JPMorgan: Innovation Economy Founders Face Liquidity’s Double-Edged Sword

For business founders, every dollar is precious, and the dollars are getting harder to come by.

The year 2023 has turned out to be challenging for small business founders and startups navigating what’s become a dynamic environment.

And that’s putting it mildly.

Before the Federal Reserve started hiking rates, before inflation’s heady ascent, it was easier for nascent firms to launch new services and products, to focus on growth first and worry about profits later.

“When there’s a lot of liquidity, it can paper over potential bad choices or changes in strategy,” Alton McDowell, co-head of technology and disruptive commerce for J.P. Morgan Middle Market Banking, told Karen Webster.

Things have changed markedly. The familiar routes of capital access are less accessible.

The special purpose acquisition company (SPAC) market is an illustrative example. Just a few years ago, nascent firms promising to disrupt any number of verticals were coming to market left and right in combination with so-called blank-check companies, promising triple-digit revenue growth rates as the great digital shift would prove to be the rising tide that would lift all boats.

Profits? Well, those would come later — much later. And for many companies, never.

McDowell told Webster that smaller firms need to adjust to a new reality, where growth at all costs no longer applies. Funding rounds are declining; investors are reticent to part with capital.

Omnichannel Is Critical

The great digital shift has given way to the fact that omnichannel efforts are critical. And there will be opportunities for the companies that wind up becoming more resilient than ever.

But to build that resiliency, startups’ banking needs are changing as they seek to straddle digital and physical channels, McDowell said. And that means that financial services firms need to rethink what they offer entrepreneurs and founders.

The conversations financial institutions (FIs) like J.P. Morgan and others are having with founders are becoming more strategic. And the larger banks have advantages that smaller FIs might not have when it comes to advisory services — contrary to what might be conventional wisdom, he said.

“Big financial institutions are only ‘bad’ if they treat you ‘big,’” McDowell said. “Big FIs are amazing if they treat you ‘small,’ with an individual approach that offers a panoramic view” of risk, reward and general strategy.

“The availability of liquidity is going to be more challenging, and you’ll really have to be thoughtful around the metrics that you’re going to use to run the business — the [key performance indicators (KPIs)] that the market is saying are important,” he added.

Increasingly, the onus is on small- to medium-sized business (SMB) executives to use available funds as efficiently as possible.

“Every dollar needs to have a positive return and build enterprise value,” he said.

Founders are tasked with doing more with less. Easier said than done, according to McDowell, who noted that smaller firms must make sure that “the less you’re doing more with is safe, and it allows you to scale.”

But simplicity does not guarantee safety.

Scaling must take place across digital and physical channels. McDowell noted that many companies seeking to bridge those worlds are finding gaps in making the transition from direct-to-consumer (D2C) to establishing an omnichannel presence.

FIs such as J.P. Morgan can bridge that gap by showing in anonymized fashion what consumers are buying with their cards and at which locations, he said. That helps create a roadmap to fine-tune their brick-and-mortar strategies. The physical location strategy is expensive, requiring significant investments in time and money while making sure the in-person shopping experience has the speed and streamlined convenience of digital commerce.

It may be easy to take cues from the digital world to figure out what stock-keeping units (SKUs) should move in the physical realm. But that’s a lot of data management to tackle, he said, and depending on the size of the startup it can be difficult to have a dedicated person on staff focused on maximizing inventory cycles for their D2C efforts versus physical ones. Software helps.

Cross-pollination can have positive ripple effects here.

“We have clients who are focused on the consumer experience,” McDowell said. “They are very good at digitally teasing out what consumers are buying. Here’s what they like; here’s what they don’t like.”

That granular insight allows J.P. Morgan to introduce that firm to four or five other clients that can benefit from the same data — and in turn helps the first company develop an optimal physical presence.

There are client firms that have, proverbially, seen it all, and had been omnichannel before everything went digital and D2C — and then went back to omnichannel again. These time-tested veterans can talk fledgling firms through their own experiences and challenges of getting toward scale.

“You have to have a financial partner who has a foothold in all of these worlds if you’re really going to get the most value out of your financial partner relationship,” McDowell said.

One overarching theme is resiliency, in good macro climates and bad.

Planning for the Future and Building Resiliency

The right financial advisors can help client firms examine their downside scenarios and plan what to do if revenues fall by double-digit percentage points, or if the Fed keeps raising interest rates, he said. They also can help examine how the client’s treasury team is structured and dissect the capital structure of the company itself.

If revenues are declining, he said, it’s important to “figure out how to cut cash burn.”

The right insights can steer client firms to identify inefficient, manual processes, where too many people are in the mix, and help redeploy staff toward other activities that actually increase enterprise value, he said.

“If you’re a banker covering the innovation economy,” McDowell said, “you have to be comfortable covering a broad range of discussion topics in these markets.”