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Bright spots in the gloom, predictions and planning

By January 11, 2008 6 Comments

As the fall out from the credit crunch continues and the macro economic picture seems to worsen almost daily it is important to remember that most of us are operating in high growth markets which should whether the storm OK.  My friend Phil made this point over on the crowdstorm blog in relation to online ad spend earlier this week and posted this chart:

I’d be surprised if the basic picture was very different in the UK or any of the other large western markets, although the scale will obviously be different.

The comments on Phil’s point out that this sort of chart is nice to read, but that we need to be very careful with predictions.  Totally right – this was really rammed home to me in my early years as a VC when I used to look frequently at analysts forecasts of markets to help me with investment decisions and then watch them fluctuate wildly in the following years – once or twice to my cost.

So you can’t rely too much on predictions.

But you can’t run a business without understanding how it’s market is going to develop, grow, and ultimately commoditise in the years ahead.

And, like them or not, analysts are an important source of information in this area.  They spend their lives focused on these questions in narrow domains and talk to more people with more insight in their niches than most of us can ever hope to.

We have been struggling with this problem at one of our portfolio companies over the last eighteen months or so with regard to exit planning.  The analysts were saying that our market would go ex growth in a year or two, but that didn’t feel right to us from what we were seeing out there day to day in the trenches.  As always we wanted to be exiting when there was still plenty of growth in the market, so our dilemma was whether to sell out early based on this information or whether to hang on and get a larger valuation once the company had progressed a bit further.  We ended up taking the middle ground of softly working towards a sale of the business in a way that we could easily stop if we wished to or accelerate if we started to believe the analysts were right.

This story sums up how I think you have to approach these situations – ignoring experts forecasts is folly, but they need to be questioned, and I always look for more anecdotal evidence from my own experience that back them up.

Back to the online advertising predictions – I believe there will be growth as much because all the figures show that the advertising dollars have yet to catch up with the shift of media consumption from TV, newspapers, etc. to the web as because of the analysts.

I’m going to finish this post with a massive caveat.  The portfolio company story I described above is still playing out (which is why I haven’t revealed the name) but the current status is that the analysts have changed their forecasts and the general feeling is now that there is a lot of growth to come in the market, but it feels like the business might be acquired sooner rather than later anyway!  Looking into the future is like peering through a thick fog and whilst we can see the big shapes and changes anything more precise than that is mostly guess work.

As a VC I’m prepared to bet on some of those big shapes and changes (mostly markets opening up) but anything more detailed is about planning and contingency.