Dear Startup Investor,
It’s been a great two years to be an investor, with VC funding, crowdfunding, IPOs and public stocks all hitting record highs.
But the last few months have started to cool off the markets, thanks to the Federal Reserve’s decision to raise interest rates (among other factors).
We’re heading into a year that will probably be a little tougher for investors than 2021 or 2020 were.
The good news is that there will be no shortage of opportunities for angels – and you’ve got some of the best in your corner.
Here are the top pitfalls you need to look out for in 2022… and of course, exactly how we’re going to avoid them.
The Supply Chain Crisis
One big investing risk I’m really keeping my eye on and staying conscious of as I make my investing decisions next year is the continuing – and possibly worsening – global supply chain crisis.
This is not the first time I’ve written to you about this problem – I wrote about it earlier this month. But since then, things have gotten worse and the risk that supply-chain challenges pose in 2022 has grown significantly.
Why am I so worried about supply-chain? Well for starters, the companies that I’m building – Miso Robotics, Graze, Piestro, Nommi, and others – all depend on components and parts sourced from all over the world.
Things like semiconductors, cameras, metal sheets, thermal sensors and other parts are being manufactured and delivered to us from all corners of the U.S., Asia and Europe. In 2021, we’ve seen the prices of many of the components creeping up, as well as substantial delays in production and delivery.
The supply chain crisis is very real for us and very real for many businesses out there. It looks like in 2022 things won’t go back to normal just yet, which is why I think it is the biggest investing risk for 2022.
At the same time, I know our companies will be able to weather this storm – because they have proven market traction and solve real problems. As an angel investor, though, you should pay keen attention to how and where a startup makes its product… and ensure they have a backup plan or enough inventory to wait this out a while longer.
The Christmas Surprise: Omicron
By now you’ve heard of the Omicron variant of COVID-19 that has rapidly spread globally in the past few weeks.
Omicron has close to 50 mutations compared to the original COVID virus that was detected in China in 2019. These mutations have made Omicron dramatically better at spreading than previous COVID variants, with experts claiming it is anywhere from 2-5 times as transmissible as the Delta variant.
One recent study by researchers in Hong Kong found that Omicron infects and multiplies 70 times faster than the Delta variant in the airways, which potentially explains its dramatically heightened transmissibility. Even more worryingly, researchers from Imperial College in London recently released odelling showing that the chance of reinfection with Omicron is up to 5.4 times higher than the Delta variant.
Omicron is spreading fast and cases in the US are soaring as the COVID-19 tracker from the New York Times shows:
Omicron Meets the Supply Chain
The increased transmissibility of Omicron is making a lot of people sick fast and keeping them home. This is a huge problem for businesses and is exacerbating worker shortages in a lot of industries.
Just look at the airline industry – thousands of flights have been cancelled the past week around the world because of shortages of pilots and flight attendants because so many of them are sick with COVID. Over 6,000 flights were cancelled on Christmas Eve alone due to airline staff calling in sick! This equates to millions of lost working hours and a huge drop in productivity and output.
While shortages of airline staff are inconvenient, the real challenge lies at the beginning of much of the global supply chain: China, where a lot of the parts we use in our robots are manufactured.
Since the beginning of the pandemic, China has enforced a “Zero Tolerance” COVID policy, meaning its goal is to get to and maintain zero daily COVID cases across China. Every time there has been an outbreak somewhere in China, that city or region immediately goes into lockdown.
China has contained over 30 different COVID outbreaks over the past two years with this strategy. China’s Zero Tolerance policy is now going to face the heavily mutated and highly transmissible Omicron variant. So far, the signs are not promising. The Chinese city of Xian – a city of 13 million people – was put into lockdown on the 23rd of December. Cases are hovering around 150 per day, a fraction of what we see in other cities of the world.
China’s Zero Tolerance policy and use of lockdowns is going to put even more pressure on the already stressed global supply chain. By locking cities down and shutting down factories and ports, the spread of Omicron in China is going to cut production of all sorts of things that the global economy needs to keep going.
These lockdowns will further delay production for many factories that are already struggling to keep up with demand. To make matters worse, it’s not just Chinese factories that are being halted by the spread of Omicron. In Vietnam factories are also being locked down thanks to COVID infections and many are facing worker shortages as burned out workers are quitting in droves.
As I said before, it’s key to make sure any startup you’re considering investing in has a backup plan, inventory in store, or some other way to survive these manufacturing hurdles.
Rising Energy and Freight Costs
Two other factors that are contributing to the global supply-chain crisis are rising energy and freight costs. In Europe in particular, energy prices have been soaring driven by shortages in gas across the continent.
This is affecting everyone, and factories in particular are being acutely affected. Many factories are being forced to reduce working hours or take off-days to try to reduce energy costs. Electricity costs for delivery next year hit an all-time high in Germany and France – two of Europe’s biggest economies. A recent Bloomberg article highlighted the pressure across the continent:
“The situation is so severe that it is forcing factories to cut output or shut down altogether. Aluminium Dunkerque Industries France has curbed production in the past two weeks due to high power prices, while Trafigura Group’s Nyrstar will pause its zinc smelter in France in the first week of January. Romanian fertilizer producer Azomures SA temporarily halted output.”:
It’s not just energy costs that are rising; the cost of freight is hitting all-time highs across the world as well.
The cost of air freight has soared to record highs. The cost of transportation and warehousing has been 10-15% higher year-on-year every single month since April.
In the Port of Los Angeles, many container ships are waiting 10 or more days to drop off their cargo because of a long backlog of ships. The pressure on the supply chain is only being worsened by worker shortages due to sick days or people changing careers. The rising cost of freight shows no sign of abating any time soon. This chart from Bloomberg shows how every single freight channel is facing the pressure.
The combination of the rapid spread of Omicron, rising energy costs, and rising freight costs is creating a cocktail of challenges for the global supply chain in 2022.
While demand is staying high and even increasing for some things, the production and supply of different goods is being delayed or taken offline by illness and energy costs. Even when things are produced on time, the cost of moving them around the world is rising every month. Shortages of workers are making it even harder to move things around and further increasing costs.
These challenges are significant and have been front of mind for all the companies I’m building – Miso Robotics, Nommi, Piestro and Graze – as the number one challenge we have to navigate in 2022.
We’re thinking very carefully on how to schedule our orders of parts to keep costs low while keeping up with demand, for example. But we’re not alone in facing these challenges; every business and every person is being affected directly or indirectly.
That’s why I’m staying very conscious of these challenges as I assess possible investment opportunities in 2022. I’m asking myself things like: “How will this company’s costs and margins be affected by rising freight costs?” or “Will they be able to produce enough of this product to meet demand?”
As a startup investor, you should add questions like these to your analysis of investment opportunities in 2022. Companies need to have a good answer and good plan for addressing these issues. Those that don’t have a plan will have a very hard time next year, while those that plan ahead will have a doubly powerful advantage over their competitors.
And as the Chairman of the Board at Angels & Entrepreneurs, this is a part of the analysis I’ll be taking very seriously for every single startup recommendation the team puts in front of you – so you can rest assured that you’re making the best decisions for you.
I’ll be back soon.