Background

In today's quick-paced and cutthroat financial environment, it is simple to forget that the economic recession was ten years ago.

Since the last recession, the venture capital sector has experienced tremendous upheaval, and the start-up scene right now is booming. However, it's crucial for us to take into account the potential repercussions of a less rosy economic climate as venture capitalists investing in new opportunities. These hazards should be understood by business owners as well. We base these choices on our prior experiences.

I worked for a subsidiary of Goldman Sachs that specialised in investing in startups and growth capital during the most recent financial crisis. I kept track of the state of investments before, during, and after the recession. This period tested the venture capital firms' investments, as it was frequently characterised by overworked teams, erratic conduct, delayed decision-making, restricted access to funds, unsuccessful business strategies, and depleting financial reserves. There was a lot of stress on many businesses, which necessitated extra funding rounds.

Lessons

The ten lessons I discovered as a venture capital investor during the most recent financial crisis are highlighted in the list below.

1. Financing: Especially during a downturn, venture capital investments frequently need additional funding since revenue growth may not exceed initial forecasts. To avoid major dilution, you must be ready and financially able to supply extra money.
2. Track investment: Lead investors' participation in successive funding rounds can draw new investors and keep the backing of existing investors, both of which are critical for stability. Failure to raise money could jeopardise future efforts at fundraising and, in the worst case scenario, lead to the company's closure.
3. ective leadership is crucial. Make a detailed investigation into the top investment managers. They play a big part in whether the business initiative succeeds or fails. Check to see if they recognise the worth of capital and are receptive to criticism, as well as if they have a varied and well-balanced range of talents and relevant expertise. Make that management maintains low expenses during a recession, operates an effective business, and, if required, modifies incentive programmes to better align interests.
4. It's important to communicate. It is crucial that the startup and its investors communicate openly and frequently and share information. This makes it easier to prevent unforeseen problems and gives investors the ability to offer the greatest support. Success depends on all parties upholding their commitment to one another and having similar objectives.
5. Deliberate Care. The process of performing due diligence requires that many different elements be properly considered. Understanding unit economics and the path to profitability, as well as developing a thorough understanding of payables to determine the amount of new equity that will be available to support the business post-investment, are two crucial areas that are especially crucial to take into account during a downturn.
6. Originality. Ventures that fulfil a genuine need with a special product, service, technology, or intellectual property are more likely to succeed. The most innovative businesses are more likely to flourish, and investors frequently show a greater interest in unusual ideas.
7. Shareholder agreements: Different classes of shareholders may not be aligned, which makes it challenging to raise money or make critical choices. Restrictive shareholder agreements can give investors protection, but they can also give other parties the power to obstruct reforms. In the long run, simpler shareholder governance may offer superior protection.
8. Relying on outside funding: Getting money from banks or other external sources, such as vendors, can help a business grow. However, it can result in unforeseen setbacks if the profitability of the investment and the returns are reliant on this outside money. The funding source could decide to stop providing funding or change the terms, which would delay the plan and hurt the company's equity position.
9. Knowing when to cut losses: Making investments in start-ups is risky. Not every business endeavour will succeed; some may fail while others may endure. Investment diversification can aid in lowering overall risk.