Thanks to everyone who attended our latest partnership ThinkIn with Tortoise last week. It was an honour to join Paul Polman, former Unilever CEO and now co-founder of IMAGINE, to talk about how the pandemic can spur innovation. This week’s Tortoise event, on Friday the 15th, will be a half-day summit on AI in a post-Covid-19 world and will feature a stellar line-up including, among others, New York Times columnist and Pulitzer Prize winner Thomas L. Friedman, former head of MI6 Sir John Sawers, and Skype co-founder Jaan Tallinn. As a member of the Seedrs community, you can sign up for free here (enter SEEDRSGUEST when prompted).
I had thought I would be writing this week about the long-awaited details of the government rescue package for startups and scaleups, including the Future Fund. Unfortunately we are still a-waiting, and the latest indication is that we will see the first puffs of white smoke toward the end of this week. The timing, I am told, is down entirely to the hard work involved in getting this thing right. Treasury has received lots of feedback from the ecosystem (including, today, a letter from UK-based companies who took part in U.S-based accelerator programmes and formed an American topco in the process), and while they won’t be able to reflect all of the inputs they are getting, they are working to strike the best balance they can.
Starting Up in a Crisis
So while we wait on Treasury, I thought I’d turn my keyboard to something a bit different.
In the Tortoise Thinkin last week, we had a fascinating discussion about some very weighty topics around the future of growth, the transformation of capitalism and beyond.
But it also got me thinking at a more micro level about the opportunities that crises create for innovative entrepreneurs. As difficult as the current circumstances are for so many businesses, including existing startups and scaleups, it will also give birth to a generation of new businesses that will come to shape the economy of the 2020s and beyond.
I am very far from the first person to think or write about how crises can breed innovation and launch great businesses. Founder Institute published a great, short blog post about why a recession can be a good time to build a startup, and CNBC published an article along similar lines today. And there some excellent, slightly more academic pieces from Harvard Business School and Chicago Booth, among others, that talk about how both big businesses and entrepreneurs can learn lessons about innovation from everything that is happening now.
I’m not going be able to add a whole lot to the general points made by these and other resources, but what I can do is share a bit of the Seedrs experience.
Seedrs was born out of the last financial crisis. The first conversation I had with Carlos Silva, who had the idea for the business and who soon would become my brilliant co-founder, came two months after Lehman Brothers failed. As Carlos and I worked away through late 2008 and 2009 to formulate the model and plan for launch, the global financial crisis loomed large around us and informed a huge amount of our thinking. It was a very different time, but a few aspects of that experience may be relevant to entrepreneurs starting out today.
Experience 1: A crisis can encourage openness to new solutions…even if the problems they’re solving had nothing to do with the crisis in the first place.
Carlos and I started working on Seedrs because we wanted to solve a specific problem. We believed that the market for early-stage capital wasn’t functioning nearly as well as it could. On one side, we saw unmet demand for capital from would-be entrepreneurs, and on the other side, we saw untapped supply of capital from high-net-worth and mass affluent investors (and later non-VC institutions). This was a classic market failure, and we wanted to use technology and a bit of creativity to build a marketplace that solved it.
In substance, this problem had very little to do with the crisis that was going on around us. Of all the areas of the financial system where weaknesses were revealed by the events from 2007 to 2009, the market for early-stage capital wasn’t one of them. The problem Carlos and I were looking to solve had existed long before the crisis, and there wasn’t a whole lot about the bank collapses and the untangled webs of complex credit derivatives that exacerbated it.
But the widespread exposure of problems in other areas of the financial system made many people—including investors, press and others who could be helpful to us in our early days—more receptive to what we were doing than I think they otherwise would have been.
In some cases this was just down to mistake. I remember some of the pre-launch press we received talking about how we were offering a much-needed replacement for banks now that they had stopped lending to startups. In reality, even before the crisis banks had rarely lent money to the kinds of high-growth, high-risk businesses we work with, as equity is usually the more appropriate form of finance for them. But despite our explaining as much, the narrative that we were filling a gap left by banks took hold in some quarters, and we gained a good deal of positive attention from it.
In most cases, though, the association between the problems of the crisis and the solution we were building was more logical. The challenges faced by financial institutions during that time led many people to see a need for new approaches across the financial system in general. So when Carlos and I turned up at the door and talked about the corner of the capital markets we wanted to change, they were much more open to hearing us out—and often supporting us—than I think they would have been a few years before.
Experience 2: Reduced opportunity costs, a/k/a there ain’t no better option
In 2007, when the market still seemed strong despite initial warning signs from the U.S. subprime real estate world, I decided to go business school. I did so because I wanted to make a career change, leaving the practice of law and doing something entrepreneurial, and I thought (and indeed found) that an MBA would be a good way to get broad-based exposure to business thinking and frameworks. But business school also provided a safety net of sorts: I figured that if I didn’t find the right project or opportunity while I was there, I could always have a soft landing in a traditional corporate role or back in the law.
By the time my MBA programme started, in October 2008, that safety net has been pulled away. Suddenly job prospects were bleak, and while I trust I would have found something that ensured I didn’t starve, there were now many fewer options if I wanted to turn back from becoming an entrepreneur. And there was also much less temptation to do so: I wasn’t (as I might have been a year or two before) surrounded by friends receiving substantial salary offers and being treated to cushy recruitment weekends.
I will never know how I would have reacted if we had been in a strong market when Carlos approached me with the idea for Seedrs. I loved the idea, and I’d like to think I would have embraced it just enthusiastically—but the safety and lure of a well-paid role on the corporate ladder might have been tougher to ignore. As it happened, though, we were at a point where opportunity cost was very low, so as Carlos and I worked through the idea and came to understand both its potential and its challenges, it was a lot easier to take the risk involved than it might have been in other times.
Incidentally, a similar effect was true for our first hires. A few years after we started working on Seedrs and had begun building our team, I started thinking of myself as a hiring genius. I had recruited this group of amazingly talented individuals, at very reasonable salaries, to come work for this fledgling little business, and they all seemed really happy to be here. I even went on panels to talk about my hiring “strategy”. As the global economy improved, and it was becoming increasingly competitive—and expensive—to recruit top talent, I started to realise that our early success had been far less about my genius than about the fact that the opportunity cost for these great first hires was about as low as it had been for Carlos and me.
Experience 3: Catch a wave and you’re sitting on top of the world
Today Britain is viewed as the fintech capital of the world, but in 2008 fintech was a rarely-used term (and even then it tended to apply to software systems that were being sold into large financial institutions). Much of the reason that we got here from there was that as the financial crisis unfolded, a whole generation of entrepreneurs started thinking about how we could use technology to improve the way financial services were provided. In a few cases these innovations were directly related to the challenges that the crisis was exposing, but for the most part these were businesses that, like Seedrs, were taking advantage of the things discussed above—receptivity to new ideas and low opportunity costs—in order to solve problems that had long existed.
What this meant for Seedrs was that, when we came to market, we weren’t the only new kids on the block asking people to entrust their financial activity to an unproven startup. As we approached our prospective early adopters—both entrepreneurs looking for capital and investors looking for dealflow—we found people who were already using (or at least knew people who were using) Transferwise for their FX needs, Nutmeg for automated financial advice, Ratesetter for P2P lending and MarketFinance (then called MarketInvoice) for invoice factoring.
I think it is difficult to overstate the importance of this. Early adopters are the lifeblood of any newly-launched business. And when you’re building a two-sided marketplace, as we were, it is a particularly complex undertaking to recruit enough early adopters on both sides of the market to create initial traction. I think that had we tried to do what we did before the fintech wave hit, we would have really struggled to attract nearly as many people willing to take a chance on us.
There is very much a limit to how these experiences would apply today. The Covid-19 pandemic is vastly different from the financial crisis of 2007-2009, and any budding entrepreneur needs to be careful not to fight the last war.
But even if history doesn’t repeat, it does tend to rhyme (as Mark Twain may or may not have said), and I suspect that entrepreneurs starting out today may, in time, find some resonance in the experiences Carlos and I had. I wish them the best of luck: there is so much that is difficult about starting a business, whether in good times or in bad, and success is so often dependent on capitalising on whatever opportunities the circumstances of the time make available.
Instead of a separate list of resources this week, I would commend you all to the articles on innovation in a crisis that I mentioned above:
- Founder Institute, “Why a Recession is a Great Time to Launch a Startup”
- Harvard Business Publishing, “Innovation in a Time of Crisis”
- Chicago Booth Review, “Four Ways to Ensure Innovation Continues After the Crisis”
That’s all from me this week. As always please let me know if you have feedback or contributions, and I hope you all stay well and safe in the week ahead.