Over the past few weeks a lot of people have asked me how the current economic crisis will affect the advertising market and emerging media like digital signage. Since I'm neither an economist nor a finance guy, I'm not particularly tuned in to the effects of macroeconomic conditions on our little niche. Then again, given the recent track record of the world's "best" economists and finance guys, perhaps less knowledge works in my favor :) All kidding aside, recent market trends will have consequences for all businesses, including digital signage and other new media. But how big will the impact be? To answer this question, I spoke to a bunch of people at banks, VC firms, hedge funds and various debt financiers. Then, I put together a handy diagram to summarize what I learned. In this article, I'll cover the more interesting tips -- some of which may surprise you.
Everyone likes to spend other people's money
Say you're starting up a new company. It might be in the digital signage industry or placed-based media, or maybe something else altogether. Like most new businesses, you need capital to grow and expand. Or maybe you've just gotten the go-ahead from your CEO and Board of the big firm you work for to begin deploying your screens, but it's going to cost $25 million to get the job done. What are the options for getting that money? Decision number one is whether to use existing cash in the bank or find new cash to fund the project. Until recently, the conventional wisdom was to minimize equity raises in favor of using cash on-hand or taking on some debt. For large companies, this continues to be an option. But for smaller companies, $25 million is way more than you have on hand or could borrow from the bank. That means finding external sources of cash.
The bad news: Debt, credit and loans have dried up
First, the bad news. You probably heard about it on the news or read about it on the web after making the terrible, terrible mistake of looking at your 401(k) account this week. Simply put, we have a "credit crisis". It's really hard to get a loan right now, even if your business has been operating profitably for a long time. As excessive debt is no longer an option for many companies, they've become much more conservative about spending their available cash. So conservative, in fact, that for the first time in a long, long while, a lot of companies are giving out equity stakes instead of spending the money in their bank accounts. Just as GE and Goldman Sachs took multi-billion dollar investments that they don't actually need right now from billionaire investor Warren Buffett, small and mid-sized firms with strong balance sheets and operating histories have been more willing to give up a share of the company to keep more cash on the books. Consequently, we're tracking a fair amount of venture capital activity right now, though requirements have become tighter and valuations lower than before. Unfortunately this doesn't extend to the very low-end of equity financing, and I expect many startups are going to find that their friends and family are quite tapped out at the moment, between shrinking savings, no access to home equity, and high food and energy prices.
The good news: Private investors and leasing companies are still active
The good news, you ask? Well, the stock market has become rather volatile and "safe" investments like T-bills and bonds have interest rates hovering just above 0% right now. This means that many wealthy individuals and angel investors are putting their money to work in private equity markets. Not all equity deals look good right now, of course. You'd have to be crazy (or desperate) to try going public any time in the next 12-18 months, and only the biggest, best companies are having much luck issuing new shares on the public market. But private companies with a good plan and solid executions should be able to find money out there, provided they're willing to give up a fair chunk of equity for the privilege. Also, the one sort of debt financing that still seems to be in favor is equipment leasing. Since the full amount of money is backed by assets with known retail values and depreciation curves, these debts are a bit less risky than those based on company performance or balance sheets. However, it does seem that the leasing companies have become even more careful about who they'll lend to.
The silver lining: Companies that survive in today's economy will dominate in the long-run
It's hard to imagine some good coming out of all this, but there is a silver lining: just as there are buying opportunities on the stock market during a down period, the same is true in the digital signage market. I expect to see a wave of consolidation as small networks merge together to improve their footprint and performance. Likewise, we'll continue to see a culling of weak vendors and service providers. Hopefully, a few winners will emerge over the next couple of years. These firms will be more svelte and streamlined, but also more nimble and dedicated to innovation. And if you're just starting out today, make sure to keep these same attributes in mind.
How has the economic crisis affected the growth of your business? Have you found any other unusual sources of funding? Leave a comment and let me know.