Our fintech experts’ top tips on weathering uncertainty
Uncertainty is in the air: two years of the pandemic, and geopolitical upheaval, is changing the macroeconomic climate. But at Octopus Ventures, we’re no stranger to economic adversity. We were founded in 2007 – and we all know what happened next.
Still, some of those earliest investments have proved to be successful: Graze, LoveFilm and, of course Zoopla, didn’t just survive – they thrived, in a time of incredible economic adversity.
With that said, building a company resilient enough to withstand an economic downturn is a challenge, and, beyond that, the funding landscape has changed. Strategising in the face of uncertainty is hard, while downturns also throw up additional issues in other areas of a business.
A range of perspectives is useful, so we held an event with our partner, Affinity – and asked our investment team and one of our pioneering founders – for their take on some of the key issues that arise when times get a little bit tougher.
Youssef Darwich is the co-founder at Nosso, an investment platform geared towards helping families invest together for their children’s future.
Malcolm Ferguson is an investor in the Octopus Ventures fintech team, with a decade’s experience in venture capital
Jeevs Mahil sits in our People and Talent team, where she advises our portfolio companies on all their talent recruitment and retention needs
How can companies refocus their go-to-market strategy and product to fit a new reality of recession?
Youssef: One of the most useful things I’ve heard over the past few months, which has really stuck with me, is you don’t want to be selling sunglasses when it’s raining. It’s important to take note of what’s on the market, and what everyone is buying around you – and make sure you’re selling the right thing.
It’s a lesson some companies learned during covid-time. Lots of businesses pivoted, while others, by sheer good luck, found a perfect market fit – they were just right for the moment. At Nosso, pivoting was a challenge: we were an early-stage investment business, and we hadn’t yet reached a point where we could launch a new product or pivot into a different area.
But we’ve spent a lot of time listening to our customers and looking at our data. Ultimately, we sell an investment product, which is hard when the market is going down and people are tightening their belts. However, we saw some really interesting things in the data – about how the product is being used, and who by.
We noticed that parents have been putting in less money – the cost of living crisis has been hitting them harder. But grandparents, who maybe have more capital put away with fewer demands on it, were still contributing. With that in mind, we started thinking about our go-to-market: who we’re actually selling our product to. This has given us a clearer idea of the kind of areas we might like to put our resource into, be it engineering, marketing, etc.
It hasn’t been a full business pivot, but we’ve definitely changed the narrative and customer focus a lot. If you look at our roadmap now, we’re focussing more on the grandparents and other external contributors.
The takeaway from this is to think really carefully about the kind of thing you’re selling. Does it make sense to sell it now – is it a product that people want now? If it feels like a bit of a stretch, then look at the tangential areas, or expand your view to take in the different customer groups that might actually want the product.
Lots of companies will be looking at future funding risk. How have fundraising dynamics changed and how should companies think about a down round?
Malcolm: This is a topic we’re living and breathing at Octopus Ventures. The second half of 2020, and 2021, were unbelievable times in venture. But the funding environment has drastically changed. We’ve been thinking hard about how to navigate that. Founders lucky enough to have raised a round in the last eighteen months may have done so at a good, high valuation. The new environment is a bit softer. As I see it, this leaves three options:
First, you grow fast into and past your valuation – and you go on to successfully raise your next round at a higher valuation. I expect that may be the case for far smaller proportion of businesses in this next period, unfortunately.
The other two options, then, are down rounds or structured rounds. Traditionally, the community in general have been afraid of down rounds – but we shouldn’t be. The reason people don’t like down rounds is mostly to do with perception. The market loves to talk about them, they make businesses look less successful, and they can impact motivation (employees find that their options have become less valuable). But I’d argue that in an environment where down rounds are commonplace, the perception risk is largely diluted to nothing. Employee motivation can be fixed, and you maintain a clean cap table, ready to tackle the next phase of the business.
The alternative to a down round is a structured round. That means you protect your valuation, you might even get a higher one, but you also get a lot of tricky terms that investors like to put in to try and justify the higher price. While this approach reduces the short-term pain, it creates pain in the long term, largely by creating complexity which may hurt future fundraising prospects.
If founders have taken a high price on a previous round, and are optimising for the long-term as they look at their next round, they’re best-off plumping for a down round. That’s the most common and, in the current climate, best option. For founders approaching an exit, optimising for their last round, structured may be better. Either way, it’s important to discuss things clearly with investors, to help think through the problem.
How should companies think about people and recruitment during a recession?
Jeevs: Unsurprisingly, we’re hearing this question a lot from founders across our portfolio, and, whilst there is no silver bullet, the advice that we’ve been offering comes in three parts.
First, don’t shy away from the fact that there’s so much uncertainty. When companies around you are making layoffs, and there’s instability and fear within the markets, there’s absolutely no point pretending that everything is fine. The antidote, here, is transparency: communication is key. Discomfort thrives in ambiguity and a lack of communication – so the best thing you can do as a founder and employer is to be open and up-front about things, and treat your employees with respect.
When it comes to recruitment, the second thing to bear in mind is that, as we all know, joining a start up is inherently risky. We see common traits in the talent attracted to the companies that we invest in: an appetite for risk, and the excitement of joining a new venture on the ground floor. However, in times like this it’s important to emphasise the security and perks of joining your company when you’re looking to hire top talent. Highlighting the length of your runway, for example, or underlining key metrics and success rates. Bringing attention to the impressive and inspiring team that they will have the opportunity to work with and learn from is also highly effective when attracting top talent. It’s also important to be clear and transparent about equity, and to signpost your long-term investment in employees, for example through supporting them through training schemes, or helping boost their qualifications.
The third point is that this isn’t a crisis without opportunity. In times of scaling, when things are growing quickly, it can be the case that companies make speedy hires simply to get bums on seats. Now, while things are slower, is a great time to step back and really reflect on your organisation structure. It’s an opportunity to make thoughtful decisions about hiring, instead of rushing, which hopefully mitigates the need for challenging decisions in the other direction in the future.
Finally, and unfortunately, it’s inevitable that some businesses will have to make some layoffs and downsize. The Octopus Ventures People and Talent team is here to support all of our portfolio companies through all decision-making – including during tricky times. But my top tip would be, once again, that communication is key. Under challenging conditions, it’s fair – and human – to be as transparent as possible.
Finally, what’s one top tip on navigating this uncertain time?
Youssef: I think Jeevs’s point is one of the most important ones. As a founder of a business, I know that my team knows what’s going on in the market. They’re reading about it, and will have their own concerns about what’s going on. That’s why I think it’s essential to be transparent with your team as often as possible. Not only that – try to make changes happen as quickly as possible too, so that people don’t need to worry. You don’t want people sitting around worrying about what’s on the horizon. Make the changes, keep everyone in the loop at company meetings, and be as transparent as possible.
Malcolm: One of the negatives of 2021 was that growth was weighted so highly, founders had to take strategic decisions that put pressure on the business in quite a risky way. They had to internationalise really early, for example, or add products really quickly, or grow teams faster than they maybe felt ready to.
The fact that the weighting around capital efficiency has now increased means you can adjust your strategy a bit. You can be less risky and more focussed. My main takeaway is that the strategy that works in 2022 can be different from the one that worked in 2021.
Jeevs: From a talent perspective, my best advice is to just be human. In times of adversity, the best thing you can do is strike a balance between pragmatism and coming at everything with a great deal of empathy for your employees. This is an opportunity to prove yourself as a really supportive employer, regardless of what you may inevitably have to do.
