent years - so whenever one of those fields is discussed they are impacted as well.
“bring my companies to safety first — then care about the others”
The airtime to listen to new investment opportunities, independent from stage and industry segment, will decrease. Investors will be busy with securing their own assets before investing in new ones. That reactions you will see when observing talks of investors among each other. Investors are like sales people — trying to sell high or buy low. While cash crunch time there will be no buying — but a lot of attempts of selling.
“The Hot-Crazy-Matrix”
When talking about the markets developments and predicting how the players in the market will react, I came up with the Hot-Crazy-Matrix for late stage VC backed companies. Maybe you will find it helpful to understand the view of an investors when looking at his portfolio. Just keep in mind the “ratio of revenues vs. Ebit” shall express the financial performance, where a company can be “highly profitable” (making earnings on the dollar they get from the customers) or “growth focused” (spending x-times the amount in customer acquisition compared to the revenues they get from those customers). The valuation axis, an indicator of “craziness” of a company, needs to be adopted for the region you are in — in U.S. valuations are 10x higher in average for the median valuations in later stage companies than in most European countries.
However, the shape of this matrix will not change due to valuations.
So here it is:
you can find a powerpoint version on Slideshare:
