Business Leader Magazine: Investment

This is the time of year when we simultaneously look back and take stock of the year we’ve had and look forward and try to anticipate the year incoming. Mostly, a new year is met with anticipation, often optimism. It’s simply human nature. Possibly because we’ve now had 3 consecutive years where the sentiment has been “good riddance” to the outgoing year, we’ve become jaded at the prospects of a fourth. In any event, this time, there’s more than enough pessimism to go round. 

We’re likely to have a strong Christmas – British retailing is reporting an up-tick in demand (compared to November), but expectations are that this will be significantly reversed in early 2023 as rising cost of living pressures take further hold. CBI Economist Martin Sartorius believes that any festive cheer will be short-lived. “Retailers are bracing themselves for chill winds that will blow through the sector this winter, with consumer spending set to be hit hard by high inflation.”

This sentiment is affecting the investment community also – particularly investment in early stage businesses or those which have not yet broken even (and need shareholders funds to survive/ fund growth). The pure start-up scene remains interestingly buoyant – due to certain mitigating circumstances. But is interesting to see what is happening to businesses which are still early-stage, but have moved into scale-up mode. Investors are more cautious and are pushing back, especially with valuation expectation and growth prospects. Many VC investors are now heavily discounting growth projections (they always did, but now by heftier margins) and, as a result, deal valuation is generally down. The number of deals is also down – likely as businesses baulk at the harsher climate and investors’ response to their valuation demands. However as these businesses realise that it’s likely to get worse before it gets better in 2023 and they urgently need cash to fuel their growth ambitions, they are likely to return to the market with more realistic expectations. This may result in an increase in investments made, but valuation is likely to be further suppressed. 

Oatly is an interesting case in point. In only June 2021 (IPO) shares were priced at $17.00. At the start of this year, the share price was $8.44. Today it is approx. $1.40. The heady days were clearly fuelled by a bullish concept. On the back of mainly millennial and Gen Z preferences (e.g. improved animal welfare and environmental conscientiousness), consumer buying patterns have undergone a structural shift towards plant-based alternatives.  This drove ESG-motivated investors into Oatly’s  arms. The share price was fuelled by FOMO. Reality has however taken hold, Oatly today has an annual revenue of $713M and a negative EBITDA (-$302), all of which makes their current market capitalisation of $900M seem over-priced, never mind the figures over the last 18 months. Investors have become wise to over-hyped valuations and are resisting. Entrepreneurs and business leaders will see more of this and 2023 is likely to be a year of down-rounds.

That’s assuming that business who are reliant on investment to compensate for negative EBITDA figures, actually secure investment and survive the new year at all. Gordon Ramsey once famously said that Covid helped to get rid of “the crap restaurants”. In 2023, inflation will almost certainly toll the death knell for those businesses which are simply poorly run or which have not worked on developing a competitive advantage in this harsher climate. If winter comes, can spring be far behind?

When I read this back just now, it struck me as pessimistic. I began to think “do I really mean to be pessimistic”? But then I realised, this isn’t pessimistic at all, it’s simply realistic.

Personally, I’m quite relieved that the days of over-hyped, over-valued start-ups are on the wane.  The FOMO motivation never served anyone’s agenda, least of all the entrepreneurs who thought they could get away with it.

But there are also reasons to be cheerful. My Grandad used to tell me, “There’s always room at the top”.     

For those businesses with a product/ service aligned to target customer needs and who have a clear value proposition, there will always be enough investors to go round. Valuations may be suppressed from 12 months ago, but that won’t bother businesses that have a clear growth strategy and who can deliver a strong RoI. o round. Valuations may be suppressed from 12 months ago, but that won’t bother businesses that have a clear growth strategy and who can deliver a strong RoI.