As noted in this post from yesterday, Y Combinator, the Silicon Valley-based start-up accelerator that has backed more than 3,000 new ventures around the world, issued an advisory to its portfolio companies last week. It cautioned them about economic and geopolitical uncertainties and urging conservative actions.
That was followed yesterday by PitchBook issuing a report looking at venture funding for the foodtech industry. The organization’s data showed that the sector experienced a pullback in Q1, with $6.9 billion funneled into 359 deals, representing a quarter-over-quarter decline of 40.8 percent and 13.3 percent, respectively.
“This may indicate the first step in a larger market recalibration, but the true impacts of the macroeconomic climate aren’t yet visible in the data,” PitchBook noted.
The previously referenced post from yesterday’s edition of teknovation.biz summarized the advice that Eric Dobson, Managing Partner at Sheltowee Angel Network, is providing to his portfolio companies as fears of an economic downturn grow. Today, we share what another local investor – Derren Burrell, Founder and Chief Executive Officer of Veteran Ventures Capital (VVC) – is advising his portfolio companies.
“One thing remains consistent no matter what the environment is: a recession is coming – economic downturns happen. No one can accurately predict the timing, but it’s coming, and it appears very likely to be coming quickly in 2022. The things you need to do to prepare in order to prosper through uncertainty are the same principles you need to apply to ensure consistent, exceptional profits through all economic cycles.
“Many businesses are scrambling for solutions as the economic uncertainty surrounding COVID, Ukrainian operations, and global inflation will force many companies, especially small businesses, to lay off workers, cut expenditures, or ultimately shut their doors. We at VVC are proud to have the majority of our portfolio companies help alleviate uncertainty through the use of government contracts and defense-related programs offered through federal channels. The most valuable aspect of government contracts is arguably their ability to provide companies with a consistent source of income, even through economic uncertainties/downturns, and today is no different. Federal contract spending has been growing at a steady rate of nearly six percent per year over the last decade, and they just passed the largest defense budget in history. The government is a potential customer that is operating with a spending budget in the billions and will always be able to buy, recession or not. In fact, the government’s spending budget tends to increase once we enter a recession to try to stimulate the economy. While defense-related contracts are among the most financially fruitful and do make up a sizable portion of the government’s spending, they purchase pretty much everything from airplanes to hand sanitizer.
“Coupled with the increase in the competitive nature of government contracts and on-time payments is the desire for less bureaucracy both by the government and the private firm (the government realizes it’s hard to deal with and has been taking steps over the last five years to mitigate the bureaucracy). While private-sector exposure is key to differentiation, now is the time to use veteran preference and past performance to obtain even more government opportunities.
“Along the same lines, we encourage you to seek non-dilutive sources of funding, which is a strong reason why many companies choose VVC as their funding partner. We have garnered almost $2 million in non-dilutive funding over the last year for our portfolio companies through various grant programs with the DoD. We’re happy to help put together these packages with each portfolio company as an ‘advisory share’ service. With newer programs like STRATFI and TACFI this opportunity is only getting bigger as time goes on.
“Finally, in terms of firm operations, we give the following guidance:
- Learn how to become margin-driven: It’s not about how much revenue you generate; it’s only about how much revenue you keep.
- Pay attention to marketing: the tendency is to decrease marketing during uncertainty. While not a terrible strategy, don’t neglect it. Become more effective at differentiating your business from that of your competition.
- Adapt and overcome: this is the hallmark of the veteran. Keep the ability to pivot. Reduce any personal or business debt as your ability permits. Keep fixed costs to a minimum. Don’t ramp up self-performing functions and team.
- Keep in constant contact with your Veteran Ventures point of contact. We stand ready to assist through our vast network of subject matter experts to help you navigate the challenges that are a part of scaling a business. We are committed to seeing you succeed and will use all matters at our disposal to aid you in your efforts. We seek to remain actively engaged with you at all times – during periods of growth and during periods of uncertainty.
“Successful business strategy always demands tradeoffs. This is why dealing with the government can at times be frustrating, but also gives you additional tools to help mitigate periods of uncertainty. Accordingly, the right adjustments to prepare for the oncoming economic down cycle will also set your business up for sustained exceptional profits, regardless of what the economy throws at you in the future.”
Look for the thoughts of Ken Woody, President of Innova, in tomorrow’s edition of teknovation.biz.