After the depressing Sequoia “RIP Good TImes” slideshow did the rounds last week, I couldn’t help but think that the situation is somewhat different here Downunder.  We’ve never suffered from the same level of irrational exuberance that seems to grip North America in vertigo-induced nauseating cycles.  We may be crashing, but it will be from a lower altitude – of course if you’re still dropping at terminal velocity then the initial height may not have mattered so much.

And yet, from what I’ve seen there’s still plenty of angel investment cash about – the trick for angels is to find investable businesses who are likely survive economic hard times and build their businesses organically until expansion resources free up, as they inevitably will in the future.   So for the local Angel scene, the reality is that we are living in interesting times full of challenge, but the I believe picture is far rosier than what Sequoia might paint.

And the Australian Association of Angel Investors concurs.  They published the following article (reproduced with permission) in their most recent newsletter, which is among the most sensible summaries I’ve seen.

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Angel Investment & the Global Financial Crisis
By Jordan Green
October 20th, 2008
Angel News Australia Volume 1 Issue 4
Published by the Australian Association of Angel Investors Limited

The global financial crisis triggered by the USA sub-prime disaster continues to spread and deepen. The question is being asked, “How are angel investors affected?”

Answers are offered here in three parts, being for angels, for angel-backed companies and for the community at large.

For Angels:

Angels predominantly invest in early-stage companies committed to high growth over a period of 3-6 years. Early-stage investing is inherently counter-cyclical. In other words, when times are hard and the ‘market’ is depressed early-stage investors are eager and active. Witness the marked activity of those quality VC firms around the world who already have their investment funds. VC who do not have their funds probably won’t be raising new funds any time soon.

In down turns valuations are lower and the quality of entrepreneurs is often higher because the market is not cluttered with me-too guys and gals attracted by the successes that appear in the early days of the up turn in the cycle. Those very successes are the ones nurtured by investors who invested during the down turn.

It usually takes 2-3 years to build a business to the point where it is best equipped and positioned to take advantage of an upturn in the market. Further, a business developed and refined during lean times is more likely to be an efficient, responsive operation able to optimize margins and adapt rapidly to market change.

At the personal level, angels have a choice about where to place their funds. In down markets the decision to put their discretionary funds in the hands of brokers and bankers who live off transaction fees is less appealing. The decision to invest in angel deals is a vote of confidence in themselves and their ability to use their own skills, experience and networks to build and harvest value.

For Portfolio Companies:

From the entrepreneur’s perspective money is never easy. In the years ahead raising investment capital will be even more challenging. Around the world early-stage investors (angels & VC) are advising their portfolio CEOs to batten down the hatches and plan for a prolonged period of self-sufficiency.

As always for young businesses, cash is king so, unless a company has over 12 months of cash reserves, it should raise funding as soon as possible and raise as much as possible.
If a company’s market position is weak and/or the target customer segment is severely impacted then cash requirements will be going up. In those cases aggressively examine and pursue M&A opportunities. Remember, everybody will have lower valuations and now might be the perfect opportunity to combine with one or two competitors to ensure that, together, there are resources to weather the crisis and to ensure critical mass (including funding, customers, rolodex power, market share, cash, synergy, etc.). Or consider getting closer to corporate partners as investors, or even as acquirers.

Hopefully, entrepreneurs already know how much cash they have, their expenditure at the current “burn rate” and when they will run out of cash. They need to cut costs, even if it means staff reductions, fewer features and lower general expenses. This is equivalent to raising an internal round through cost reductions to buy more time before the need to raise money again. Losing staff is hard and often emotional but, consider services for their higher capital efficiency.

Re-evaluate development plans, customer acquisition timelines and revenue milestones to achieve more with less. Sounds like blood out of a stone to most entrepreneurs but, this is essential to survival. The lesson learned from the Tech Wreck and other down turns is that the winners are those left standing.

First to market means bearing the brunt of market education and other front runner costs that demand deep pockets. Speed to market remains critical but, aim to be the last one standing.

For the Community:

High growth SME are a key driver of our economy. These businesses drive product and service innovation thus lowering costs for customers while driving their own growth of revenues, staff and profits.

Small, agile businesses backed by experienced, successful business people can rapidly address the changing needs of the distressed markets. While large firms struggle to adapt through mass lay-offs and other unproductive cost cutting efforts they become more aggressive acquirers of innovative technologies and services that improve their productivity. The interplay of angel-backed businesses can sustain, or introduce key capabilities for the competitive advantage of Australia.

A vital, active angel community applying its resources to fostering, mentoring and funding commercially successful innovation while working in partnership with inspired government leadership and initiatives can underpin the rapid evolution of Australian business that is essential to protect and improve our lifestyle, our culture and our security.

The Angel Association has linked up with international partners in Australia, the United States, and Europe in a move which it hopes will help young New Zealand companies looking to expand offshore.

Angel Association chair Andy Hamilton said cooperation agreements have been signed with the Australian Association of Angel Investors, the European Business Angel Network, and the United States Angel Capital Association.

“The objective with signing these agreements with Australia, US and Europe is threefold. It will promote relationship exchanges. It will promote best practice exchanges. And it will aid our kiwi companies entering foreign markets and getting finance in those markets.

“Angel investing has become a significant asset class in its own right since the year 2000. By building international linkages, angel groups in New Zealand can benefit from the worldwide growth in angel investment.

“Since 2005, we have seen considerable growth in syndication of angel deals between angel groups in countries. Now, we are starting to see syndication occurring across country borders.

“For a young New Zealand company looking to expand to, for example, the US, having a US angel investor alongside some New Zealand angels could help greatly in terms of that company’s knowledge and understanding of the US market. Syndication also greatly expands the potential  capital available.

“We are already seeing international interest in our growing angel community. Representatives from three Australian angel groups will be attending the Angel Summit in early November in Auckland. We hope that Kiwi angels will be attending US and European angel conferences next year.

“We are also look at building links with the Asian region. Further, moves are underway to establish the World Business Angels Association, of which we will be one of the founders,” Andy Hamilton said.