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Bearing all: How choppy markets can produce the best start-ups

by | Apr 13, 2023

What do General Motors, Burger King, CNN, Uber and Airbnb all have in common? They were all founded during economic downturns. Uber and Airbnb set up business in the global downturn of 2007-2009. Burger King flipped its first patty in the US post-war recession of 1953.

CNN switched on 24-hour cable news in 1980, as US inflation hit nearly 15 per cent. GM rolled out its first car in 1908, on the heels of the 1907 financial crisis. As the tech world reels from the failure of Silicon Valley Bank, it’s worth remembering that many of the  best, and longest-lasting, companies are set up during downturns.

A difficult economic backdrop makes them both tougher and more nimble for years to come. So as a founder, you just “need to get above the noise and differentiate yourself”, counsels Ferdinand Roberts, chief executive of Asset Class, a Dublin software company  which works with private equity and venture capital firms.

If you’re a founder, it’s a good time to showcase your sterling fundamentals – that you’re lean and can make money from the get-go. “I think it helped that we were cash-flow positive in our first year” with “zero client churn”, reflects one founder, Martin Ratz, chief executive of Doccla, a virtual ward start-up founded in Sweden and now based in London.

Ferdinand Roberts

Stay calm and keep your powder dry

Medical technology is a sector in ferment,with the collapse of Silicon Valley Bank now exposing many medtech firms – including such significant ones as iRhythm, AtriCure, ViewRay and Humacyte – all of which had financing agreements with the failed tech lender.

It is also a market that happens to hugely flatter Ireland, which is the fifth in the world for medical patents per capita. There is a “tremendous” amount of capital out there currently looking for a place to live, says Roberts.

Private capital dry powder – money that pension funds and other investors have given to fund managers but which has not yet been invested in companies – reached an all-time high of $3.7trillion in March.

And tech remains the second most popular sector for venture capital investors, behind commercial real estate, he says. Meanwhile asset managers are waiting for signs of distress in real estate before deploying dry powder there.

Good companies can still get funded, says Roberts, and usefully for the newest founders, seed funding “hasn’t changed that much. In fact, seed capital for early-stage start-ups is buoyant he says. “Healthy and getting healthier.”

Seed investors now include “people who’ve got significant experience working for companies like Google and Meta” who also  currently have “lay-off cheques and significant capital behind them.” It just means founders now need to expend a bit more shoe leather to get themselves heard.

A year ago “I might have taken my proposals to 40 or 50 companies to value and get a decent valuation,” adds Roberts. “Today I  might take it to three times that amount,” he says.

Bear Mrkt, a Dublin independent coffee roasters started during, and was named for, the downturn (pictured is our writer’s daughter Carlotta Belton)

The bonfire of the bad business models

In a boom market it’s “ironically very hard to do well as a good start-up,” says David Yin, partner in GSR Ventures, a technology investment firm in San Francisco. “Even if you’re building an amazing company, SoftBank and Tiger Global are going to find a competitor to do it, and give them money,” he adds.

So it’s “harder to get a fundraising game together,” pointing out how ride sharing pitted SoftBank’s investment in Uber against Rakuten’s investment in its competitor Lyft.

By contrast, he says, the “best companies, the most innovative business models come out from bear markets”. In a bear market, “all the tourists leave, all the folks who should’ve gone into banking or consulting, but they thought a start-up was a cool way to make $1billion in five years,” he says.

So “you flush out a lot of the noise, people doing it for the wrong reasons,” and are left with “people more committed in for the long game,” he adds.

The eye of the bear

The “more traditional breakout stars” of the coronavirus period, the medtech sector concerned with viruses and vaccines, is somewhat waning in terms of investors’ interest, Roberts says.

But the prosumer market, anything from the measured self and Fitbit-type devices to blood glucose-level measurement, is “still relatively buoyant”.

“What’s happening in the market is there’s a move toward B2B (business-to-business) type applications rather than necessarily B2C (business-to-consumer)” amid the threat of recession and disposable income being in decline. Businesses are more reliable customers than consumers, feeling the pinch of the cost of living crisis and rising interest rates.

So the B2B market in biotech includes “anything helping to accelerate pharmaceutical time to market” to supporting biomedical  start-ups, says Roberts. Meanwhile, healthcare start-ups must “offer a significant service layer to be truly disruptive and transformational,” says Ratz.

This can sound painful to some investors as the scalability of ‘service’ may seem less appealing. But healthcare is about people, and to transform it requires behavioural change.

“And to change behaviour, which is really hard, healthcare start-ups will need a service layer, at least initially,” he says.

Life after Silicon Valley Bank

The start-ups that survive a recession “are the ones that learn the fastest,” says Markus Berger-de León, a partner at management consultancy McKinsey.

“You really need to think, ‘should I spend my next pound or euro on this, or something else?’,” he says. “And that makes you need to embrace and scale one skill that is core to your company. And think about doing that with as little money, as fast as possible.”

And for some time, the medtech ecosystem is going to be figuring out the long-term impacts of Silicon Valley Bank’s collapse. Silicon Valley Bank had filled an important niche for Europe’s tech start-ups, investing in companies where no one else could or would.

In Ireland alone, the lender had planned to invest more than $500million in technology and life science start-ups by 2024, through  an agreement with the Ireland Strategic Investment Fund (ISIF).

The bank’s vice-president, Brian Geraghty, moved accordingly to Dublin from the London office. “I don’t bank with SVB but I hate to imagine what would have happened if I did”, says London start-up founder Arshia Gratiot.

“My LinkedIn feed is full of people who have been affected,” she adds. Which is to say, the bear market just got a bit more bearish.

@PadraigBelton > PÁDRAIG BELTON is a SmartHealth journalist who also writes about global business and technology for BBC and the Guardian

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