With the start of the New Year, we are all hoping that the downturn will end, and business will improve. However, at Strategic Exits Partners, we predict that 2023 will be much the same as 2022. Here are five things that we are predicting will get in the way of a turnaround in 2023:
Finance is Frozen
Despite all you hear about “dry powder”, as long as interest rates stay high, public equity markets will be in a funk and the private markets will catch the gloom as well. If you are not in the top 15 per cent of your sector, you might not be able to finance. Which brings us to the old aphorism: cash is king.
Cash is King
If you can’t raise money then you have to survive on what you have and what you can generate for a lot longer than you think. Our advice: practice ruthless prioritization. Cut expenses early and deeply. Guard every nickel until you can see the numbers on your cashflow forecast flip from red to black.
Inflation is Not Going Away Any Time Soon
Despite the optimistic headlines that we are at the end of interest rate increases to fight inflation, we are a long way from the 2 per cent inflation target we got used to over the last 25 years. There are billions of dollars in excess liquidity which the banks created to fight the pandemic. Excess liquidity is a prime driver of inflation which the central banks are fighting with the only tool in their belts – increasing interest rates. But interest rate increases take months to impact inflation so they are not a fix in the short term.
And there are other factors fueling inflation: as COVID spreads, supply chain problems in China are getting worse which will continue to drive up costs. The Ukraine invasion will keep oil prices high. Supply chain problems and oil price increases cannot be solved solely by increasing interest rates. So, we expect inflation to be difficult to contain and interest rates are likely to increase and stay high for quite some time as the central bankers fight inflation on three fronts.
Plan for a 2023 that looks a lot like 2022.
An Exit is Not a Plan B
Many entrepreneurs looking at their cashflow forecast may conclude that they can’t make it with their cash on hand. They may consider selling the company rather than slash to try to survive. That may be possible if you have one of the four pillars favouring an early exit. Strategic acquirers are looking to acquire new technologies and markets for cheap during the downturn. Your company might be suitable.
Apart from these special situations, negotiating an exit may be difficult: if investors won’t finance your company, why would you be any more attractive to an acquirer? Further, a well-executed exit takes several months; likely more time than you have.
While you guard your cash, you can extend feelers to see if there may be interest in an acquisition, but don’t quit your day job.
Downturns Can be Good for Fully-Remote Startups
Even as the tech sector struggles through the downturn, there are many flowers blooming. Fully-remote companies, with no physical assets and minimal overhead, can be started and bootstrapped more easily now than ever before. Focussed and agile, they can scale and become cashflow positive quite quickly. While cash-hungry companies falter, fully-remote companies can thrive, ushering in the newest cohort of startups.
These market conditions will have an impact on many technology businesses. Keep them in mind as you ride out the storm, as there is light at the end of the tunnel for those that conserve cash and bootstrap until the sector begins to grow again.
David is a Partner at Strategic Exits Partners, a boutique investment bank, specializing in the sale of technology companies. David has devoted his career to help tech companies grow from small to large, and now works with Strategic Exits Partners to structure and execute more valuable exits for technology companies.
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