With markets crashing around the world few investors can be blamed for seeking the relative safety of cash, but in doing so they are missing a key opportunity, according to one of the UK’s leading start up investment funds
At a time when even gold is seeing its positive attributes questioned could solace be found in the nation’s freshly funded tech businesses? That’s certainly the view held by Haatch Ventures, a fund led by a quartet of entrepreneurs currently managing a portfolio of early-stage digital disrupters.
So why, when others see risk for ‘start ups’, does the Haatch team see it differently?
Partner Simon Penson explains: “We are undoubtedly living in unprecedented times. Investors are scared, but equally it can pay to take a contradictory view. As Warren Buffet says, ‘be greedy when others are fearful’. And right now, people are certainly the latter.
“Such fear is understandable as the news fills with large corporates and small businesses gasping for cash as liquidity disappears from the system for a time. But it is that very fact that puts freshly funded start-ups in an advantaged position”, according to the fund partner.
He went on: “While scale up companies and existing businesses are running around looking to shore up cash positions, those that have cash at hand and agility on their side will often win and make the most of the situation.”
The comments come as the fund’s current portfolio businesses rally around the outbreak. Grocery delivery start up BuyMie, for instance, is quickly building capacity to support the Irish government’s efforts to feed those most in need, with almost unlimited demand for its services.
But it’s not just the most obvious businesses that are seeing opportunities to help. Digital development outsourcing platform Deazy is currently surveying the nation’s digital agencies and consultancies to help the industry share best practice around how to manage dropping demand and customer cutbacks.
And to prove the point on the value of agility, a portfolio company within the travel niche has managed to find opportunity amidst the chaos. Eleanor builds software to allow guests to book restaurants and activities, both from home pre-arrival and while staying in resort. While those around them closed down, Eleanor’s cash position meant the team could use the downtime to offer a 6-month free trial of the system to dozens of key hotels.
“Such proactive, agile approaches can be seen in all sorts of places within the start-up ecosystem, not just our funds.” Mr. Penson went on. “Even knitting start-up We are Knitters is experiencing a 4x revenue growth, so demand is there if you look in the right places.
“And that’s what funds like ours are doing – looking in the right places to take advantage of the changes that are now happening apace. Our EIS fund obviously continues to benefit from the generous tax breaks but, most importantly of all, we are able to back companies with 12 months+ of runway, an agile team and with the right opportunity ahead of them to take advantage of the shift.”
The argument, according to the experienced entrepreneur, is that the crisis will only serve to accelerate significant changes to society – with start-ups positioned to fill gaps in the demand.
And with plentiful cash at hand those businesses can afford to innovate, pivot and focus on serving the customer need, when it is most needed, while existing businesses fight to survive.
The fund works daily with each portfolio company to support key decision making and scale up challenges too, drawing on their own experiences as founders to leap many of the bumps that inexperienced start up teams often stumble over.
The former marketing agency founder went on: “We talk a lot about the value of our support being greater than our cash and that certainly plays out at times like this.
“By calling on our own experiences and battle scars we can accelerate through to the opportunity more easily than a business doing it alone and as part of our investment criteria, we spend a lot of time ensuring that the investee business has 12 months of funding to find market fit and traction, irrespective of what happens to revenue.”
Such a process means that, for a good stretch of time at least, the portfolio is immune to the market and can ride out storms, using the time to build quickly.
“While we will absolutely beat Covid-19, what it will leave behind is a world that will look very different indeed,” Mr Penson explained.
“It may well accelerate changes on the high street. It will increase the velocity at which businesses move to automation to allow them to ride through such pandemics in the future. It will increase spending on hygiene and healthcare…. the list goes on.
“And with returns in stocks looking risky why would you not increase investment through EIS, taking advantage of the tax reliefs and, most importantly of all, backing the creators and builders of this new era?” he enthused.