In closing out a rollercoaster 2023 and to prepare for a very interesting 2024, I have had time to reflect and plan, and wanted to openly share my key learnings.
It is all about timing and risk - luck is overrated
Serial entrepreneurs and seasoned investors will tell you that timing and taking calculated risk play a key role in success. In working closely with many business owners, companies and funds across the UK, Europe, US, and Canada since 2007, I would say this statement certainly holds true. Luck is overrated.
Building and scaling any type of business requires continuously making smart decisions, and executing fast. It requires knowing your options and understanding the trade-offs, and trusting in daily choices made, every step of the way.
This starts with asking the right questions and surrounding yourself with the right people, at the right time. It is the most effective way to navigate a complex and dynamic business and macro environment.
Four years ago, I took a big risk in starting Pegafund to solve key pain points I felt were urgent and big. The business model was not yet proven in Europe and candidly, we were too early for the ecosystem.
The market shifts in the past year or two have been eye-opening: “Management Accounting”, “FP&A”, “Modern CFO” and “Fractional” are now commonly used terms (just Google it!) and better understood by many.
The 0 to 1 journey has been filled with ups and downs. Entrepreneurship is hard and lonely - sounds cliche, but only entrepreneurs really get this. I am forever grateful to those that have provided support along the way (a BIG thank you and hug if I have not expressed it enough!). I know I can always count on you.
As much shareholder value is created during an exit than the journey ‘in between’
When it comes to unprofitable, frequently changing businesses dependent on external funding to grow (often VC-backed startups), this statement certainly holds true most of the time (caveat: unless the fundraise or exit was poorly executed). Tech executives of product-led transactional businesses will tell you that being as close to and optimizing the point of a transaction is still where most value is realized. I can confirm this also shows through in our numbers.
Many funds are under tremendous pressure from their key customers (i.e. Limited Partners) to provide returns and distribute portfolio liquidity (refer to EIF report published in October 2023). Historical data shows that only 4% of startups deliver venture-like returns (defined as 5x return per EIF report from 2017) and 78% are unprofitable investments. (The equivalent data for US VC funds can be found in a Andrew Chen of a16z post in reference to a Fund-of-Funds report by Horsley Bridge.) Venture capital as an investment asset class is cyclical - it tends to perform better when interest rates are low, and future profitability is valued more highly than present day cash and liquidity.
This means many entrepreneurs and investors are faced with some very challenging yet critical decisions this year. For a VC-backed business, you need to decide whether to become profitable, continue burning cash and raise more capital, or realize value through a partial or full exit. It all comes down to market opportunity, unit economics, and execution speed. Business fundamentals have not changed…time value of money has.
Curiousity and craftsmanship compounds
When I started dabbling in accounting, finance, economics, and investing in 2003, I was looking for answers to questions I did not yet know existed and therefore far less, how to even ask them. Having been traumatized by the aftermath of a bad financial decision made, my professional and life decisions have been a byproduct of continuously and consistently asking the “why” and “so what” - a discipline Ivey Business School deeply ingrained into my brain. I found myself taking on different and new challenges as I learned more about the worlds of financial services and software.
Having experienced the last recession, the early warning signs of another economic bubble arrived in late 2018 and early 2019. The first came in the form of an equity term sheet (from a now delisted VC firm) being structured and priced cheaper than debt - this contradicts first principles behind cost of capital and investing. The second incident came shortly after during a negotiation process when a successful founder-CEO revealed that he did not know the difference between equity and enterprise value, in spite of going through multiple funding rounds for his VC-backed business. For me, it felt unethical that these events were happening and not enough was being done to prevent or fix them.
Though the cost of entrepreneurship is high, I am a big believer in taking real risk to challenge the status quo and re-design a legacy system. Well-functioning systems are meant to benefit most, rather than a few.
In deeply understanding the inner workings of a VC-backed startup, I have come to realize that a lot of business scaling challenges boil down to gaps in bringing together the past (performance), present (forecast), and future (planning) for effective value creation. This includes structuring data and communicating key insights to inform strategic decisions and tactical choices, and building that into the business culture over and over again.
What to look for ahead…and your input to get there
We have decided to share our expertise and network more widely for entrepreneurs who want to better understand core concepts in business strategy, financial services and software in order to grow smarter. Practically, it means we will be hosting webinars and in-person events, publishing YouTube videos, and posting on LinkedIn more regularly.
Being a bootstrapped business with big scaling ambitions, we need to be deliberate with our time and resources. Focus is key.
I would like to get your input on the topics most valuable to you:
Business strategy
Building and scaling Modern Finance
Modern tools and technology
Funding and Exit
From Founder to CEO: Scaling as a leader
Internationalization: Ready to go global
Accounting, Finance, Investing, Economics fundamentals
Reflecting on the Past: Accounting, Finance
Unit Economics: customer profitability and go-to-market scalability
Business hygiene: record keeping, compliance and controls
Business design: Management Accounting, controls and planning
Understanding the Present: Finance, Investing
Resource allocation: Operating Leverage, Financial Leverage, Cash Conversion
Knowing your worth: Enterprise Value, Equity Value
Funding and Exit: timing, competition, comparables, negotiation, price
Anticipating the Future: Investing, Economics
Time Value of Money: cash vs. opportunity cost, yield vs. multiple return
Investment Strategy: passive vs. active investing, diversification vs. conviction, liquidity
Business and Life planning: measurable goals and time horizon, access to capital, cost of capital
As always, your feedback is incredibly valuable! Please let me know in the comments section (below). Sharing is caring.