Posted by: kevinliebl | July 15, 2009

Capital Formation and Business Investment – How Best to Take Advantage of the Current Economic Conditions

Keys to SuccessCapital formation and business investment are on the minds of most executives today.  The question of raising capital and investing in your company is a critical strategic decision. Businesses of all size are trying to determine how best to take advantage of the current economic conditions.

Most angel investors, venture capital firms and private equity firms are sitting on a great deal of cash.  However, they are currently looking to avoid risk and are investing in their existing portfolio companies to try to keep them afloat, rather than investing in new ventures.

Most startups are not profitable, and are therefore running out of cash quickly.  Many are trying to put themselves into “hibernation-mode”.  By reducing their burn-rate to almost zero, it is less of an issue that they are not generating much revenue.  The logic is that they may be able to ride out the economic storm and emerge on the other side with an opportunity to restart.

Profitable companies, regardless of size, are looking for opportunities to take advantage of the economic downturn.  Many companies are in acquisition mode and are looking to pickup struggling companies for pennies-on-the-dollar.  This can be an excellent strategy if you are looking to acquire intellectual property, talented employees or a franchise (customers).  Other companies are simply capturing market-share as competitors struggle.  Others are hiring talented employees away from competitors by presenting more attractive career opportunities.

This discussion reminds me of a lesson my grandpa Joe shared with me when I first moved away from home.  I was living on my own for the first time and was struggling to keep within a budget.  His advice was simple – “Never go grocery shopping when you are hungry.”  It is a simple rule, but you can apply it to a number of situations.  In this business climate, we need to remember that while many bargains may look attractive, they are only a bargain if they are on your shopping list.

As with most business ventures, the most important step is to start with a strategy.  What resources do you need within your company to make it more competitive?  Just because you can buy a competitor or partner for a 40-50% discount doesn’t mean you should.  Just because you can hire the employee you have admired for years, doesn’t mean you should.  Don’t put yourself in a competitive disadvantage because you went grocery-shopping hungry.

Capital formation is a term normally associated with raising “capital” or funding.  However, there are many forms of capital within a company.  As you consider reinvesting in your company to create a more competitive business, consider other forms of “capital” – human resources, intellectual property, business process, creativity and innovation.

I recently participated in an “innovation” roundtable discussion.  We debated the reasons companies invest.  We all focused on classical return on investment (ROI).  However, one of my good friends helped us reach the core reason for investment.  He stated, “we invest when our greed exceeds our fear”.  I believe he is correct.

Action Item: Before you take bold moves in this economic period, make sure your “greed” is focused on an area that aligns with your corporate strategy.

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  1. Terrific site! nice job, keep it up!

  2. You’re right about the investment piece. It’s not just financial investment. For me, investment is about building your business. In boom times it’s usually done confidently because you can see the return potential in a rising market. The problem is business’s risk profiles tend to retrench in a downturn – think back to the risks you were prepared to take in the boom times compared to now. So in this market fear rears its head big time. Investment, whether financial or energetic e.g. changing your processes and the way you do things, what you spend your time on, can get stopped by this fear. A client of mine summed this up eloquently recently. They said they only decided to invest in changing the way they did things because the fear of not changing had finally outweighed the fear of the change itself.

  3. Rowan,

    Agreed. As I said in my blog above, “we invest when our greed exceeds our fear”. There are many research studies that show those companies that invested in marketing during economic downturns ended up in better positions after the economic return. It is counter-intuitive and often difficult to invest in downturns, but it is often the best time to do it.

    Great post!

    – Kevin

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