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With every end to a year there are predictions and expectations for what the incoming year will bring. So following the twists and turns of 2018, what can the business world expect in 2019?
There will potentially be a further decrease in global stock market values, leaving a mass of venture capital fuelled tech businesses without a route to liquidation and thus no means to return value to investors. This is important as many so-called ‘unicorn’ businesses tend to rely on the public markets for the $1billion plus liquidation events or exits.
In the past in the US, only approximately 10% of venture backed businesses completed their exit via an IPO. The past few years however have seen an increasing number of companies stay private for longer. This has led to companies taking on further venture debt in rounds that feature the second half of the alphabet as well as exploiting the secondary venture market where early investors are able to liquidate at a discount. So will the 10% remain 10%? An increase will be needed as keeping companies private for longer increases their value and thus reduces the chanced of a trade sale due to cash demands. Think about it, how many private companies have the cash to buy other companies valued at billions of dollars?
As we head into 2019 there is a greater demand on the public markets to liquidate some of these huge private assets and a decreasing public market and as such less investors and less money. This could be a big problem.
Have some of the huge tech businesses just left it too late?
Many of the tech unicorn type businesses on the public markets are way overvalued and most still can’t prove a business model of profitability. These big public tech businesses will decline in value along with the rest of the public markets (and probably at a faster rate) as will their private counterparts, who more worryingly, have nowhere to go to liquidate. This is compounded by the fact we will see a further slowdown and probably a global recession, kicked off by Brexit in Europe. Brexit won’t be the cause, it will just be the catalyst to getting a delayed recession started that politicians have been trying to prevent for so long.
So if things do pan out this way, what does 2019 hold for entrepreneurs?
Bad times for most, unfortunately. New venture funding will come to a virtual standstill and big business valuations will plummet. Valuable businesses will be sold in fire sales to reduce hedge fund positions and provide liquidity, leaving entrepreneurs who are holding what they think is €100m of stock with nothing due to the mix of preferred stock (which most investors hold) as opposed to common (which most management and entrepreneurs have). Meanwhile some private equity organisations will swarm in on anything with profitability and a potential to service 15%+ debt interest and restructure the organisations, sack the management and take the business through the down cycle to its private sale.
However, it’s not all doom and gloom. The smart smaller scale entrepreneurs will do well.
Those that kept control, or took smart venture money from smart long term venture partners will continue to see growth. They will spend the next few years with reduced competition, able to focus on growth while their overvalued competitors concentrate on fighting off their investors who want out, the private equity organisations that want in and the administrators who want to close the doors and return some money to creditors.
These businesses will typically be the ones that did not need $500m of venture funding to get this far. Businesses like consultancy, outsourcing and manufacturing will benefit from the sexy tech that has been developed over the years and streamline their service with more competitive rates by reducing overheads through AI and robotics. In short, they will quietly add billions in value across the world increasing in value while the sexy ones fight to stay alive.
All of this will lead to a change in attitude. Investors will start to fall out of love with tech businesses promising to be the next unicorn and instead find more ‘boring businesses’ offering less risk and promising slow, steady growth far more attractive and stable. This doesn’t mean tech won’t be attractive… but rather than trying to find the next Google, smart investors will focus on finding technologies that can transform traditional industries.
With all this in mind, 2019 is going to be fun. Hold on to your pants it’s going to be a bumpy ride. Where some businesses will suffer others will do extremely well – and these businesses will be traditional, boring, unsexy businesses that have found ways to use technology to steam ahead.
January 1, 2019 at 07:08AM
Forbes – Entrepreneurs