🌊 Financial Fragility: Why Startups Must Understand Economic Cycles
Welcome! I’m Ivan Landabaso, VC at JME.vc. Join thousands of Startup Riders discovering new startup trends and leverage every 2 weeks (+ a little surfing 🤙)
Summary
🌊 Startup Wave: Financial fragility.
🏄🏻♂️ Lever: Money Dials.
💵 Recent Deals in Spain: Impress, ifeel, etc!
📉 Financial Fragility
This isn’t a startup trend - but it most certainly is a wave that startups have to surf from time to time. So - here’s a tool (one of many) to help you spot them 🔭.
There was a time when I geeked out (a lot) on financial crises. I wrote a paper a few years ago on how to spot financial fragility (its a bit dense, so here’s the TL;DR).
Financial systems are inherently unstable, and as such the normal functioning of an economy leads to financial crises
Basically, I want to give you a framework to help you be mindful of - or at least set some time 📅 periodically to intentionally reflect on - what moment in the financial fragility cycle (which has always existed) you are in.
My favorite framework is Mr. Hyman Minsky’s Financial Instability Hypothesis.
In a nutshell 👇
1. Development of Financial Fragility
Economic expansion leads to an increase in optimism, which results in both an increase in the price of financial assets and a rise in the general level of speculation. The shifting of attitudes towards risk and liability structures, causes financial stability to decrease and become more “fragile”. Minsky coined the terms:
Hedge units are able to repay their debt with existing cash
Speculative units typically have to refinance their short-term liabilities
A Ponzi unit must borrow in order to meet interest payments, continually increasing their debt.
2. Shifting to the brink of collapse
As debt levels rise, fragility develops, the proportion of short-term debt increases, liquidity becomes scarce, and the number of speculative and Ponzi finance units surge.
There are other factors at play like central bank actions, interest rate and exchange rate fluctuations.
3. An event(s) that shatter(s) confidence
Also referred to as a Minsky Moment.
This is a point where something happens that impacts investor confidence - i.e. Korean 1997, it was driven by 2 high profile corporate bankruptcies.
Over-indebted borrowers sell off their assets to meet repayment obligations, which in turn causes a decline in asset prices and further loss in confidence.
4. A debt-deflation-like process (rinse and repeat)
A negative downward spiral whereby debt defaults lead to a decline in aggregate demand, which in turn reduces asset prices and increases the value of outstanding debt.
🚨Take-aways
When you start hearing👂 “this time is different”, it is time to visit Mr. Minsky’s framework AND/OR read some economic history books - you will quickly find how many boom & bust cycles there have been in human economic history.
It looks a lot like this - and don’t lie to yourself, it will keep happening:
📅 Take Action: Setup a recurring quarterly meeting invite (with yourself) right now, title it “☕ with Mr. Minsky’s Financial Instability Hypothesis”
🐇 Follow the white rabbit 🕳
This time is different: 8 centuries of financial folly - by Reinhart & Rogoff
Crashed: How a Decade of Financial Crises Changed the World - by Adam Tooze
Lessons from the Financial Crisis - by Martin Wolf
The Financial Instability Hypothesis - by Minsky, H., 1992.
Bonus - For a great review of how the economic machine works by @raydalio, watch this 👇🏄 Money Dials
The Money Dials framework (by Ramit Sethi) is an 80/20 approach to squeezing all the happiness nectar out of your $$$.
TL;DR - If you look at your own spending, what gets you excited? Think about:
Travel
Health / fitness
Relationships
Self-improvement
[Insert many others based on personal choice]
The idea here is to:
Identify the one you instinctively came to within seconds (i.e. surfing 🏄)
Turn down spending on the ones that didn’t (i.e. clothes 👕)
Spend “extravagantly” on it (i.e. Maldives surf trip with my dad 🏝️)
It is powerful because it allows you to consciously spend “extravagantly” on what you really want - guilt free.
💵 Recent Deals in Spain
You love startups and want to enjoy a Spanish lifestyle? Come join the Spanish startup ecosystem. Here’s a list of recently funded startups:
Impress (dental) raised 41M
Ifeel (mental health) raised 5.5M
Urbanitae (real estate crowdfunding) raised 2.5M
Leadartes (biotech) raised 1.6M
eCustoms (shipment documentation SaaS) raised 850k
Turbosuite (traveltech) raised 200K
Stockagile (store operations saas) raised 400K
Predicthion (real time predictions for clinicians) raised 800K .
Jobs @ JME Portfolio Companies
If you find this interesting, please consider sharing with your friends. I’d also love to get your thoughts and feedback on Twitter. Until the next one! 😃
So what Minsky moment do you think we are going to see this time?
So what Minsky moment do you think we are going to see this time?