An appetite for risk

By Ian Silvera

It’s hard to ‘move fast and break things’, the mantra Facebook’s Mark Zuckerberg once espoused, in a lockdown brought by a global health pandemic. In fact, to just keep moving, at any given pace, is the main challenge for the West’s start-ups right now.

Many of these fledgling businesses are unprofitable, a factor which wasn’t an issue for many revenue-focused venture capital (VC) funds until now. Some so-called ‘founder friendly’ outfits have had a change of heart, reportedly stripping term sheets – non-binding agreements between investors and start-ups – of once heady valuations. Others have gone AWOL.

Founders and CEOs can try and tap the banks up for some cash. In the UK, however, this has proven to be difficult, with loss-making outfits being turned away and others experiencing long delays, high interest terms and requests for personal guarantees. They are now languishing in what business leaders have dubbed the “stranded middle”.

Other start-ups, meanwhile, are pushing on regardless and hiring. This may seem odd, almost crazy, for those not initiated with the Western technology start-up scene. But the industry faces a skills-shortage of engineers and many hyper-competitive businesses want to “blitzscale”, a term and strategy popularised by LinkedIn co-founder Reid Hoffman.

That means they need more workers. Now. And those that don’t have another HR-related headache: furloughing and firing staff over impersonal video chats.

If you could boil the current malaise start-ups face down to two related principles, it would be the precept of ‘risk appetite’ and what Berkshire Hathaway CEO Warren Buffet and his right-hand-man Charlie Munger have described as the ‘opportunity cost’.

Simply put in the first instance, VCs are attempting to recalibrate the level, nature and extent of a potential investment whilst trying to deal with a whole heap of uncertainty – will lockdowns go on for three months, six months or intermittently? And what is the short, medium and long-term impact of the crisis on business and consumer behaviour?

These first order considerations (we haven’t even delved into the second order/potentially unforeseen impacts of the outbreak) can be weighed against the Oracle of Omaha’s thinking – that a VC, in our case, can miss out on benefits when choosing an alternative course of action (to invest in a different start-up or not to at all, for instance).

Much actual and digital ink has been used mooting this corporate quandary over the last fortnight. Little, so far, has been said about these issues in relation to the public sector. Governments are happy to shout about being start-up ‘hot spots’ in the good times, but what can they offer entrepreneurs now in the tough times?

Ministers and policy makers should not just weigh the question purely on a set of financial scales – it’s a reputational one too. They, alongside VCs and the banks, will be judged now on their actions and start-ups will inevitably form their own opinions on where they should do business in the future.