We all know the score: technology stocks have crashed in public marketsscaleupy I don’t want an IPO while the market is down and investors are asking how and when they will start to see returns.
Happen record levels of inflation across Europe, prospects for rising interest rates and wider economic slowdown, and you have a prescription for a large dose of medicine for the continent’s founders after the VCs reached record cash levels in 2020 and 2021.
But what does it all do with the European valuation of start-ups and how can companies adapt when investors become nervous?
Initial valuation in the growth phase
Let’s start with the larger players who are most exposed to market fluctuations. Investors say these companies in the growth phase will have difficulty raising money quickly, while people are waiting for market and interest rate corrections to end.
If you are a late-stage investor, you do not want to spend millions of euros on a high-value delivery company from the previous round, when publicly traded companies like Deliveroo and DoorDash saw a drop in stock prices.
One investment researcher, who did not wish to be named in this article, said that companies that began to increase growth cycles in the fourth quarter of 2021 saw a decline in valuations to 60% of what was at the beginning of the process.
Lina Chong, Target Global’s early and growth fund investment director, tells Sifted that strong companies in growing sectors “with a very clear path to market leadership” will still be able to raise capital.
“It doesn’t look so great to everyone else.”
Chong points out that some of Europe’s most funded startups in recent years, fast delivery companies, are likely to be in trouble in today’s market.
“If you’re just burning money and sending 20-30 bucks with each order, I don’t think it’s a growth game that will be favorable in the next few years,” he says.
Target Global is an investor in the Berlin startup Flink with fast delivery, which recently acquired competitor Cajoo, and Chong predicts that further consolidation could be on the way.
This is partly because big wheels may be harder to reach if US funds stop investing in Europe. Within five years until 2021 American investors contributed 49% capital in rounds of $ 250 million and higher in Europe.
“The question is, will these non-European sources of funding continue to invest heavily in Europe? I think it will be very mixed and the general opinion I hear so far is that a lot of them have withdrawn, ”says Chong.
Initial awards in the initial phase and series A
How does a market downturn affect the prospects of early-stage companies today?
“It’s a bit inconsistent,” says Hussein Kanji, a partner at London’s Hoxton Ventures. Supported the initial phase of VC as Deliveroo, Darktrace and Babylon. “We’ve seen a lot of companies continue their very good, strong rounds a few weeks ago, where nothing has changed and it doesn’t seem to be significantly different from 2020 or 2021.”
He says he hears founders with less proven metrics are likely to achieve valuations at around 10 times their annual income or less, if they can increase at all. This is comparable to the fact that some companies raised valuations to 20 to 100 times their income during the heady days of 2021.
Like many investors, Kanji says the strongest companies will be able to find supporters.
“But for the average company, which earns a million or two, which will grow to three or four million, I suspect it won’t even be a matter of valuation.” I suspect they won’t even trade. “
Kanji says he now hears that the typical amount of a Series A investment in Europe is between $ 5 million and $ 20 million, which translates to pre-fund valuations ranging from $ 20 million to $ 80 million. Pre-commissioning is the estimated capitalization before taking into account a new investment.
He adds that the upper end of this spectrum is significantly higher than pre-pandemic levels, with outlying companies collecting $ 10 million at a valuation of $ 40 million, indicating that there is still great enthusiasm for technology.
Another investor, who declined to be named, said the initial valuation of $ 20 million was a remote value captured only by the most competitive companies, and that many companies raised to $ 12 million or less.
Initial awards in the pre-seed and angel stages
As we move on to the early stages of startups that might be interested in increasing angel or pre-seed rounds, things seem a little more optimistic. This is because these companies have a long time before they are enough to think about listing, and they usually focus only on creating their product before it actually expands.
Anthony Rose, CEO and co-founder of SeedLegals, says from data on recent funding rounds that so far things seem to be mostly “business as usual” when it comes to opening and closing funding rounds. SeedLegals is a UK platform for seed and pre-seed stage founders and investors.
But even if trades can still take place, the initial valuation does not necessarily change. One investor from the British Angel Fund, who did not want to be named in this article, says that pre-seed deals are starting to appear. According to a survey of 60 business angels, angel investors are beginning to demand a 20-25% reduction in valuations.
Which industries will suffer the most?
Although, in general, later-stage transactions appear to be more likely to be affected by current market conditions, things vary by industry.
All investors with whom Sifted spoke for this article agreed that it would be the most difficult to finance consumer-oriented businesses, while B2B SaaS companies could also have a hard time.
Marcin Hejka is a co-founder and general partner of OTB Ventures, a deeptech investment fund, with portfolio companies including BabbleLabs, Scalarr and Kevin.
👉 Read: What is the impact of the decline in technology stocks on European startups?
Sifted said companies with a strong technological component tend to be a good bet in difficult economic times.
“Difficult times are often the best times for business efficiency efforts, which you can’t do in the 21st century without using deeptech,” he says. “No one is immune to macroeconomic trends. But in reality, deeptech space, especially early deeptech, is probably the least affected part of the venture capital market. I would even say that investing in deep technologies at an early stage is actually countercyclical. ”
Hejka points to recent follow-on investment which OTB turned into a startup Kevin in the area of payment infrastructure, which also included heavyweight investors Accel, Eurazeo, Speedinvest and Harry Stebbings from 20VC.
“The award has increased significantly compared to the previous round, the company’s potential is absolutely massive and from this point of view it was a very fair evaluation,” he says.
What should the founders do?
But not everyone is lucky to be in this position, and some founders say they will look for a bootstrap instead of taking investors’ money with worse terms or appreciation.
Some venture capital providers say that startups should rely on the expertise of their investors to strengthen their business in the event of a likely economic downturn and ensure that they are in a stronger position to raise capital when capital becomes available again.
“Investors should encourage you to understand your user feedback, listen carefully, repeat your product, and upgrade.” says Laura González-Estéfani, founder and CEO of TheVentureCity.
Chong of Target Global also encourages founders to look at other financing options outside of equity.
“Quite a few debt funds have accumulated in the last few years. It might not be a bad idea to look at such alternative sources, just turn to equity and expand that path, ”he says.
“Go inside with your eyes wide open.” [equity] is an extremely expensive form of capital “
However, Chong also warns that as the balance of power shifts more in favor of investors, the founders must be careful about what the VC puts in the time sheets and understand what they mean.
“I think we’ll see a little more protection against the downturn, a little more in favor of liquidation than we’ve ever seen in the last five or six years,” he says.
The liquidation option means that if the company is liquidated, investors will gain preferential access to the company’s remaining assets, and Chong warns the founders to be extremely careful about what they sign on the timeline.
This would be a reversal of the trend set in the boom times, when time sheets – a document that outlines the conditions of the investment – he became friendlier to the founders.
“If you can avoid lifting in this environment by extending your path, I think that would be the most sensible thing to do. If not, go ahead with your eyes wide that this (capital) is an extremely expensive form of capital. “
Tim Smith is a correspondent for Sifted of Iberia. Tweeting from @timpsmith
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