Investing in a downturn? How recessions breed opportunity
Whilst the current state of the economy is certainly cause for concern, it’s important to remember that recessions can also breed opportunity. Some of the strongest companies in the world have been built during a crisis. Here are just a few reasons why investing during a downturn can actually be an opportune moment for those looking to unearth the stars of the future.
There will always be stars:
There are always industries to disrupt. Good ideas don’t disappear during a downturn, and great businesses won’t let the economy stop their funding efforts. Neither will the smartest investors.
Deals are less competitive:
Some investors and institutions will be more cautious – it’s inevitable. That just means there’s less competition for the best companies than there might have otherwise been. Smart investors who are motivated to invest may find themselves getting into opportunities that they would never have been able to access in a bull market. When there’s less money chasing good companies, it means that there are more opportunities for proactive investors.
Valuations are lower:
The natural consequence of less competition, coupled with market uncertainty, is that valuations should be lower. You might be investing at a lower multiple now, but potentially exiting the same business in a better market, and therefore improve your return incrementally through additional margin uplift. The key question is not what is happening in the market today, but rather what the market will look like when you exit.
You’re not investing for now:
Investing today means you’re looking for a business that’s going to be big in 4-8 years’ time. These businesses might be born in a downturn, but they likely won’t be sold in one. If something is going to be great in 5 years’ time, it’s still likely a good investment, regardless of the economic climate. For other companies that have a longer lead time to revenue, a downturn remains a good time to build, and capitalise later.
The power dynamic will shift:
The current global economic conditions are favourable for early stage companies. The power dynamic has already shifted. Office space is less competitive and more affordable, and the overheated labour market has cooled slightly, allowing businesses to attract top talent at more affordable rates (especially in technology).
If you’re looking to invest, and concerned by market conditions, it’s worth considering that there may be some reasons why a downturn favours early stage investing. Sign up for Sprout today to learn more about venture capital and the top-tier funds we’re partnering with.
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