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Investing in Uncertain Times

Technology and private equity investments resilience in uncertain times.

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This year started with a breath of fresh air, people hoping the world will overcome the two past pandemic years and have everything coming back to a normal lifestyle. Financially, even though many lockdown restrictions impacted the global markets, startup investment had a positive trend, especially in Europe. 2022 trends looked brighter.

Everything was shaken on February 24th, when the Russian aggression started in Ukraine and caused a new wave of anxieties and worries globally. If we couldn’t focus on anything else but following the development of the events via news outlets during the first week, we had to go back to our normal day-to-day activities slowly. Ionut Patrahau - Managing Partner & Corporate Development, shared recently in his editorial article — Sailing through troubled times: “If there is one thing that COVID-19 taught us - we can’t stop and look terrified at the future - life continues, whether we want it or not.".

After more and more countries started to impose drastic sanctions on Russia, European VCs also started to examine their activities and any connection they might have with this country. Besides analyzing any involvement with Russia, the constant efforts of the European tech ecosystem moved towards Ukraine and a massive unification of forces to help them in different ways.

The tech ecosystem from Eastern Europe united its forces to help refugees escape the country, welcome them at the borders with food & everything else needed, find them a home to stay in or a new job to support their families. Additionally, startup companies having an office in Ukraine focus on offering financial assistance to employees or helping them leave the country. Among them are VC-backed companies, such as Bolt, Grammarly, UiPath, People AI, and many others.

The state of European startup investments

Besides the high hopes that people had to overcome a global pandemic, there was a significant shift in the mindset of startup founders, who gained more courage to build a business after seeing local examples, such as UiPath, Transferwise, or Bolt.

"We always had a strong education and technical knowledge. Our most vital asset now is that more people are willing to take the risk to build their own company. And I can see it in my day-to-day activity when I get introductions to many talented founding teams," said Luciana Lixandru, Partner at Sequoia, during her panel with Andrew Reed at Slush, back in December 2021.

At the end of 2021, all the signs show that money is pouring into the Central and Eastern European startups, according to the report launched by Dealroom back then.

The continuous development was highlighted even at the beginning of this year by experienced local VCs. They said that startups would continue to gain momentum, as Payhawk did when it became Bulgaria’s first unicorn.

Beyond local startups, more and more global VC funds are looking at Europe as a potential place to expand, as Sequoia opened its European office in London.

It wasn’t only regular people who had a rush of anxiety about different aspects of personal security, but also on investors' side. It might sound cliche or too simple, but some of the most generic advice we get for our worries also apply in the venture capital world.

It’s a foggy feeling, not a defined phenomenon

Fabrice Grinda tried to analyze the current events of The Great Unknown, and there are a few essential takeaways to remember from there. Since the recent invasion in Ukraine is still under development — the whole perspective for the future looks more like a foggy feeling than a precise result.

Fabrice Grinda’s recommendation for investors is to raise liquidity and prepare to buy attractive assets at lower prices and for founders to raise more cash to help them survive and be in a better position than competitors.

So, let’s see what else we can learn from uncertain times to protect our investments!

A global shift towards what matters now

Two years of pandemic time taught us some essential lessons on where we should focus our efforts and what matters more. What worked yesterday it’s not necessarily the best idea for tomorrow.

The best advice to protect your portfolio as an investor during uncertain times like this is to evaluate the resilience of your investments and see which are all the potential wins you’ll get from long-term results. The European startup ecosystem doesn’t have a deep connection with Russian funding money, but the current state of events might impact it, leading to a slower funding journey for startup founders.

Now, let’s think about any startup funding process – they all have a form of uncertainty, whether they will succeed or not. Additionally, the world has seen other financial crises before, and we learned to protect ourselves during these difficult moments. According to Mohamed A. El-Erian, chief economic adviser at Allianz, cited in Bloomberg, there are ways to understand when to stay calm and panic.

"Over the last few years, markets have been conditioned not to overreact to political and geopolitical shocks for two reasons: first, the belief that there would be no significant subsequent intensification of the initial shock; and second, that central banks stood ready and able to repress financial volatility."

Private markets hold a hidden power

Many countries worldwide united their forces in imposing sanctions on Russia, and other international organizations closed their local offices. The private equity community doesn’t have many connections with Russia but has shown us the deep connection between this country and other countries in Europe when it comes to energy, fuel and other essential elements.

Ukraine is one of the largest wheat suppliers globally, and there is a real threat to international transport that will be affected by the current invasion.

More commercial ties will be restricted globally, involving the relationships between more private equity firms worldwide.

The global investment industry has already reacted to all of these, and the private markets proved quick to sync with the public markets in adjusting the valuations, number, and size of transactions.

Everything slowed down. It is not a freeze, not yet, but I can say that the good days are behind for those hoping to raise a lot of money fast. added Cristian Munteanu from Early Game Ventures for The Recursive

Another reason to keep an eye on this is the ongoing growth of inflation. We have to understand how private markets react under uncertain times and how fund managers allocate their resources in helping companies offset the effects of inflation or supply bottlenecks.

“Generally, inflation is not necessarily bad news since private equity is flexible and more in control of their investments than other types of investors,” says Philip Meschke, Investment manager at Moonfare.

Although we’ll have a more fragmented market, some investors might consider directing their capital towards private equity. According to Mark Haefele, Chief Investment Officer at UBS Global Wealth Management, private markets are another option for portfolio stability. This proved to generate higher returns during uncertain times in the past.

“This is especially the case after a period of above-average public market returns. For investors willing to lock up capital for longer, private equity and credit have historically generated higher returns than listed markets, a trend we expect to persist. Private markets also have a low correlation to public markets, offering diversification benefits.”

Portfolio diversification remains a strong option for investors

So, there is more than clear that the future will bring significant long-term economic repercussions, both for the world financial ecosystem and the VC one.

At the same time, there are still industries thriving in uncertain times like this, and investors have the chance to spot these opportunities.

For example, Russia’s invasion of Ukraine has raised massive attention over the cybersecurity space, with multiple cyber attacks happening in both of these countries. A few moments ago, the president of the United States was drawing an alarming signal over private companies and organizations to lock their digital doors, according to BBC.

The fear of a possible escalation of cyber attacks over international borders challenged cybersecurity companies to have higher protection shields ready against different types of threats. Investors should consider looking at these thriving industries over uncertain times as a potential source of growth for their portfolios.

“Over the last 40 years we saw countless crisis and crashes: the 1981-1982 recession, Black Monday in October 1987, the 1990-1991 recession, the bursting of the dot com bubble & 9/11 and the corresponding 2001 recession, the Great Recession of 2007-2009 and the COVID-19 Recession of early 2020. Throughout all this, if you invested in technology writ large you did well,” states Fabrice Grinda in his post.

We talked about portfolio diversification not so long ago, and we emphasized that you don’t have to put all your eggs in one basket.

Avoid potential risks associated with your portfolio by starting with these easy steps:\

  • Create an investment thesis and see how you want to diversify your portfolio.\
  • Keep building your portfolio. Consistency is key.\
  • Analyze past deals and step out when needed (we have liquidity options when new valuations).\
  • Have a multi-sector, multi-geography, multi-stage approach.\
  • Syndicate as an angel investor (smaller tickets).

Fabrice Grinda shares his portfolio allocation:

“My current asset allocation is as follows: 60% early-stage illiquid startups, 10% public tech startups (the companies from the portfolio that IPOed that I have not yet sold to reinvest), 10% crypto, 10% real estate, and 10% cash.”

Discipline and patience are two of the core ingredients that describe a successful portfolio.

By Patricia Borlovan

PublishedMarch 29, 2022


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