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The dire warning comes at a time with digital advice provider a.i. entering voluntary administration and licensee balance sheets being challenged, but the principles apply to any business in the financial advice space including practices themselves.
Simon Cathro, founder and managing partner of restructuring and insolvency specialist Cathro & Partners, says his general view on advice tech providers is they are often too heavily reliant on capital injections because they’re not cashflow positive.
“What we’re seeing at the moment – and it’s not just that industry specifically but genuinely any business or industry that’s heavily reliant on capital injections – the investor appetite is they’re expecting a quicker turnaround into profitability,” Cathro tells Professional Planner.
“These days, the importance of profitability is significantly greater so there’s some pretty tough decisions being made in the businesses that are heavily reliant on cash or capital injections.”
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Shifting winds
Cathro says investor appetite has shifted towards a conservate approach which can be attributed to a variety of macroeconomic factors.
“What you’re seeing now is what I would call a return to a more traditional approach around investment where people are placing the importance of profit right at the top,” Cathro says.
Cathro & Partners were appointed liquidators of Metigy last September. Founded in 2015, Metigy used AI to provide small businesses with potential customer insights to inform marketing strategies.
Cathro drew on this recent experience as an example of the danger of a valuation not reaching expectations – he says the company grew to a $1 billion valuation but never drew a profit.
“Whilst there were other issues that caused the downfall of [Metigy], once you dug into the business and looked at the cash flow and the expected revenue from that, it wasn’t that strong,” he says.
In the current economic environment, Cathro says the cost of business has gone up significantly and businesses are concerned about the implications of wage growth.
“We will see a pickup in unemployment rate because people will really start to cut heads to reduce their cost base, because other parts of the cost base are growing,” Cathro says.
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“If there’s businesses or divisions or revenue streams in the business that are not performing sufficiently, then they need to think very closely around whether they should continue to operate in that space,” Cathro says.
This is an extract from an article written by Chris Dastoor for Professional Planner, published on 5th June 2023.
Read the full article below:
Read the full story: Reckoning due for businesses reliant on capital injections- Professional Planner
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