Hartford Business Journal

HARTFORDBUSINESS.COM | JANUARY 8, 2024 23 In 2024, CT startups and stalwarts must confront VC funding gap, rising labor costs By Frank Milone T he state of Connecticut unveiled its "Make it Here" campaign in 2023 with a video highlighting what can be "made" in the Nutmeg State: a family, pizza, championship team and submarine, to name a few. The slogan, of course, plays on Connecticut's longtime position as a manufac- turing center and, for me, it also calls to mind the state's more recent success as a hub for tech and bioscience. Amid a constrained and uncertain economic climate, both newer and more established companies in Connecticut face a host of challenges, but "making it here" comes with undeniable advantages as well. Overcoming wary investors It's no secret that in Connecticut and elsewhere, venture capitalists have been more cautious over the past two years. In the next 12 to 18 months, access to venture and growth capital most likely will not get any easier. While investors remain reticent, they do continue to invest. Founders who can effectively define the problem they're solving and make a strong case for the innovation they've made are still getting funded, espe- cially in industries that are strong for Connecticut, such as digital health, biotech and fintech. These industries remain attractive to investors because of their poten- tial to provide immense exit value. They will also be some of the first industries to heat up once the IPO market gets going again, which puts Connecticut in a strong position to take advantage of a market rebound. Medical device startups in partic- ular are creating products that are highly sought after by the largest global players in health care, many of whom are based or have offices here. With long, profitable histories, these companies have their own funds to invest in promising innovations. But even in bioscience, early stage companies that haven't yet proven their concept may have some difficulty obtaining funding. These companies have to get creative with options like crowdfunding, grants or debt financing. Interest rates are, of course, much higher than any time in recent memory, but they're still not unman- ageably high, and increases seem to have plateaued. In the short term, companies using debt to grow have to factor in a greater portion of proceeds going to debt service than they might like, but it can be done. Banks also continue to lend, though they are strengthening the required covenants — both financial and oper- ational — that come with that capital. These mileposts can have less flex- ibility than objectives outlined by VC investors, but if the company has the financial discipline to manage them, the founders will retain more equity. Companies with history can make gains While some in Connecticut seek to "make it" in the high-stakes startup world, others look to continue growing businesses first "made" here decades ago in fields like manufacturing. These companies face their own set of challenges, particularly rising labor costs. With an overall labor shortage and companies moving into Connecticut for the talented workforce, job seekers continue to have the upper hand in the marketplace. This, combined with inflation, has pushed starting salaries at many companies higher, which then causes upward pressure on all salaries to retain team members. Inflation may also enable price increases, but there's typically a delay between when those decisions are made and when the increased revenues are realized. For estab- lished companies in need of capital to cover the gap, debt financing remains available. Even with interest rates more than double what they were two years ago, companies with a strong growth plan can build in debt service. Growth may be slower or more modest, but don't let the headwinds of the labor market and interest rates push you out of a growth mind-set altogether. Frank Milone is co-founding partner of Glastonbury-based Fion- della, Milone and LaSaracina LLP (FML CPAs). INDUSTRY OUTLOOK | BANKING & FINANCE Key considerations for values-based investing in 2024 By Rosa Y.C. Chen I n the last few years, there has been a surge in the popularity of values-based investing. At a time when ethical, moral and political beliefs have infiltrated every aspect of American life, personal investment has the appeal of aligning values and actions, all while securing investors' financial future. Large firms such as BlackRock, S&P and MSCI have helped with the drive towards values-based investing by developing and promoting funds built around specific ideals of environmental and social responsibility and corporate governance (ESG). These and other ESG-linked prod- ucts have done well, now accounting for more than $30 trillion under management worldwide. Yet, in the last year, these funds have been the subject of major backlash, specifically from lawmakers and investors. What 2024 holds for ESG-linked products is uncertain, but values- based investing isn't going away. Portfolio managers should be prepared to integrate values of all types in a way that assures capital preservation and appreciation. New name, same investment strategy Thoughtful investment strategies have long incorporated environmental, social and governance concerns. Evaluating foreseeable risks and integrating them into a compre- hensive company and stock anal- ysis has always made sense in best-in-class investing. Risks include poor labor prac- tices, which lead to higher turnover and higher labor costs; misaligned financial incentives that lead to capital misallocation and opera- tional mismanagement; ineffectual marketing and public relations that generate negative publicity and create bad reputations; and lastly, violations of environmental standards and laws, which could mean large regulatory fines, massive cleanup costs, and in some cases, bankruptcy. All of these risks can compress earnings and cause the stock price to fall. Taking these things into consid- eration isn't about a social stance or political perspective; it's part of a prudent risk management framework. Beyond these considerations, clients may wish to reflect their own personal values with their investments. For example, one client may want to own defense companies, while another may want nothing to do with companies that profit from war. A portfolio manager must integrate those beliefs and desires into the portfolio when making the invest- ments that will also serve the client's financial interests. Know what you're getting Once an individual or institution decides to incorporate values into their investment strategy, there is the question of what kind of financial product will serve them best. A number of ETFs and mutual funds have been introduced into the marketplace geared towards values-based investing. However, due to the diversity of values as well as the multitude of ways ESG can be defined, it's hard to know exactly what investors are buying without significant research and monitoring. For a mutual fund, the consci- entious investor should review the prospectus and research fund management to ensure it aligns with their philosophies. For both mutual funds and ETFs, the investor will want to review the holdings and assure that they agree with them. For example, an ETF could be focused on solar companies, but include a couple oil and gas compa- nies because they are moving into renewables. This may not align with investors who do not want any oil and gas. Investors whose values are more nuanced or shifting are more difficult to contain in a single fund or index. These investors are likely to have more success with individual securities. In the end, though, there is no reason a diligent investor can't feel good about both the companies they invest in and their returns. Rosa Y. C. Chen is director of research and a portfolio manager at Hartford-based registered investment advisor Bradley, Foster & Sargent. Frank Milone Rosa Y.C. Chen

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