An Investors View: What Should Investors Look for when Investing in Volatile Markets

  • Andreas Wuchner, Angel Investor at Venari Security

  • 21.11.2022 11:45 am
  • #Investment

The government’s recent ‘mini-budget’ announcement caused huge shock waves across UK financial markets. In subsequent weeks this has driven the value of the pound downwards and interest rates and borrowing rates up significantly. The institute for Fiscal Studies called the market’s reaction to the proposals ‘worrying’, accusing then chancellor Kwasi Kwarteng of ‘gambling the house’. Despite a climb-back on most of the tax proposals made in the announcement, and ultimately a change in leadership, an undercurrent of volatility throughout the UK markets persists.

With the level of concern in the UK markets, and continuing governmental instability, many investors will be questioning whether now is the right time to invest in UK start-up businesses. For those who hold US dollars, the value of their currency has risen, offering more value for their investment when looking at opportunities in the UK market. However, market instability is never a desirable trait, particularly for early-stage companies often battling for solvency and survival.

As such, it’s crucial that investors look beyond the macro environment as the sole indicator of potential business success. While it’s important to consider the health of any given financial system, investors should also look closely at organisations that are facilitating social change, and businesses so they can add genuine value and expertise to. In recent years, this has been one of the key drivers of my investment decisions and was a core factor in investing in businesses like Venari Security. I always consider whether I am supporting ideas that can have an impact on the world, even if it’s in a small way. Beyond this there are also several other indicators on a business level, which demonstrate whether a start-up is properly leveraged for success and longevity.

Leadership is crucial

On many occasions, the leadership of a company can ensure successful navigation through macro-level instability, particularly if the ideas or product is valuable. This can be a crucial factor in the ultimate success of a business. Good leaders will demonstrate a clear and unquestionable understanding and passion for their company and the market it which it operates. They will also ensure they are constantly evolving in line with the requirements of their workforce.

A study from the Journal of Business Venturing Insights found that Leadership Development – the aim of developing workplace meaning and relationships, and interpersonal competence – was a crucial factor in the success of a start-up. While the World Economic Forum found that vision, patience and tenacity were all leadership traits most indicative of business success. While investors of the past would have looked solely at markets and financial details as a solid foundation for their investment decisions, these fail to account for the quality of leadership at any given company.

Personal investment in a company from its leadership is also a useful indicator of stability and commitment – important traits for long-term sustainability. A hired CEO or leader will find it easier to leave a company, whereas someone who has a significant amount of money invested is more likely to stay the course.

When making any investment decision, it’s crucial to build up an accurate picture of the background and traits of that company’s leader. It’s a promising sign when a leader can demonstrate their commitment, a clear plan for navigating financial uncertainty and present their company’s values and story with avidity.

It's who you know

Almost as important as the traits, experience and vision of leadership teams, is who they know and can influence. Having strong industry connections and the ability to get in front of the right vendor or partner can be the ultimate difference between success and failure. When considering investment, it’s really valuable when a leader has a wide-reaching network that they can call upon as a launchpad for their product or service.

Fundamentally, a strong network facilitates continued business growth – even in tough markets. Having the ability to secure investment, and business advice, from a range of sources will significantly improve resilience to market shocks. Each angel investor will bring with them a host of different experiences and their own networks, meaning start-ups can immediately access the support and knowledge then need from a variety of different sources.

A study in Computers in Human Behaviour, concluded that social connectedness was the ultimate predictor of successful funding, and this had a direct correlation on the level of financing received. With this considered, founders who have a well-defined network of experts that they can use for advice or for future investment decisions, are well-placed to ensure the viability of the start-up moving forward.

Who is the target market?

Financial uncertainty will of course stoke the fire of competition between start-ups. For investors, this makes it all the more crucial for them to carry out sufficient due diligence on the companies that they are considering for investment.

Even in a booming market, companies should ensure they have a very detailed understanding of who their customer is and the problem they are trying to solve. Companies need to be able to answer key audience profile questions including: Why are they interested in your offering? What do you offer that is different to the competition? And foremost, what specific issues are customers looking to solve by engaging your company? It’s very hard to justify investment without sufficient answers to these questions.

For me, Venari Security is a very clear case of a start-up that has cognisance of its target market and is well-positioned to demonstrate this as they seek investment. The industry Venari operates in, cyber security, has new risks and evolving legislation, like the proliferation of encryption, on a regular basis. Venari’s understanding of the market, lead to the development of an Encryption Traffic Analysis tool, which prevents malicious cyberattacks hiding within in encrypted traffic – a really significant business problem.. This ensures they are a valuable option to security teams across industry and a very attractive proposition in the eyes of investors.

Workforce is key

When you buy into a company, you’re also buying into the knowledge and expertise of the people who complete the work on a day-to-day basis. A workforce that is diverse, stable and challenged professionally are most likely to deliver continued business growth. On the other hand, a high turnover of staff can be a useful indicator of poor leadership or unethical work practices. This not only risks the growth of a company in the immediate term, but can lead to a reputational problems and an inability to properly recruit, which can be immeasurably detrimental to the health of a company in the long-term. As outlined in the Harvard Business Review, two-thirds of start-up companies fail due to problems within the workforce.

Diversity is also a key consideration for the operational success of a start-up business and in particular those without huge infrastructure or a large workforce to draw experience from. Interestingly, research from Gartner,research from Gartner, found that performance improves by 12%, and intent to stay by 20% in workforces that are considered diverse. Those companies with a range of people, thoughts and opinions are best set up to tackle business challenges, sustain future growth, and ultimately make the most attractive investment propositions.

Investing for future success

Of course, stability in the financial markets is an important consideration when making any investment decision, and should be thoroughly considered ahead of agreeing any deals. However, this is not the only indicator of business success in the long-term, with a myriad of factors important to the viability. The best investments are made when markets are considered alongside other predictors of business success, like leadership, connections and team structure.

Investors need to carefully consider all of these points, and what value they might also bring to an organisation when making investment decisions. While risk always exists, these can help investors to predict whether a business is set-up sufficiently for long-term success.

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