this is your survival guide - prepared capital...survival guide - for your business take advantage...

The Next Recession Is ComingThis is Your Survival Guide

Webinar: July 26, 2018

Proprietary & Confidential

Welcome & Introductions

Alaa Ismail Consulting CFOEarly Growth Financial Services [email protected]

Phil Argue CEO / FounderPrepared Capital [email protected]

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mailto:[email protected]



About Early Growth Financial Services

• Outsourced financial services firm that provides early-stage companies with an integrated financial solution • Three platforms of services and support: transactional accounting, CFO,

compliance • Services include: AP/AR, financial forecasts, cash management, financial

statements, monthly close, 409a valuations, taxes

• Supports 18% of privately-funded, venture-backed startup companies in the United States

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About me and my company

• I had family members who lost nearly everything during the Dotcom Bubble and the 2008 Financial Crisis • 10-years in management at Morgan Stanley Wealth Management • Oversaw 7 offices across Los Angeles with 230 Financial Advisors and $33 Billion in

assets • Left Morgan Stanley in 2017 to launch Prepared Capital, an online wealth

management company (robo advisor) • Prepared Capital helps investors reach their financial goals and protect their

portfolios by predicting recessions

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Agenda

• Welcome / Introduction • The Next Recession – How long do we have? • How do we know? • How bad will the next recession be? • How to prepare

• For your business • For you personally

• How we can help

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Why Are We Doing This Webinar?

• Chance meeting with David Ehrenberg and Gadiel Morantes outside a restaurant in Santa Monica. Led to a discussion about business cycles and the impact on innovation and start-ups • Simply put, a recession is the greatest financial risk that you cannot control • EGFS and I feel that this is a topic that should be discussed, for you and your

business

Three action steps to minimize the impact of a recession on your business (and you)

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The Next Recession – How Long Do We Have?

• We are in the 9th year of an unusually long business cycle • Second longest cycle in US History -- only longer

cycle was 1990s • Ended with the bursting of the Dotcom Bubble (2000-2003)

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Why Do Recessions Happen

We’ll spare you the economic details, but… it’s the Federal Reserve: • The Fed is mandated to maintain full employment, and stable prices • There’s never been a recession without the Federal Reserve raising interest rates • Also, there’s never been an economic recovery without the Fed lowering interest rates • Recessions are predictable

The Fed has raised rates seven times during this cycle and is expected to continue to raise rates through 2018-2019

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The current cycle will likely last another 18-24 months before the next recession occurs


How Do We Know?

• Business Cycle Indicator – A proprietary research process that uses economic and financial market data to predict recessions • Tested back to 1968. During those 50 years, the US Economy experienced seven

recessionsBusiness Cycle Indicator Warnings

Recession Start Date

Recession Warning

Lead Time in Months

Lead / Lag

Dec-69 Feb-69 10 LeadNov-73 Jul-73 4 LeadJan-80 Dec-78 13 LeadJul-81 Dec-78 31 LeadJul-90 Jun-89 13 LeadMar-01 Aug-00 7 LeadDec-07 Sep-06 15 Lead

Average Lead

Time: 13 Success Rate: 7/7 (100%)

Our Business Cycle Indicator predicted all seven recessions Average time between a warning and the beginning of a recession was 13 months

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How Big Will the Next One Be?

• Our research focuses on the timing of recessions, not their severity • However, here are some facts that lead us to believe the next recession could be

BIG: • The amount of debt in the US is 50% higher than it was in 2007:

• Excessive amounts of debt triggered the Global Financial Crisis • 40% of US Households would struggle to pay an unexpected $400 expense:

• Many consumers are living paycheck-to-paycheck (is your B2C product a necessity?) • Federal budget is running at a deficit of more than $1 trillion per year:

• Leaves little room for expanded government spending during the next downturn

• In 2008 – 10 million jobs lost, 170,000 net small businesses losses, $12.8 trillion in losses (in US)

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Debt Levels at Prior Cycle Peaks

• Total US Debt is now 50% higher than where it was in 2007 • Table show US Debt levels at prior cycle peaks over the last 30 years • More debt = More severe recessions

Type of Debt 1990 2000 2007 2018Consumer Debt (non-mortgage) $0.8T $1.8T $2.6T $3.8T

Mortgage Debt $3.7T $7.0T $14.8T $15TCorporate Debt (non-financial) $1.2T $2.7T $3.4T $6.1T

Government Debt $3.4T $5.7T $9.4T $20.8TTotal $9.1T $17.2T $30.2T $45.7T

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Debt & Stock Market Declines - Recessions

What do current debt levels imply about the decline in the stock market during the next recession?

$45T in debt points to a potential 68% decline in the S&P 500

The actual decline, will largely depend on the response by policy makers in Washington, D.C.

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What markets & types of companies will be worst hit?

• Recessions tend to reverse trends from the expansion phase of the cycle: • 1990’s Tech Boom, then bust in 2000-2003 • 1990s to 2006 - Housing Boom, went bust in 2007

• Blockchain/Crypto – Innovation will continue, but vast majority of the 1,500 coins/tokens will not • Tech and companies that generate revenue from online advertising • Companies that rely on Venture Capital: VC funding:

• 2017: $72B (3rd largest) • 2009: $29B • 2002: $15B

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US Technology Sector in Context

Dow Jones eCommerce index (Amazon, Netflix, Google and Facebook) up 617%, 3rd largest bubble of past 40 years

U.S. tech market cap ($9.9T) exceeds all Eurozone companies ($8.0T) Facebook (25k people) market cap > MSCI India (1.3B people)

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Venture Capital Investments (1995 – 2017)

• Venture Capital funding fell 85% between 2000 and 2002 • 13 years for volumes to recover • VC Investments totaled $72B in

2017 • 3rd behind 2015 & 2000

• Take Advantage NOW

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Survival Guide - For Your Business

Take advantage of current funding sources • Venture-Backed – Raise more capital than you may need over the next 18

months: • Assume there will be a funding ‘black-hole’ in two/three years • Investors will be VERY selective; focusing on revenue & cash-flow, not just users • Facebook raised $280MM in 2007 right before the Financial Crisis – long runway

• Banks are eager to lend today, but that won’t last forever: • Expand lines of credit for a raining day • Be aware, lines of credit can be cancelled or limits reduced

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How will your customers fare during the next recession? • B2B – If your customer’s business is down 25% or more, how receptive will they be

to your product? Does it help them gain market-share? Lower Costs? Increase profitability? • Second level thinking - Consider your customer’s customer

• B2C – How will your product be received if people are concerned about their financial well-being? If investment accounts are down 50%, pay-cuts are a risk, is your product still desirable? • Netflix doubled it’s subscribers during the 2008 financial crisis because they were a low-cost

alternative

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• Exit Strategies – If you are entertaining offers, be aware that those offers may not exist once the economy turns. Valuations will likely fall • Employment Strategy – It’s currently an employee’s market. Consider using more

freelance labor until the market turns • Real Estate –Hold off on signing long-term leases, leverage co-working space until

quality space becomes available at lower prices

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Survival Guide - For You

• Review your monthly cashflow: • Build a rainy day fund (6-12 months of living expenses)

• Hold off on large purchases – cars / homes • Review all personal loans – especially adjustable rate loans:

• Expect higher interest rates on all variable lines of credit (HELOC, ARM Mortgages, Credit Cards, etc.)

• Pay-down balances as much possible – Start with highest rate loans • Lock-in rates on loans that could impair your monthly cashflow

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Survival Guide - For You

Review your investments • What do you own? Where is it? How will your investments do during a recession? • What process do you have to shelter your investments when a recession occurs?

• Move to bonds before a recession. Our results during the last two recessions: • +25.3% during 2001 • +20.2% during 2008

• Review the costs associated with your investments and accounts: • Look for hidden fees associated with different account types and products • Over-time, those fees eat away at your account

• Many investors are overly exposed to large tech names: Facebook, Apple, Netflix, Google, and Amazon: • Recessions have a habit of reversing fortunes gained during the prior expansion • Review how your investments performed during 2008

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Losses Outweigh Gains; Recessions = Losses

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Next steps to recession proof you and your business

Early Growth Financial Services • Help you be nimble in changing

market conditions • Financials & Forecasting • Cost effective CFO solution

vs hiring full-time • Seasoned business consultants in the

startup world

Prepared Capital • Sign up for a Complimentary

investment review: • Reach out to me for an assessment of

how well your portfolio will hold up during a recession

• FDIC insurance review • Get complimentary monthly market

updates

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Prepared Capital - Disclosures

Prepared Capital is registered as an investment adviser and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment adviser

does not constitute an endorsement of the firm by securities regulators nor does it indicate that the adviser has attained a particular level of skill or ability.

Back-testing involves a hypothetical reconstruction, based on past market data, of what the performance of a particular account would have been had the adviser been managing the account using a specific investment

strategy. Performance results presented do not represent actual trading using client assets but were achieved through retroactive application of a model that was designed with the benefit of hindsight. Back-tested

performance results have inherent limitations, particularly the fact that these results do not represent actual trading and may not reflect the impact that material economic and market factors might have placed on the

adviser’s decision-making if the adviser were actually managing the client’s money.

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Q & A

Phil Argue CEO / FounderPrepared Capital [email protected]

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Alaa Ismail Consulting CFOEarly Growth Financial Services [email protected]



this is your survival guide - prepared capital...survival guide - for your business take advantage...

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