Renzo A. Cenciarini is Senior Professor specialised in entrepreneurship and asset restructuring at Bocconi University and SDA Bocconi School of Management.
He is an expert in the management of start-up, corporate restructuring as well as merger and acquisition projects.
Renzo has considerable experience in strategic consulting, investment banking, private equity and growing entrepreneurial ventures. This experience was gained in 20 years of professional activity with the Boston Consulting Group, the Chase Manhattan Bank, Citicorp Investment Bank and international private equity funds, and later with Cenciarini & Co., a merchant banking boutique specialised in early stage investments, which he founded in 1998.
Renzo Cenciarini holds a Degree in Economics from Bocconi University and an MBA from the Harvard Business School.
Below you find his analysis on the 2020 coronavirus crisis, and his views on the role that start-ups can have in re-launching the economy.
The present crisis is different from the 2001 and 2008 ones
The fundamental difference between the present crisis, and the two that preceded it (2001 and 2008) is that this one is an economic recession, very different from the others.
The 2001 crisis was caused by the burst of the internet bubble, which was the result of a build up of irrational euphoria in the last years of the past century. It was not an economic recession, but rather the downward adjustment of over bloated expectations. We haven’t forgotten company valuation methods based on exotic metrics, such as number of clicks, or time spent on a page. The economic world absorbed the excesses in a couple of years, and by 2003 we were back to “business as usual”.
The 2008 crisis in the US was caused by the burst of the real estate bubble, which was the result of the economic policies of the Bush administration. In countries like the USA, there are two major policy measures to increase the level of wellbeing of the lower classes. One is, to supply health care at very low costs (Obama). The alternative is to allow the lower percentiles of the population to become property owners, thus possibly enjoying capital gains in the resale of the properties, or else having the choice of selling the property in case of financial needs (such as health issues). In order to grant ownership to low income citizens, credit standards were lowered (Bush), with the indirect financing of government sponsored enterprises (Fannie Mae and Freddy Mac). When the real estate market made a substantial correction in 2008, many properties foreclosed, wiping out the equity of the house owners. So, it all started as a financial crisis with major consequences on the lower income citizens. The immediate, substantial liquidity infusion into the economic system by the Fed prevented the financial crisis from turning into an economic crisis. Since the European Union does not have a “Fed”, the money that was pumped into the economy through the banking system did not reach quickly enough the productive system. The slower the money reached the corporate world, the deeper and longer lasting the recession became.
In conclusion, none of the two crises started off as economic crises.
The present case is quite different, as it resembles in many ways more the 1929 recession, than other economic downturns. In 2020, there will be no “bubble bursting”, but rather an outright screeching halt to the economic activities in many countries, with such deep consequences, that it will take quite some time to go back onto the trend line, even if the recession takes a V shape, instead of a U shape.
Short-term fire fighting measures will not be sufficient, the world economy will need significant medium and long term measures to bring it back to the prior levels.
Despite the financial stimuli, economic activity will suffer for a significant time to come. The distancing rules and other protection measures will inevitably impact, amongst others, on the efficiency and effectiveness of business processes, on the social relationships at work, on people mobility and habits.
The pre–Covid19 perspectives for the 2020‘s: the role of big data and the creation of eco-systems
There were a number of interesting apparent trends, before the black swan appeared.
Mastering big data will be a goal for every company, as it will become one of the key competitive factors, enabling companies to focus their energy where the returns are higher.
In a few years, the blockchain will most likely be part of our lives, perhaps as much as the internet did, starting at the end of the last century. Let us not forget, electronic mailing has been around since the eighties, but it is only 10–15 years later that it became widely used.
Diversification as a way to achieve competitive advantage will decline, under the pressure of specialised competitors in the individual sectors, and because of a different relationship between risk and return. The financial risk of diversified companies will be enhanced by the increased level of debt necessary to maintain adequate investment levels in all their corporate activities. In turn, with increased levels of debt, diversified companies will find it more and more difficult to raise equity, as the fund raising will not be specific to one line of business.
New eco–systems are developing, semi fluid networks of companies, that change shape with the changing requirements of the competitive environment. Company boundaries are getting blurred (are workers, employees or temporary freelancers?), industry boundaries are getting blurred (are third-party merchants, collaborators or competitors?).
Consumer aspirations are changing, consumers focus more and more on the purchase experience, and the authenticity of the product offer (image, promotion, etc.).
Value creation will be more and more driven by resilient business models and improvements in productivity and quality. These will be mostly driven by artificial intelligence, augmented reality, machine learning. Again, all based on big–data analysis.
The present crisis will impact on the digitalization process of all actors in the economy
The digitalisation process will accelerate, and its role will become more relevant. A “hybrid” competitive environment is already developing, at the intersection of physical and digital. Digital giants are moving into physical sectors, (e.g. Amazon – Whole Foods, Google – Waimo), traditional physical incumbents are pursuing digitization (e.g. Walmart, Starbucks, IKEA).
There will be a further expansion of deep tech. Besides the already mentioned blockchain and artificial intelligence, biotech will grow, as well as photonics and electronics, robotics and drones, and advanced materials. It still remains to be seen, when quantum computing will become a major factor.
Finally, as already mentioned before, there will be an acceleration of new industrial architectures, based on the coordination of economic ecosystems.
Asset side restructuring measures should be put in place to restructure and revamp the economic activities
What measures should be put in place, to restructure and revamp the economic activities is really a question for macro–economists and policy makers, rather than for early–stage investors.
Besides the obvious need for short–term cash infusion in the system, in the medium term there will be a need for large and medium sized companies to restructure their asset base, in order to concentrate on the activities that have a higher sustainable competitiveness in the long term.
Asset restructuring should go along with a balanced capital structure, meaning that it cannot be carried out with debt financing, but it will need substantial equity infusions.
A consequence of this is, the financial means that will be pumped into the economy for its recovery cannot all be debt, otherwise the debt level of a number of companies and sectors will become unbearable. There is a need for non–reimbursable grants to the corporate world.
New ventures will have significant role in re–launching the economy
Start–ups will have a significant role in increasing the digitalization processes, which will be a key value creation driver for the economy as a whole.
Start–ups will also facilitate the development of new industrial architectures, based on the coordination of the semi fluid networks of companies that are becoming a permanent element of the competitive environment. The blurring of company and industry boundaries mentioned above is already taking place in the world of new ventures. When these principles will be applied to the incumbent corporate world, they will improve the adaptability of the economic system to the new industrial paradigms.
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