Global Strategy - blog

The dynamics between a firm's strategy and finance is one major research focus in GloStra (see e.g. http://www.glostra.fi/research/business-model-evolution, as well as http://www.glostra.fi/faculty/hse/120-jaakko-aspara). Therefore, it is interesting to ponder what implications the current financial crisis and looming recession have for the relationships between firms' strategies and finance options, such as venture capital.

Many venture capitalists seem to assume that in the current situation, it's really not a good time to launch a venture. See, for example, the presentation of one of the world's most prominent venture capital firms, Sequoia (R.I.P. Good Times). Also Finnish venture capitalists seem to share this assumption (see e.g. an article in Kauppalehti).

Unfortunately, such assumptions among venture capitalists or other investors may easily end up being a self-fulfilling prophecy. Indeed, a vicious circle may be generated whereby the assumption that new ventures won't succeed leads to decreased willingness to invest in new ventures, which in turn hinders the emergence and viability of new ventures, which in turn reinforces the initial assumption...

On the other hand, an equally interesting issue is whether the viability of ventures started during a recession (i.e., those that do get funded and started) is really poor, by default. Or does the tense situation in product and labor markets during a recession actually give rise to better-than-normal opportunities for new ventures?

Vivek Wadhwa makes a nice case about this in his short Business Week article. The article is worth reading to venture capitalists and investors, as well as to corporate managers and entrepreneurs. Wadhwa points out that during a recession, new ventures can enjoy e.g.: less competition, lower costs, ease of recruiting and keeping employees, and less pressure to expand hastily.

Jaakko Aspara