Are we heading for a recession? I think we are.

It’s not difficult to see how a recession is on the horizon. Corporate America leads the world’s financial markets and the so-called FANG Stocks: Facebook, Amazon, Netflix and Google are at their craziest valuations ever. An example of this is Amazon which is trading at its highest valuation in 10 years although its growth rate has dropped to 50 per cent on previous years.

Another is Netflix whose free cash-flow has moved from £300m positive to £2b negative and their business model is also moving into content creation which is margin reducing not enhancing. The competitor content creation companies like Disney trade at 2-3 times revenue while Netflix trades at 7.5. How can this be right? You can buy a share in Netflix for $183 today which will give you a $1 return after a year of owning it. Crazy.

In every bull market you get a group of stocks that become priced for perfection. These are the FANG Stocks. Unfortunately, perfection they are not.

At the end of the dotcom era we had 29 companies on the S&P 500 trading at 10 times revenue – today we have 28. Let me put this into perspective.

Buying company shares at 10 x times revenue valuation would need to give 100 per cent of their revenue as a dividend over 10 years to give you your money back. To do that the company would need to:

• Get this past its shareholders, which is unlikely
• Have a zero cost of goods over 10 years, which is difficult
• Have zero expenses e.g. staff costs, rent and rates over 10 years, which is impossible
• Pay no taxes over 10 years, which is illegal, and
• You would also need to not pay any tax on your dividends over 10 years, which again is illegal

What are people thinking? Would you buy shares in a company valued at 10 times its revenue?

The way businesses are valued should not change. It has worked for over 100 years. The iron law of valuation is discounted cash-flow. How much free-cash is returnable to shareholders in each of the forecast years, multiplied by a suitable period for return.

So how does this effect start-ups?

High company valuations are due to many things including low interest rates. Interest rates are going to rise in 2018 and valuations will decline. When start-ups can no longer point to Amazon and Facebook as good reason why they should be funded at a multiple of revenue rather than forecast profit, the investment landscape will change.

When investors can get a 5 per cent return on savings and make a 100 per cent return with minimal risk over 20 years why would they gamble on waiting 183 years with Netflix or 30 years with a start-up (based on average business length of 10 years, making a 100 per cent return and a start-up success rate of 1 in 3)?

When interest rates rise the world is going to be left with thousands of early stage businesses that raised early investment and now have nowhere to go to raise more. They will need to become inventive, create down-round opportunities and in some cases turn to friends and family to bail them out. Others will just close the doors and go bust. 2018 and 2019 are going to be interesting years and I predict the success rate of early stage businesses changing to more like 1 in 6.

What’s a real shame is not that thousands of start-ups will fail (as that happens every year) but that we never learn. During the next recession, Governments will authorise the printing of money and the reduction of interest rates and in coming out of the recession we will do it all again. We will look for greater returns on investments through greater risk and young, inspiring entrepreneurs, will be given easy money to give their business ideas a go. Investors will lose cash, entrepreneurs will waste their most valuable asset (time) and the Government will achieve what they set out to achieve – recession bailout by the people.

Some entrepreneurs of early stage start-ups will ride the forthcoming recession and make it to the next bull market and I wish them luck. If they want to increase their chances however, I strongly advise they seek out that almost non-existent outcome of the modern start-up: profit.

It’s worth remembering that the definition of an entrepreneur is a person who by risk and initiative attempts to make profits. It brings into question I guess how many of the modern start-ups are actually owned and managed by an entrepreneur.

Jamie Waller is an entrepreneur, investor and author. Pre-order your copy of Unsexy Business here: www.unsexybusiness.com.

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Watch Out Start-Ups…A Recession is Coming!

My early years

I am 38 years old and have been working for 22 years. Starting work at 16 has given me a four-year advantage on most people that start post University and enjoy a gap year or two. That early advantage has paid off as I now work one month in the UK and one month from my Yacht in the Med. How did I do it? Here is a brief overview:

Introduction to work and money

At 16 I worked doing whatever paid well. It’s nice to do what you love or like but I needed cash and the ability to start my own business. So, during my first year of work I did demolition, car sales, portering at the local hospital, bricklaying, club promoting and security.

In business

By the time I was 17 I acquired my first business, a window cleaning round for £1600. A year later my first business was worth £6,000 and I sold it. I took the £6,000 and paid one month rent in advance for a car sales yard, £400 down, £5,600 left for a Porto cabin, a billboard sign and cars.

Within two weeks I had visited six car auctions and purchased 17 cars. Some for as little as £100 and some a few hundred quid. I was now in the car sales business. Taking enough money to live off and putting the rest back in I soon had over 50 cars ranging from £500 to £3000 for sale. Transport for London then introduced red route parking restrictions, my business went bust.

I parked my remaining car stock on the streets of London with for sale signs in the windows. This gave me a couple of weeks to get a new job. Selling cars from the streets is a great low cost business model, I had no costs and was using Government land. This lasted a few months.

Big business

Red Route parking restrictions meant people were being fined. In fact, about 30,000 people were failing to pay and needed chasing for payment. I soon had a new business idea; debt collection for Government.

A short period with an existing company to learn the ropes and I was in business. I was now the owner of a debt collection business and in year one turned over £1m.

Twelve years later I sold that business for over £30m. Six days post sale I formed big business number two. Investing £1m from the sale, I started a fintech firm and sold it nine months later for over £9m.

Many businesses

Two weeks after selling big business number two I launched www.firestarters.co.uk – a £13m investment fund for early stage businesses, using my own personal wealth.

So far, I own equity in nine companies and am looking to increase that to 20 by December 2018.

Overview

The key to building a business empire is to take measured risks. At each exit, I re-invested and rolled another dice. This enabled me to take a little for myself and invest a little back into a new venture.

Money makes money and that means you must not be afraid to roll again and again.

Sometimes you lose but that’s just business. Good luck!

Read more:
How to build a business empire

Over my career I have taken business courses at Cranfield University, Stanford University and the London Business School (LBS).

In my opinion only one of them truly understood early stage business and the leadership credentials it takes to run one. That was Cranfield. I am not saying that Stanford and LBS were not excellent schools but they were almost entirely run by academics and attended by academic business people too.

Cranfield’s Business Growth Programme was different; it was built from the ground up for entrepreneurs rather than the top down and 100% of the attendees were entrepreneurs. The top down approach tends to use regurgitated MBA material.

So, what can these courses offer entrepreneurs and is it right for you?

Cranfield: Business Growth Program

This is a real “get it done” programme for early stage businesses and entrepreneurs. I would recommend businesses that have more than 20 employees and more than £3m in revenue attend this course.

My time at Cranfield taught me good basic discipline. It taught me the importance of financial control and it taught me to act bold, make difficult decisions and to think big. The course was bi-monthly for two days and three months in duration. The fee was £15,000 and worth every penny.

Stanford University: Executive Program for Growing Businesses

You need a turnover of at least $10m to be accepted on this course. I would personally argue, the entrance criteria should be moved to $25m and is probably best suited to businesses with over 50 staff.

My time at Stanford installed a confidence in me that only Stanford could. In part because of the stature of the University but also because of Silicon Valley itself. No one could spend three weeks in the Valley learning about business and not be inspired to succeed. At the end of the three weeks I cared and understood more about company culture and about working with the right team than ever before.

The fee was £25,000 which was expensive but if you need a confidence boost and fancy an inspirational holiday then I would recommend this course.

London Business School: Executive Master in Business Administration

This course does not discriminate against company size or value but that does mean its focus is wide. The fee was £80,000 and in my opinion probably the right value for the complexity of the course and stature of the University.

My time at LBS (which was only the first term as I quit) taught me that business administrators are not entrepreneurs. The course was too wide in its approach and the school spent a significant part of their time teaching and guiding the attendees on how to get a new or better job once they were qualified. Not ideal if 1. You are the owner of the business or 2. You have sponsored and paid for one of your team to attend the course.

LBS in my opinion let itself down in this area and any business thinking about sponsoring an employee to complete an EMBA should seriously consider this when choosing a school.

The course was complex and the learning material top class. I would not recommend existing entrepreneurs attend this course but have someone with an MBA in their team or as an advisor. This linear approach to business administration installs good discipline in a business at the right time in its growth.

There are obviously other schools that I have not attended that claim a great understanding of entrepreneurship. My advice would be to research well, attend at least 4-5 school briefings and then talk to at least three alumni (ideally not anyone the school recommends!).

Personal development is so important and on my journey, I can honestly say I learnt something from all three experiences. In fact, I am off to LBS again in November for a program in Private Equity Funding. I hope I get a warm welcome after they read this article.

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Business Schools for Entrepreneurs

When I set up my first business doing window cleaning when I was 17 years of age, I remember leaving Barclays Bank in East London and fist punching the air because I had a loan approved for £1600.

That’s how much I needed to buy an existing small business; £1400 and £200 for a van. When I purchased the business, I celebrated again with a lunch time drinking session with a friend. The next celebration was when I sold the business one year later for £6,000 (a 3.75x return).

My next businesses were a little more significant; a car sales showroom that I closed-down before going bankrupt in 2000, a debt collection company that I sold the majority of for £24.5m and a FinTech business that I sold in 2017 for £9.2m.

Celebrating success is good and everyone should do it. The problem these days however is the definition of success and the misunderstanding of the definition of the title Entrepreneur.

Entrepreneur used to be a title earned. Today it seems to be a title given and mostly by individuals to themselves. Let’s take one of the people I have meet in the past month that pitched to me for investment as an example. I have named this person, person 1 to protect his self-worth.

Person 1 presented me a slide deck on a technology solution that was going to change the way people communicate online. Yep, the next Twitter but for certain groups of people i.e. females, gay people or people that own dogs.

He was around 23 years of age; had clearly developed great power-point skills and spoke like he was presenting his Thesis to a University professor. His email signature was misleading, however.

It read: Person 1, Founder and Entrepreneur. Even more misleading was his slide deck and, slide number 9, with the heading ‘Our Success to Date’. The content was minimal: Raised £50,000 a further £950,000 is available, EIS qualifying.

So, sat in front of me was a successful entrepreneur in his opinion. He had left University, came up with an unethical equality missing business idea, drafted a fancy power-point presentation and convinced his parents to invest £50,000 in his search for entrepreneurship.

The truth is however, he was unemployed and a chancer. He was expecting someone like me to give him £1million to try his chances at becoming an entrepreneur. What his email signature should have read was Wannabe Entrepreneur or Fundraiser.

Look don’t get me wrong I am not saying that we don’t all start somewhere and that believing in yourself and having confidence is not a good thing. What I am saying however is respect the process.

The definition of an Entrepreneur is a person who sets up a business or businesses, taking on financial risks in the hope of profit.

Person 1 was not an Entrepreneur because he was 1. only a person with an idea and not a business, 2. taking financial risk with someone else’s money and 3. probably the most important point was planning on providing the service for free and not making a profit. His view was that one day it would sell and thus make a profit. Sorry mate, not often in the real world.

Save the title Entrepreneur for those that really deserve it. Some people have put everything on the line, their home, their relationship or their life savings.

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You don’t have the right to call yourself an Entrepreneur, just yet mate