24Haymarket CEO Paul Tselentis discusses the challenges faced by investors and founders during the global COVID-19 pandemic

Author

UK Business Angels Association

07 April 2020

Paul TselentisThe world is facing an unprecedented challenge thanks to the ongoing global COVID-19 pandemic. Impacting on the lives of everyone and causing economic uncertainty for businesses, we are faced with having to adapt to a new way of life and conducting business for the foreseeable. The Government has announced a range of initiatives to help businesses survive (find out the latest in our COVID-19 hub) while angel investors are looking at how they can support their portfolio. We spoke with 24Haymarket’s Paul Tselentis to find out about their ‘triage’ process, discuss the challenges faced by investors and founders, and to talk about what the future may hold.

24Haymarket is an angel-led investment firm that focusses on early-stage growth equity and venture capital investments. Founded in 2012 it has approximately 100 high-net worth individuals and family offices as members. Explaining more about what they do, Paul says:

“We focus on Seed or Series A stage opportunities predominantly in the B2B and life sciences verticals where there is some proof of initial traction and our capital and support is focussed on commercial scale up rather than unduly exposing our investors to technology or science risk. We try to differentiate ourselves by the level of operational support we provide to our investments – both by appointing experienced Investor Directors from our network to the boards of our companies, relevant commercial introductions from our network but also through the development of central portfolio support functions (for example, leadership mentoring, sales training and pipeline management, talent recruitment, best practices in product and technology etc.). We seek to make an initial investment of between £750k and £2m for a minimum of 10% ownership post-money and follow-on or increase our exposure in the companies that are doing well.”

To date 24Haymarket has invested approximately £70 million in 48 different companies. They have recently completed their third profitable exit.

With the pandemic causing issues across the globe, many investors – both private and institutional – have taken a hit to their public equity market exposure leading to a need to rebalance their portfolio. The knock-on effect is that investors are being more selective when it comes to early-stage investment opportunities with investors reserving their capital for their existing portfolio.

Paul does see one positive though that will come out of this pandemic and that’s around valuations. He comments:

“The single largest driver of risk of any asset class is a high entry valuation. Valuations over the past two years have been over-heated across the board and angel deals particularly so. We feel that it is likely these will settle at more normalised levels in the medium term and that is encouraging to us. Furthermore, very few of our investee companies have intricate supply chains and large numbers of employees locked at home that they are figuring out how to productively engage (as is the case with many larger businesses). Few of them have leveraged balance sheets. In this environment, that agility, if you can properly harness it, is a huge advantage.”

For founders, Paul believes there are two implications. Firstly, the near-term implications which he expects to take place over the next six months.

“For the near-term, we are encouraging all of our companies to aggressively shore up their liquidity position through a combination of operational efficiencies, accessing what government support might be available (e.g. Job Retention Scheme, VAT holidays, rent moratorium etc.), applying for non-dilutive grants and where they need to access equity capital, do so on the basis that it is “survival” capital rather than growth capital. In the near-term, surviving is winning and this requires a rapid mindset shift for the CEO of any business.

Secondly, founders need to look to the medium-term, which will require a significant adjust. Paul shares:

“In the medium-term (which in our view starts in the Autumn), we believe founders will need to adjust to doing more with less. Valuations will likely come down and round sizes will commensurately adjust. Encouragingly, the market for talent (particularly sales and marketing) and a lot of other costs (like real estate) will be less tight than it has been for a while so for the right type of operator, they should be able to navigate this to get to the same, if not a better, result. I say operator rather than founder because we feel that this new environment will lend itself to the best operators rather than the most talented fundraisers (which has been the case for the past couple of years) and we are fortunate to have some fantastic founder operators in the 24Haymarket portfolio.”

“For the near-term, we are encouraging all of our companies to aggressively shore up their liquidity position.”

To help investors mitigate against the difficulties that the pandemic is causing to their portfolios, 24Haymarket has rapidly ‘triaged’ their portfolio on the basis of two simple variables: liquidity profile and commercial threat or opportunity. Detailing this process further Paul reveals:

“The way in which we support our companies varies considerably based on in which “bucket” they fall. We feel that it’s easy in this time to be distracted by the urgent situations (i.e. pressing liquidity) when an investor’s overall portfolio return could be maximised by focussing their attention on those companies who could make something positive out of a difficult situation.

“I think it’s also important to add that we are constantly revisiting our assumptions with monthly portfolio reviews. A company might have a secure contracted revenue stream but with counterparties who are not in a position to pay their bills right now. You need to drill down to the level of individual customer credit risk to really have a full picture of the liquidity risk.”

He also acknowledges that some companies could actually benefit from the current climate pointing to sectors such as cybersecurity, data privacy, life sciences and at-home exercise solutions who are likely to see an increase in demand with most of the world having to stay indoors for the upcoming weeks and months.

What advice is 24Haymarket giving to their portfolio? Paul says it varies by cohort.

“For those with tight liquidity runways and seeing an adverse commercial impact, we are pretty frank with the companies that we are unlikely to contribute more of our capital to these situations. But we are not abandoning them either and we are helping them with their aggressive cost savings initiatives and review other sources of capital, particularly that which is being made available by the government. It’s a very difficult thing to do, but the best angel investors avoid being sucked into these situations.

“For those companies with tight liquidity and where there is an opportunity to benefit, we are working with them to retool their plans and go-to-market approach (particularly in a home working environment) prior to contributing further capital. I think there is a stronger rationale to put more capital into these companies as we build better conviction in how the world is going to shape out, but they need to have a well thought through plan first.”

“For those companies who will likely struggle but have the benefit of liquidity on their hands, there is more time to operationally and commercially restructure these businesses and this is going to be the bulk of our focus and time and effort right now and this Summer. It pays to be decisive early so that we can avoid to having to invest defensively in these companies later this year.

“Finally, for those companies who are long liquidity and long opportunity, aside from ensuring they have great boards in place (which almost all of our companies do), we do not worry about them – they will take care of themselves!”

Looking to the future when we come out of the other side of this pandemic, Paul believes there will be some investor churn in the broader angel market but is confident that modest valuations and the ability of the right companies to do more with that capital will offset the decline in ticket sizes in the near and medium-term.

“It is inevitable that there will be some churn out of the broader angel asset class in the coming months and years and it will test the commitment of individual investors to want something more meaningful than generous tax breaks and a bit of fun. Angel groups will need to spend more time qualifying their members to ensure their long-term commitment to the asset clause.”

Find out more about 24Haymarket at https://www.24haymarket.com.

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