As we pass Independence Day (the holiday, not the movie), it’s hard not to think about the United Kingdom being in the process of pursuing its own revolution from (perceived) tyranny. My idea is hardly novel. The search term “Brexit” on Google returned 257,000,000 entries. But hang in there with me – this post isn’t so much about Brexit as it is about understanding how global events on another continent might (or might not) impact an emerging business in the United States.
The proposed severing of ties between the United Kingdom and the European Union is fascinating in that it caught everyone so off guard. Prime Minister Cameron quit. The British Labour Party seems intent on figuratively guillotining Jeremy Corbyn, and the UK Independence Party – the party that pushed for this thing in the first place, just sacked their leader, Nigel Farage, presumably because he decided to gloat in a very un-European/English way. In short, both the winners and losers are acting as if Wile E. Coyote somehow caught the Road Runner, and had no clue what to do next. The markets felt the same way.
Markets hate uncertainty, and they equally dislike unmet expectations. The British Pound hit a 31-year low after the vote (quick – plan a vacation to London!) $2 trillion was lost in stock markets around the world as the vote returns made Brexit clear. The U.S. markets also took a hit but they are already pretty much where they were, pre-Brexit. Does that mean that tech companies are out of the woods?
Not necessarily. While the British-E.U. break-up will likely directly impact only those companies that happen to sell to customers in the U.K., and, to a lesser extent, the remaining portion of the E.U., U.S. investors could choose to back away from risk, which would mean fewer dollars available for higher-risk commitments, such as angel/venture capital.
The best historical analogue here is the Long-term Capital Management (“Asian Contagion”)/Russian financial crisis of 1997-8 (I consider the two linked), because it was a severe financial shock that did not directly impact the U.S. (as opposed to the 2008-9 “Great Recession” or the 2000-2001 dot-com crash recession.) That crisis was followed by a 6% decline in U.S. venture capital investing (Q3 1998 vs. Q2). I haven’t done the number crunching to prove causality, but it’s reasonable to speculate that venture capital investing paused a bit to allow the markets to see if the Asian Flu was going to be quarantined or become global pneumonia.
The upshot here is that Brexit will most likely impact your fundraising if:
- Your investors are European – Europe is in collective shock and their already risk-averse stance should stiffen over the next couple of years. Getting Europeans to take exceptional risk right now is going to be harder than hard.
- Your investors are American (or non-European), but they are not professional investors. Financial advisers are generally advising their high net worth clients to de-risk their portfolios. This means more money in low-risk assets, like T-bills and blue-chip, dividend-paying stocks, and less money in higher risk investments, such as angel capital. Rich people are being advised to be relatively liquid so they can react quickly if the markets continue to have dry heaves. Those high net worth individuals will likely maintain those portfolio positions until the markets become more clear and the impact of the U.K. leaving the E.U. on the global economy and financial markets is more easily quantified.
- You are planning on going public on a European exchange. You’ve probably been advised to delay your offering already if your advisers are even remotely competent and not desperate for fees.
Otherwise, you are probably OK if you are in fundraising mode. Professional investors have already allocated funds to high-risk investments into a largely segregated bucket, and those investors will likely ride things out and stay in the game, unless some other bad shoe drops (the failure of the Italian banking system would be unhelpful). Institutional venture capital may pause a bit to make sure the bump in the road is just a bump and not an absent bridge, but generally speaking, it’s likely safe to carry on.