Inflective Havoc
Reflections on Our Big Entrepreneurial Times from Jan Horsfall

In Growth We Trust

    As our early stage companies move into springtime 2012, it’s time to take an honest look at our status as entrepreneurial, revolutionary companies and make some decisions about how we’re going to move through what remains of this crusty recession. In so many ways, 2011 was a year of renewal for many early stage companies. Though the light at the end of Downturn Tunnel  didn’t hit our eyes until late in the year, it was good to know that we were moving forward with a slight wind at our collective backs instead of the unwelcome breeze that’s been blowing in our faces since late 2008. And from here the breeze just gets stronger behind us.

Next Wednesday I’ll be getting together with Vic Ahmed (CEO, Business Genetics) and Daniel Epstein (Founder, Unreasonable Institute) – two ‘revolutionaries’ in the truest sense of the word – to discuss where we stand during the “In Growth We Trust Session” in Denver. As part of this work, I shared my thoughts yesterday at the every-other-Thursday Open Coffee Club in Colorado Springs and I thought I’d pass on my thoughts here as well.

First, if you’re judging small business by their collective report card, grades are improving, but little Johnny’s still probably going to get extra chores after bringing this latest update home. Comparing mid-2010 to the end of 2011 across a variety of subjects still means our overall grade-point average is a little better than a C+, but we’re improving across the board:

  • Capital Access / F > D+
  • Marketing & Innovation / D > C
  • Workforce / C > C+
  • Customer Service / B > B+
  • Computer Technology / D+ > B-
  • Compliance / C+ > B
  • Mentoring / C > B-
  • OVERALL / D+ > C+ (1.25 > 2.46)

By far the toughest obstacle for our entrepreneurs continues to be capital access, followed by marketing and optimal use of technology. Still, the many newcos we’re in conversations with are digging in and attacking these issues with a very, very positive frame of mind. They’re also doing it with improving air cover as mentors and entrepreneurship groups are increasingly helping them check the boxes against these issues. Accelerators and incubation in general are on the rise again – as Vic Ahmed’s latest introduction of Plug and Play in Greenwood Village and a soon-to-be-announced Colorado Springs accelerator (with seed money) suggest. Entrepreneurs collectively are moving at a faster speed than a year ago and there seems to be an internally-biased push from entrepreneurs themselves to “get sh*t done” as it relates to these opportunity-based obstacles.

We do have several macro-economic issues which won’t make things easier for us. The global economy is still anemic. Gas prices could hit $5/gallon this summer which will certainly impact those in consumer products and services. Mall vacancy rates are the worst they’ve been to date and the housing market is growing at a snail’s pace as federal intervention continues to get in the way of a faster natural market correction. Corporate profits have been decent, but not awe-inspiring by any stretch. And it certainly doesn’t help that we have a federal administration continuing to confuse and confound most of us in the world of business.

Angel investors – the key to many of these early stage companies – continue to be a fickle lot. Though showing up again and making public appearances, most angel investors continue to be very slow to pull out their wallets. Sadly and inexplicably in more cases than not, they’ve also generally failed miserably when it came to critical add-on, second stage funding. Outside of the Super Angels, we have to get more participation from this group, but don’t expect an upturn for another year or so on this front. It’s just part of the cycle.

On the subject of light at the end of the tunnel. there are a lot of bright spots emerging as we expect at this stage of recovery. The Payroll Tax cut was extended. Interest rates are as low as we’ve ever seen them – which will be good once the lending log jam slowly dissipates. To the extent one can get an SBA Loan, the interest rate is fantastic. Tech investment is up and so is manufacturing investment. Corporate strategic money ($1 trillion has been in the coffers) is continuing to find its way into the market as companies compete with emerging private equity groups to invest in and buy newcos. Venture money is active and the IPO market is waking up. Thus, there is an exit to recovery ahead even though the ride still sucks a bit. Again, just part of the cycle.

Internally, newcos have been busy changing their playbook as these macro-economic shifts start to work in their direction. There’s also been an growing increase in group air cover as entrepreneurs have banded together themselves – outside of those willing to help like TechStars – to use some good old fashioned group think to attack their opportunities. Entities like Startup Colorado and Springs Startup are lead by entrepreneurs themselves, not government or pay-for-play. We’ve seen dramatic traction in participation as this independent push gains more and more followers from within. I’ve been blown away by how many companies there really are up and down the front range of Colorado which were flying under the radar. Now they’re joining these groups to test their ideas and gain a deeper understanding of how to solve their issues quickly and economically. Hit one of PVG’s Five-Minute Pitch Nights in Colorado Springs and you’ll see it in action. We’ve gone from a dozen people back in late August to over 150 at our last event. It’s must see, from-the-inside-out, creative activity.

Further, the idea of The Lean Startup introduced to us by Mr. Ries is prevalent in more and more conversations. Entrepreneurs appreciate the capital markets are still mushy and they’re intent on using a modern sense of process-based frugality to not waste money this time around. First stage ask has dropped from $1 million to as low as $50,000 as entrepreneurs tighten up that first milestone push by an order of magnitude. We’ve been encouraging our entrepreneurial colleagues to gather more and more information about what’s acceptable to those making decisions for the second stage of funding as well, such that they know what they’re trying to do in more exact terms. The purpose of this thinking is for them to be the invited guest at the table when they do show up in front of next round’s benefactor.

We’re seeing a multi-demographic approach to business building as tech-savvy, younger business people partner with boomers and their respective experience relative to sales, marketing, finance and capital. When I myself decided to review C-level positions again about 45 days ago, I had no idea how much this holds true. There are some very rich environments which have the best of these two worlds and they do seem to have more collective confidence and tighter thought processes relative to planning and execution.

The advent of cloud computing has lowered a key cost to doing business and is one of the reasons I give our newcos a better grade for use of technology. Ditto on the usage of social media which has not only dramatically lowered marketing costs for cash-strapped entrepreneurs, but in many cases has actually leveled the playing field to the extent they’ve immersed themselves in creating social media loops which spread the word of their new products and services.

Alternative capital sources continue to enter into these new companies, in part lead by new crowd-funding companies like Kickstarter and CircleUp (being officially announced next month) and Angel-Newco brokerage entities like AngelList and Invertual emerge. We’ve watched with a smirk on our faces as Paul Lizer, CEO of newco Devium raised his requisite seed capital goal of $45k on Kickstarter within 2.5 weeks and is on par to raise around $80k with the effort. More of that please

Hiring is also increasing at a nice pace with Bullhorn reporting that all U.S. geographic regions are demonstrating increases in month-over-month job openings.  In general, small business entrepreneurs are “optimistic” and this shows as they add talent to their staffs as they anticipate the growth cycle coming up shortly.

Finally, this all makes for feel-good TV when you consider that private business valuation increases are also headed in our direction. If you look back at economic cycles over the past 50 years, you’ll see the same pattern emerge in terms of how valuable companies are at the time of exit. Like clockwork, 2008 through 2010 represented a Neutral Market – one in which fewer buyers were present. Banks shut down. Corporate money was locked up. Private equity groups were dealing with breached bank covenants on their leveraged holdings. VC’s were hunkered down working on their companies instead of their own funding. From the beginning of 2011 through 2012, we’re experiencing a Buyer’s Market, one in which all of these investor types begin to emerge as they purposefully have to invest and the target company values are generally lower. The good news? From 2013 through 2018 we’ll enter back into a Seller’s Market (as we did from ’83 – 88, ’93 – ’98 and ’03 – ’08). This means all of our hard work – as investors and newcos – will be on display during the best time frame to create liquidity events.

As we’ve been telling our newco colleagues, right now stay focused on building a great business. We’ve been through both sides of the hurricane’s eye and we’re about to hit some really nice weather and some really smooth water. Timing is on our side. Oh – and by all means – “In Growth We Trust!”

– Jan

One Response to “In Growth We Trust”

  1. […] about the current state of small business in America (you can read his blog post on the topic HERE).  Jan will be speaking formally on the subject at the Denver Metro Chamber of Commerce State of […]

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