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Investing in the Face of Crisis

Contrary to popular belief, the Chinese words for “crisis” and “opportunity” are, in fact, not the same. But as an anecdote, it has survived the test of time because it touches on something we all intuitively know to be true: that crisis begets change and change often represents an opportunity. 

3-1

The economic impact of crises past…

Crises occur in many forms, from the social and political to the biological and environmental. Each is different, a new problem to face and solve, and the opportunity to create something new. 

Take for example, the attack on the World Trade Center on that fateful day in September, 2001. The fall of the Twin Towers had widespread and lasting consequences, politically and economically, locally and internationally. 

Unsurprisingly, the founding of new business in and around Manhattan ground to a halt immediately following the fall of the Twin Towers. Very quickly, however, it bounced back—and then accelerated at an unexpected pace. Importantly, the closer a county was to Manhattan, and thus the epicentre of the crisis, the more significant the effect. In other words, where the crisis was most keenly felt is where innovation took hold. 

This frenetic multiplication of new businesses has been attributed to the opportunities offered by the destruction of existing infrastructures, policies and practices, a kind of tabula rasa or forest-fire effect, whereby the destruction of one state of affairs clears the way for new growth. 

Covid-19 stands out as another example of a rapidly-evolving crisis that resulted in widespread changes and slumps in markets. As the world adapted to shifts in working practices and the implementation of social distancing and quarantines, though, certain sectors came back all the stronger, thriving in the new environment. 

It hardly bears mentioning that investors who seized on opportunities to invest in telehealth, collaboration software, logistics, and of course pharma, biotech and healthcare supplies did well, by and large. In fact, there’s a plethora of companies that prospered not only during, but because of the Covid-19 crisis. 

 

…and present.

Of course, it’s much easier to look back on a crisis and critically examine which investors made wise (or lucky) decisions and which did not. The current crisis in Ukraine reminds us of the emotional and psychological impact of the lived experience of crisis and how uncertain the future can feel. 

Still, important trends are emerging that haven’t escaped the notice of investors. 

For one, the conflict has helped strengthen ties between many European (speaking both geographically and politically) countries, with growing solidarity between Western and Eastern Europe, and financial, social and infrastructural aid moving with it. As a result of China’s maintained relations with Russia, the US and Europe have continued to drift further from China, and focus has shifted to CEE, both politically and economically. 

In speaking with prominent Central and Eastern European VC firms in anticipation of the upcoming Wolves Summit event (May 24th - 27th), conversation naturally turned to Covid-19, the Russian invasion of Ukraine, and other crises in recent memory. During these discussions, one element in particular stood out as a common thread in how VCs understand and react to crisis. In a word: optimism. 

 

The essential role of optimism in venture capital

It’s often said that founders are optimistic people. Indeed, they have to be. Optimism is fundamental when it comes to starting a business. As a personality trait, optimism is associated with greater persistence and resilience, especially in the face of stressful situations. It enables people to learn from their mistakes, by envisioning a better way of doing something again, and is a common characteristic of inspiring leaders. 

It’s one of the traits VCs look for in founders, and perhaps that’s because they understand its intrinsic value. 

“Venture capitalists are one of the most optimistic groups of people,” affirmed Max Filippov, managing partner at Ukraine-based GR Capital. “Because we see positive things where others can’t.” Filippov has more reason than most, today, to be pessimistic about the future; and yet, our conversation with him was resolutely optimistic. Grounded in reality, certainly, but optimistic. 

Part of that optimism no doubt comes from the tendency among venture capitalists to think and plan long-term, seeing founders and businesses through crises as they come up. With each crisis comes experience, and that optimism is refined and reinforced.

 

“We see almost every second year, now, some crisis somewhere,” noted Andreas Nemeth, CEO of UNIQA Ventures. “In situations like the current one [Covid-19], with high volatility in public markets, the unique nature of private markets, with more long-term and mid-term views, offers more opportunities for stable funding.” 

 

How VCs and Start-ups can work together in times of crisis

More than anything, crisis offers an opportunity to strengthen the bonds that connect us, both socially and economically and professionally. VCs are particularly well-positioned to facilitate the ever-important exchange of ideas, knowledge and expertise among growing companies. 

When faced with the sociopolitical upheaval and uncertainty of the crisis in Ukraine, Markus Erkan and his copartners at Sunfish Capital doubled-down on their commitment to their portfolio companies. 

“All of a sudden,” explains Markus, “we have to think through so many aspects. So what we always do in situations like this—because we don’t have the answers, nobody does—we try to be open and speak with our portfolio companies, share best practices and share thoughts within our portfolio. And then, whatever the teams are doing, we try to support them.” 

This benefits start-ups immensely, by providing them with resources in the form of information, dialogue and solutions to common problems struck upon by their fellow founders. But VCs also benefit significantly, not only because it builds resilience among their portfolio, but also by positioning themselves as key actors and conduits in the start-up ecosystem. Being central to that exchange of information is a powerful thing. 

Lastly, crisis throws a light on those it impacts. It highlights their strengths and gives them a voice they may not have had before. Wise investors should listen carefully to the voices that rise out of chaos; very likely, they are the voices of future leaders, future founders, resilient and optimistic in the face of crisis and ready to move forward. 

“This could be the beginning of a new, innovative—not just industrial or agrarian, but truly innovative—and service-oriented economy, based on all the talent and help we’re receiving from the rest of the world, which we feel deeply. This is the moment to remind the world that people here are very, very clever, and they can build really interesting things,” says Filippov. “I’m very optimistic about what will happen next.”

 

All Posts

Investing in the Face of Crisis

Contrary to popular belief, the Chinese words for “crisis” and “opportunity” are, in fact, not the same. But as an anecdote, it has survived the test of time because it touches on something we all intuitively know to be true: that crisis begets change and change often represents an opportunity. 

3-1

The economic impact of crises past…

Crises occur in many forms, from the social and political to the biological and environmental. Each is different, a new problem to face and solve, and the opportunity to create something new. 

Take for example, the attack on the World Trade Center on that fateful day in September, 2001. The fall of the Twin Towers had widespread and lasting consequences, politically and economically, locally and internationally. 

Unsurprisingly, the founding of new business in and around Manhattan ground to a halt immediately following the fall of the Twin Towers. Very quickly, however, it bounced back—and then accelerated at an unexpected pace. Importantly, the closer a county was to Manhattan, and thus the epicentre of the crisis, the more significant the effect. In other words, where the crisis was most keenly felt is where innovation took hold. 

This frenetic multiplication of new businesses has been attributed to the opportunities offered by the destruction of existing infrastructures, policies and practices, a kind of tabula rasa or forest-fire effect, whereby the destruction of one state of affairs clears the way for new growth. 

Covid-19 stands out as another example of a rapidly-evolving crisis that resulted in widespread changes and slumps in markets. As the world adapted to shifts in working practices and the implementation of social distancing and quarantines, though, certain sectors came back all the stronger, thriving in the new environment. 

It hardly bears mentioning that investors who seized on opportunities to invest in telehealth, collaboration software, logistics, and of course pharma, biotech and healthcare supplies did well, by and large. In fact, there’s a plethora of companies that prospered not only during, but because of the Covid-19 crisis. 

 

…and present.

Of course, it’s much easier to look back on a crisis and critically examine which investors made wise (or lucky) decisions and which did not. The current crisis in Ukraine reminds us of the emotional and psychological impact of the lived experience of crisis and how uncertain the future can feel. 

Still, important trends are emerging that haven’t escaped the notice of investors. 

For one, the conflict has helped strengthen ties between many European (speaking both geographically and politically) countries, with growing solidarity between Western and Eastern Europe, and financial, social and infrastructural aid moving with it. As a result of China’s maintained relations with Russia, the US and Europe have continued to drift further from China, and focus has shifted to CEE, both politically and economically. 

In speaking with prominent Central and Eastern European VC firms in anticipation of the upcoming Wolves Summit event (May 24th - 27th), conversation naturally turned to Covid-19, the Russian invasion of Ukraine, and other crises in recent memory. During these discussions, one element in particular stood out as a common thread in how VCs understand and react to crisis. In a word: optimism. 

 

The essential role of optimism in venture capital

It’s often said that founders are optimistic people. Indeed, they have to be. Optimism is fundamental when it comes to starting a business. As a personality trait, optimism is associated with greater persistence and resilience, especially in the face of stressful situations. It enables people to learn from their mistakes, by envisioning a better way of doing something again, and is a common characteristic of inspiring leaders. 

It’s one of the traits VCs look for in founders, and perhaps that’s because they understand its intrinsic value. 

“Venture capitalists are one of the most optimistic groups of people,” affirmed Max Filippov, managing partner at Ukraine-based GR Capital. “Because we see positive things where others can’t.” Filippov has more reason than most, today, to be pessimistic about the future; and yet, our conversation with him was resolutely optimistic. Grounded in reality, certainly, but optimistic. 

Part of that optimism no doubt comes from the tendency among venture capitalists to think and plan long-term, seeing founders and businesses through crises as they come up. With each crisis comes experience, and that optimism is refined and reinforced.

 

“We see almost every second year, now, some crisis somewhere,” noted Andreas Nemeth, CEO of UNIQA Ventures. “In situations like the current one [Covid-19], with high volatility in public markets, the unique nature of private markets, with more long-term and mid-term views, offers more opportunities for stable funding.” 

 

How VCs and Start-ups can work together in times of crisis

More than anything, crisis offers an opportunity to strengthen the bonds that connect us, both socially and economically and professionally. VCs are particularly well-positioned to facilitate the ever-important exchange of ideas, knowledge and expertise among growing companies. 

When faced with the sociopolitical upheaval and uncertainty of the crisis in Ukraine, Markus Erkan and his copartners at Sunfish Capital doubled-down on their commitment to their portfolio companies. 

“All of a sudden,” explains Markus, “we have to think through so many aspects. So what we always do in situations like this—because we don’t have the answers, nobody does—we try to be open and speak with our portfolio companies, share best practices and share thoughts within our portfolio. And then, whatever the teams are doing, we try to support them.” 

This benefits start-ups immensely, by providing them with resources in the form of information, dialogue and solutions to common problems struck upon by their fellow founders. But VCs also benefit significantly, not only because it builds resilience among their portfolio, but also by positioning themselves as key actors and conduits in the start-up ecosystem. Being central to that exchange of information is a powerful thing. 

Lastly, crisis throws a light on those it impacts. It highlights their strengths and gives them a voice they may not have had before. Wise investors should listen carefully to the voices that rise out of chaos; very likely, they are the voices of future leaders, future founders, resilient and optimistic in the face of crisis and ready to move forward. 

“This could be the beginning of a new, innovative—not just industrial or agrarian, but truly innovative—and service-oriented economy, based on all the talent and help we’re receiving from the rest of the world, which we feel deeply. This is the moment to remind the world that people here are very, very clever, and they can build really interesting things,” says Filippov. “I’m very optimistic about what will happen next.”

 

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