Top 5 Business Finance Trends
While everyone is straining for signs of hope in the current economic morass, the fact is that we're in a slump worse than any seen since the Great Depression. It's not hopeless, of course, but there's no use kidding ourselves that things are getting better right now. As Max Gunther wrote in The Zurich Axioms, "Optimism means expecting the best, but confidence means knowing how you will handle the worst. Never make a move if you are merely optimistic."
Now is the time to see things as they really are, not as you wish they were. So here are the important business trends we see at work right now, without any varnish or sugarcoating.
- The amount of capital available to SMBs will continue to shrink. Every private source of capital, from private angels to banks to venture capital firms to acceptance companies, is reducing the funds it makes available to startups, small and even midsize businesses. Government stimulus plans take a long time to trickle money down to where it's needed, and needs are much greater than even the Treasury Department's printing presses can satisfy. Capital will remain tight through the rest of 2009 and beyond. Your business expansion plans should be self-funding or they probably will not be realized.
- Investments in startups will continue to be trapped with few exit options. The IPO market is in a profound slump, and there is no reason to expect it to climb out in the foreseeable future. Not only is the economy in recession, people are deeply cynical about equity markets as a result of seemingly endless uncovering of financial scandals. If they had money to invest they would not entrust it to an IPO. Government efforts to reform equity markets and restore investors' confidence in the system face prolonged, stubborn resistance from entrenched and powerful interests. Investors' capital is locked in startups without profitable exit options. That means less capital available for new investments. All you can do right now is continue to increase the value of your business until the logjam is broken and money can flow freely again.
- Methods of internal financing will proliferate and be used more creatively. With traditional external financing dried up, more and more business owners are striving to unlock the capital within their companies. This demand is giving rise to new methods of internal financing, such as tapping one's 401(k) plan. "New" is always scary, but when the old methods are no longer available, one must adapt or die. Look carefully at financial advisers' new suggestions but remember Buddha's words, "The whole secret of existence is to have no fear."
- Government will not come to the rescue of entrepreneurs. With Chrysler and other very large employers of voters in bankruptcy and laying off legions, do not expect government to pay much attention to the problems of small businesses. The biggest wheels squeak loudest and get greased first. Entrepreneurs are forces of creative destruction; they undermine large, established corporations and replace them with new, more vigorous growth. But government is in the conservation business; it seeks to shore up the status quo, not foster its replacement. Therefore expect to see elimination of the capital gains tax and other meaningful stimulants of change to be shoved to the back burner while government concentrates on propping up dying corporations and industries.
- Entrepreneurs and investors are returning to their senses. Entrepreneurs are becoming more careful, refusing to start businesses until they know how they will secure financing down the road. They are choosing their investors more carefully, no longer imagining that they can earn satisfactory profits no matter how onerous a venture vulture's terms are. Entrepreneurs are no longer seeking one-night stands and summer flings with indiscriminate investors, but long-term relationships with investors who share their values as well as their greed. Investors, in turn, are lowering their expectations of ROI and extending their exit-time expectations. They are seeking ventures that generate genuine value, not just those that rely on being first to market with headline-making fluff. A new realism is arising from the excesses of past years. It is not a lowering of expectations, but a return to sanity.
There truly is nothing new under the sun. What we are seeing now is a return to the values of a past century. Government interference ("aid") will be limited. Self-reliance, not reliance upon "other people's money," will become the norm again. Ingenuity will regain supremacy over marketing hype. Businesses will be built upon hearts, not just spreadsheets. Entrepreneurs will give who they are, not just sell what they do, and people will shower them with money as they would water roses. Pernicious weeds will be uprooted and cast into the fire. The world of business is regaining its balance again.