Prepare your business for the big rotation


Financial market volatility seems a long way off for most small business owners, but fractional CFOs like myself are increasingly concerned about the impact of financial markets on our clients. Do you know how vulnerable your business can be to what’s happening on Wall Street? Here is a summary of the impact that current financial markets can have on your trading strategy.

The growth of risky investments.

Beginning with the 2008 crisis, the Federal Reserve adjusted its policies so that treasury bonds (considered the safest investment in the world) earn 0% returns, meaning they yield no profit. With this safe-haven investment gone, investors have to put their money elsewhere to get returns.

The result was a 14-year boom for risky investing across the board: shares of tech companies soared, private equity expanded into new markets, venture capital exploded in popularity and do-it-yourself investors (often newly wealthy through employee stock options) dove into angel investors. invest. Many advances over the past decade – from electric cars to AI to life-saving medical discoveries – have been funded by this boom in technology investment.

The big spin.

March 16e, 2022, the Fed abruptly changed its policy to control inflation. While widely seen as an appropriate overall adjustment, a necessary consequence is the recreation of risk-free assets: Treasuries are now yielding 0.65%, a 13x increase from just three months ago. Markets reacted in what some call “the great rotation” – a shift in portfolio allocation from risky investments like technology to value stocks, bonds and cash.

The Great Spin had a direct impact on public tech companies like Instacart, which lost nearly 40% of their value when they went public. In addition to the obvious changes in public markets, invisible changes are happening in smaller capital markets.

  • Venture capital funds are struggling to raise new funds as investors are now “overexposed” to risky investments.
  • Private equity, which relies heavily on loans, is subjecting companies to greater scrutiny as interest rates increase their cost of capital.
  • Companies are delaying strategic acquisitions as they reserve cash for inflation and supply chain challenges.
  • Angel investors, whose portfolios have shrunk with the markets, are reducing the volume of investment.

Overall, there is less money for risky start-ups at each funding stage.

Strategies for small businesses in the big spin.

Your business’s vulnerability to high turnover depends on your operating cash flow. Cash flow positive companies are not dependent on outside capital, which puts them in a good position to weather the current market volatility. Company-backed startups in a raise/burn cycle are the most susceptible, based on the length of runway they have. For now, as a rule of thumb, you should expect your next round of VC to take twice as long as originally planned.

Here are some strategies to reduce your financial market risk.

Become cash flow positive.

The best way to protect your business from the financial markets is to remove your need for outside capital by becoming a profitable and cash flow positive business. Depending on your business structure, this may mean slowing or stopping growth, postponing long-term investments, or restructuring your organization. These actions hurt your long-term growth, so think carefully about each change.

For some startups, positive cash flow is anything but impossible (e.g. early-stage pharmaceuticals). If so, consider other options below.

Refinance debts now.

Although not yet closed, the window is rapidly closing on low-interest loans. It’s still a great time to refinance business debt like MCA loans or AR factoring to improve cash flow and lower interest costs. Talk to your bank or CDFI to see if refinancing is a good option.

Accelerate the closing of your adventure tower.

If you are actively re-raising a risk round, consider accelerating the close. You may need to lower your rating, concede demands such as board seats or terms, or reduce the amount of your raise. Despite these drawbacks, it may be better to complete any round now rather than not being able to close in the future.

Extend your trail.

If you are currently burning a lead, consider steps to save time. Extending the runway usually means reducing expenses or headcount – a painful setback for high-growth companies. Reducing the burn is a bet to gain more time at the expense of traction. Yet investors also want to see traction ahead of your next turn, so consider this strategy carefully before deploying it. Work closely with your business forecast to understand how lower spending can impact traction.

Seek public funding.

Government grants remain well insulated from capital market trends, so consider applying for an advanced industries grant through the National Science Foundation, Department of Defense, or other well-funded government agencies.

Plan early and often to give yourself options.

No matter what happens with the capital markets, it never hurts to plan for the worst and adapt as needed. Work closely with your managers and advisors to choose the best strategy for your business and avoid disaster from causes beyond your control.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.

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