Smaller companies will tend to be more vulnerable to the pandemic and its economic turbulence. Most have little or no financial reserves and sell a limited range of products. However, well-funded smaller companies have a major advantage over larger firms as they can change direction much quicker and this flexibility could prove vital as they grow their way out of the crisis. Below we identify some essential characteristics the management teams of smaller growth companies will need to display in order to be successful and attractive to investors.
Our Flexible Friends
Flexibility for management teams means they do not get too wedded to a plan and recognise when market conditions change. At the start of the crisis, companies were forced to adapt and make changes to survive. It is essential they harness the speed and discipline adopted during the crisis and continue to react to changes in the business environment faster than was thought possible pre-crisis.
Tick the Right Boxes
It is essential growth companies are structured to offer investors what they want. In the UK this means offering EIS shares. The Enterprise Investment Scheme offers significant tax benefits to investors that can maximise returns at the same time as being an important risk management tool.
The Need for Speed
One lesson of the crisis is the need for speed: businesses had to adapt through quick fixes and workarounds. To achieve this management teams increased the speed of decision making, while improving productivity, using technology and data in new ways, and accelerating the scope and scale of innovation.
Effective post pandemic companies will have streamlined decisions and processes replacing slow-moving hierarchies and bureaucracies.
Tech and Data
In order to thrive management teams must not be afraid to reinvent themselves. Even well-run companies may find that they need to reinvent themselves more than once.
This will mean they continue to embrace technology and data, reinventing core processes and adopting new collaboration tools. Technology and people will interact in new ways.
Business owners, executives and managers must master the ability to make good decisions quickly in order to keep the business moving forward. This is no time for management teams to sit on their hands and often it will come down to making sure a decision is made. With the only constant in business being change, if a leader is not open to exploring new ideas it can literally spell the demise of the company.
Why, What, How?
Firstly, when faced with difficult decisions, management teams must be clear on ‘why’ the decision needs to be made. This sets the context for the decision.
Not only does this help management teams separate the wood from the trees in these times where there seems to be endless decisions to be made, bringing focus on the key decisions. It also means management can communicate that ‘why’ to everyone else who is affected by that decision.
The ‘what’ and the ‘how’ of that choice can then be made relatively easily once the ‘why’ is understood. People are more likely to buy into the changes that need to be made if they understand the context and when that happens their engagement levels will increase too. Employees will remain focused on the change in hand, customers, partners and suppliers will understand, and people will more easily align behind the decision. In such a fast changing business environment, it is essential the whole team are pushing in the same direction.
Keep Your Eye on the Prize
For management teams there is additional incentive to get it right with the huge amount of PE and VC money looking for the right opportunities. In our last blog we reported $21 billion was raised by VC funds in Q1 2020, to add to the estimated $276 billion pile already waiting for the right opportunities. See Investing for Value Post COVID.
Return of the SPAC
Another exit route for high growth companies could be through a Special Purpose Acquisition Company (SPAC).
In recent years the Special Purpose Acquisition Company has come into fashion, offering companies a path to going public that’s faster and simpler than a traditional IPO. SPACs raised $13.6 billion across 59 offerings in 2019, compared to $1.4 billion in 10 listings back in 2013, according to the website SPAC Research. This year has already seen $19 billion raised across 50 such listings, with an average size of nearly $380 million, up 65% from last year.
SPACs are holding companies that raise money in an IPO on the promise of making a future acquisition or investment. Managers who commit capital to the IPO are betting on the ability of the executives behind the SPAC to find an attractive target at an attractive price.
Investor interest peeked further this month with none other than Bill Ackman joining the party as he raised $4 billion for a SPAC called Pershing Square Tontine Holdings, widely believed to be the largest SPAC IPO on record. Hedge fund pro Bill Ackman has a long history of converting bold, contrarian bets into very large sums of money.
Ackman has indicated that the vehicle has $5 billion in total capital, including his fund’s own money, and that he wants to make a minority investment in a highly valued growth company. Pershing Square is now reported to be “in a unicorn mating dance.”
One name that has been mentioned repeatedly is Airbnb. The pandemic has caused serious strain at the vacation rental company, and CEO Brian Chesky told Reuters that the company has “been approached regarding a merger with a SPAC. The prospect of a potential marriage of Ackman and Airbnb could be quite something to watch and more importantly could set the precedent for multiple SPAC deals for high growth companies over the next few years.
CSSP backed companies will often offer EIS Shares so investors can use the significant tax breaks of the UK Enterprise Investment Scheme to help mitigate the risk of venture capital and maximise returns.
Investments offered by CSS Partners are not appropriate to all investors. Our free client service aims to be of benefit to high net worth and sophisticated investors looking to achieve higher returns.
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Any views or opinions expressed in this blog are those of the author alone, except where specifically stated that they are the views of CSS Partners LLP.
What business in a post pandemic economy looks like – Forbes 19 June 2020
McKinsey & Co COVID—19: Global Health and Crisis Response 01 June 2020
Pitchbook Data: Ackman, Airbnb and the Blank-Cheque Bonanza 26 July 2020
Bureau Van Dijk – A Moodys Analytics Company Global M & A Review H1 2020