The entrepreneurial ecosystem under threat – will companies survive?

 In Companies, Economy, Investment, News

Stephan Morais, of Venture Capital firm Indico Capital Partners, says the current crisis and looming recession will test budding entrepreneurs and sort the wheat out from the chaff. However, Indico will continue to invest prudently and prepare promising companies prepared to retain a cool head and listen to advice make the championship grade. He talks to the American Club of Lisbon.

By Chris Graeme

Portugal’s current crop of tech startups are facing their first real test in resilience and common sense as the economic consequences of the shutdown and expected recession begins to bite.
Up until now most of these millennial entrepreneurs have never faced a recession and have only been used to the good times but now face leaner, meaner times which require tough strategies and seemingly ruthless decisions if they are to find the solutions to help them survive in a bear market.

From bull to bear

Venture capitalist Stephan Morais recalls the recent past when the economy, in capital market terms, was enjoying the “largest bull run in history” i.e. the 11 years since March 2009 to the start of the year, with uninterrupted economic growth and positive results.
This success had not been the same in all countries. Portugal had already been through a protracted recession which lasted until at least 2014 with the sovereign debt crisis and consequent IMF-EC-ECB bailout from 2011, but overall there followed “a fantastic decade” with helped by economic stimulus packages and low interest rates.
The result was a lot of asset classes making huge profits until they had reached unsustainable levels.
“I sometimes think that the coronavirus pandemic was used as an excuse for a general correction of the market” he says.
“The virus is a human tragedy and healthcare issue, but was a trigger for what was already about to happen and everyone in the business knew that,” says the President of the Harvard Portugal Club.
Morais admits that real estate markets were too high and stock markets were at record levels, but points out that the optimism and subsequent downturn happening now has happened many times before, with crises occurring every 10 years or so.
“Of course, no one could have predicted that this time a virus would cause this lockdown and economic collapse, but all who were involved in economics, markets and investments knew that something was going to happen, there was a bubble in many asset classes that was unsustainable and creating further inequality,” he explains.

Tech drove success

Stephan Morais says that tech has been one of the big drivers of the bull run, with maturing technology on the internet and cloud, AI, IoT and online purchasing all naturally causing major disruptions in businesses.
The big winners over the past decade have been the big tech companies and the tech sector in general which “redefined how we all live”.
This led to a huge influx of capital into the tech sector with low interest rates encouraging investors who traditionally allocated money into bonds, equities, hedge funds and real estate now putting more capital into funds such as venture capital funds which have driven the tech startup scene.
And even though venture capital is still a very small amount of the total majority of the allocation of investment into funds and other asset classes such a bonds, equities, treasuries, stocks and shares, nevertheless, there was a lot of money pouring into tech, and a mushrooming of tech companies.
On the downside, this resulted in too much money chasing too few quality opportunities. However, Morais points out that the tech sector is the only sector which allows you to start a company and grow it to be successful in terms of size, customers and valuation within the life span of these 10-year funds.
The venture fund manager stresses that investing in new tech companies is very risky and many fledgling companies fail, which is why the few very successful ones have to compensate investors for the many others that don’t make the grade. “It is only the tech sector that can sustain that kind of return,” he adds.
He says that a lot of these entrepreneurs are young and “what we’re seeing now with the current crisis is a lot of people who have only experienced the bull run in the existence of their companies who are now faced with a lockdown and potentially huge recession”.
Some tech businesses, he says, are doing very well as people shut at home are buying more on line, but many more have to adjust which has been hard.
Patrick Siegler-Lathrop, President of the American Club of Lisbon, who has run several businesses throughout his career, says that its very difficult when you are used to success to suddenly run into failure, but failure is the learning lesson entrepreneurs often have to go through. Failure and seeing things collapse is not a surprise for seasoned business owners, but can come as a shock for someone who has never experienced a downturn.

Not about saving whales

Morais believes that it is only through these kinds of crises that can you see how entrepreneurs and their teams react under duress and if they really understand the game. “One of the issues VCs have, is that some entrepreneurs do not always understand the game they are playing, the actors and the decision-making processes because they are in their own creative and optimistic bubble”.
He says they also don’t always understand that you are going for a mode of “let’s grow at all costs to let’s save cash at all costs”.
“In times of crisis you require leadership and have to make choices that are not always popular ones. You have to choose who is leaving and not, who survives and who doesn’t, and we often have to ask entrepreneurs to take harsh decisions into letting people go,” he explains.
“It’s not a family, it’s a company and companies and their owners have to take hard decisions to ensure their survival. Morais says the Millennials were living in an idealistic pop culture phase, but the reality is that it’s not about saving whales,” he stresses.
Patrick Siegler-Lathrop said that firing friends was one of the most difficult decisions he had to take when running businesses, and that it is only in times of pressure can you see the real qualities people have.
Stephan Morais explains that some of the startups that Indico Capital Partners have been supporting and nurturing came to them and asked for more capital during the crisis and he says that they have not fortunately been put in a position yet in deciding whether a company gets the cash to survive or not.
“Most of our companies are either benefitting or in product development mode, or else have quite a bit of runway. We can see that some of them that are not doing so well but have quite a bit of money but may not have that money forever”.
“We are still investing, but we’re not investing as much as we were. We have to ensure that we protect the fledgling startups we already have rather than spread ourselves too thin” he says.
Morais says that it is also important that VCs and entrepreneurs don’t try and abuse their leverage and power because in times of crises, like now, VCs are far more likely to help and sustain those that they have a greater interest in, than those whose entrepreneurs only relinquished a small part of their power and share in their companies.
“We should never abuse the other partners in a negotiation, because it will come back to haunt you when the tables turn,” he says.
VCs have to prioritise the startups in which they’ve invested the most money and at the largest percentage, those that are closest to them and work with them to find solutions and are not in denial to the current crisis.
“Once you have a VC and institutional board, the decision making process is different for startups and they have to include people that are on the board and listen to the investors because they are there to help you come up with solutions and that’s what boards are for, to help you get the best out of investors” he says.
Indico says it always learns from past mistakes, carries out due diligence and psychological analysis through psychometric tests to tease out possible problematic issues. “This has been useful, because we have discovered things about people before we invested. It is like a high-performance game of training athletes that have enormous potential, but you need to understand them psychologically to get the best out of them, and if you don’t train them in the correct way they will never reach the champions league,” he concludes.