Despite a small rally in the public markets this morning, there’s no denying that the overall trends are alarming.
And while we’ll certainly see it recover eventually… I don’t think that’s going to happen anytime soon.
This is a very scary time for people – not just health-wise, but financially as well. I think we’re all starting to understand why our parents and grandparents buried their assets in the yard during the Great Depression – watching the markets nosedive makes you want to do anything you can to keep your finances safe.
But if you ask me, you shouldn’t go burying your cash just yet… Because market pullbacks and recessions can actually create really favorable conditions to invest in startups. Here are three reasons why.
Valuations go down when the markets drop
In a bull market, everybody looks at startup valuations through rose-colored lenses. Think about it – Uber went public at a valuation above $80 billion before it was even a profitable company. You just can’t pull off claims like that when the market is tanking.
What that means for you is that startups raising capital are likely to do so at a lower valuation than they would have just a few months back. Lower valuations are a good thing – the lower the valuation, the more equity you can buy for your dollar. It also means there’s more room to grow, since a startup you invest in now will have to continue to justify palatable valuations down the road.
Angel investments are long-term commitments
When you write a check to a startup founder, you do so knowing that you may not see a return – or much of anything – for at least a few years (sometimes as much as ten).
Recessions are, historically, much shorter-lived – the Great Recession of 2008 lasted 18 months. Most startups raising capital right now should be able to make it that long; those that adapt to fit consumer needs, pinch pennies, and focus on optimizing their margins could potentially last much longer.
Tough times teach companies to get tougher
Startups that are founded during recessions tend to grow up with exceptional grit and courage – born out of necessity in the moment, but immensely useful for life.
Does that grit boost a startup’s chance of success? Maybe so. The Great Recession produced some of the biggest companies in existence today; Slack, Uber, Airbnb, Dropbox, Glassdoor, and Github were all founded during that time.
I genuinely believe we’ll look back at this time and see a new generation of titans that emerged – and made their angel investors incredibly rich.
Now, that doesn’t mean you should jump right into every deal opportunity you see. Now more than ever, it’s critically important that you approach every decision you make with a discerning eye and a logical, data-driven strategy.
Over at the Angels & Entrepreneurs Network, we use a suite of tools – and the power of our vast network – to break down any deal opportunity that comes our way. In the nine months since we launched, we’ve analyzed hundreds of startups… and given the green light to just 36.
With tens of thousands of passionate subscribers, there’s never a single stone left unturned. And, while I can’t say for sure whether those startups will fledge or fail, I do gain immense comfort and confidence knowing that each and every startup on that website made it through our gauntlet.
Until next time,
18 responses to “3 Reasons Why You Should Invest in Startups when the Markets Are in Freefall”
April 02 2020