EUVC Newsletter | 25.9.2023
EUVC Newsletter | 25.9.2023
On navigating raising and deploying in the current market, Taming big Tech, Follow-on investment reflections on the back of Instacart, Shouts to trailblazers and discounted allies tickets for WVC:E ✊
Welcome to the EUVC Newsletter 🗞️
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Table of Contents
Upcoming events
Insights from our LP Panel on Fundraising in the Current Market
State of the Market: Light at the end of the tunnel?
Public Institutions’ Role in The Current Market
Cyclical Trends or Unique Challenges?
Fred Destin on the Dynamics of The Current Market
Europe Has Figured Out How to Tame Big Tech by The Information
A thought on Follow-on investing: when to stop?
Shout-out to Tilia for getting first close done on Fund II ✊
Shout out to Allocate for raising $10M to increase access to venture
Get your discounted Allies Ticket for WVC:E Deal Day Now 🎫
This edition is brought to you in partnership with HSBC Innovation Banking
HSBC Innovation Banking provides commercial banking services, expertise and insights to the technology, life science and healthcare, private equity and venture capital industries.
From first-time founders to the funds that back them, innovators rely on us for deep expertise, endless energy, agility, and connections that help them to build organisations that better our world.
Upcoming events
Virtual events we’re hosting
The Impact of AI on VC | 📆 Sep 26, 2023, 12:00 PM - 1:30 PM CEST
(👆 >4.000 VC sign-ups and counting - don’t miss out!)
Winning in The Secondaries Boom | 📆 Oct 31, 2023, 3:00 PM - 4:00 PM CEST
In-person events we’re attending
Expand North Star in Dubai | 📆 15 - 18 October | 🌍 Dubai
How To Web | 📆 4 - 5 October | 🌍 Bucharest | 🤌 Use HTW15EUVC for 15% discount
Web Summit | 📆 13 - 15 November | 🌍 Lisbon
Insights from our LP Panel on Raising VC Funds In A Bear Market
Last week, we did our LP panel on Fundraising in the current market with David DANA (EIF), Joe Schorge (Isomer), Christian Roehle (KfW) and Michael Sidgmore (Broadhaven Capital Partners). This is the first of a series drawing out the core insights from the session. Hope it’ll be of help 🙏
In case you missed it, you can watch the broadcast here 👀.
State of the Market: Light at the end of the tunnel?
First of all, the fund-raising atmosphere today stands in sharp contrast to that of 2020-21, in that it - across the board - is noticeably more challenging. Nevertheless, the resilience of competent fund managers and budding companies is noteworthy. In the face of the current market dynamics, they persist in securing investments, but the chips have been rearranged so the fundraising journey has become longer, which while presenting a challenge for fundraising VCs is perceived by LPs as a net positive, as it provides allocators the leeway to cultivate sincere relationships and meticulously evaluate potential ventures before committing.
During the boom, direct investment and even some fund investments often demanded quick decisions. While we have seen some bets resulting in substantial returns from this period, it’s clear that it wasn't beneficial (for anyone).
Given that many partnerships last a decade or more, there's a collective acknowledgment of the need for comprehensive due diligence rather than hasty decisions. The consensus seems to be that the slower pace isn't merely healthier but also essential in ensuring all involved parties align in their expectations and dedication. No doubt, emphasis has shifted to a more thoughtful approach, which bodes well for forging new, strong enduring partnerships.
That said, it is clear that many institutions increasingly prefer to reinvest with managers they're already acquainted with, as it minimizes uncertainty and there’s often less capital to be deployed, resulting in a lightening of the pressure to deploy.
In conclusion, while the current market might seem daunting, there are potential benefits emerging from the challenges. A more deliberate approach to investments and partnerships might be the necessary evolution for the long-term health of the sector
Public Institutions’ Role in The Current Market
With both David Dana and Christian Roehle, the heads of venture investments at EIF and KfW respectively, a discussion of the role and approach of public investors in the current market was particularly prescient. Here’s what we learned.
Unlike private investors, institutions such as the EIF have a fundamental duty to bolster the market, particularly during less favorable cycles. Even in challenging times, their market engagement remains unwavering, though with an adjusted focus. The current emphasis is on being more proactive in sectors emphasizing climate and sustainability. There's also an inclination towards pioneering technologies, including space tech, AI, blockchain, and quantum technology.
Notably, the role of public institutions like the EIF, alongside counterparts such as KFW in Germany and BPI in France, is evolving. In contrast to a bull market, their role in a downturn is about much more than achieving initial fund closings and deploying capital on behalf of their beneficiaries. In downturns, they become essential for the very survival of many funds.
This shift is evident when considering that many funds in the bull market could secure substantial backing from a wide range of LPs even after being declined by institutions like the EIF. Bu that narrative has changed. While premier funds maintain their fundraising endeavors, albeit more cautiously, the more “innovative funds” face escalating challenges in a market like that which we have today.
It’s important to remember, that despite the public markets showing a bullish trend, the overall mood in private markets isn't as buoyant. A significant number of LPs made substantial investments around 2021-22, resulting in over-allocations. This has been exacerbated by a lack of distributed profits from investments (DPI) which complicates matters for private investors, especially because many managers are coming back to market for their next funds. These shifts present significant challenges, especially for new, emerging funds trying to gain a foothold in the market.
Cyclical Trends or Unique Challenges?
Let’s make one thing abundantly clear. The European Venture Capital scene has consistently exhibited growth, drawing significant capital to its fold and yielding even more capital for their beneficiaries. However, while the growth narrative suggests a high-performance rate, the insider would also know that many of these gains remain unrealized. This observation, when melded with the complexities of the geopolitical climate and other associated risks, presents a conundrum for LPs looking at the asset class in the current market.
Delving deeper into the investor psyche, it’s important to realize that our VC ecosystem has undergone a revival after the financial crisis, marking a period of uninterrupted growth. This continuous growth in Europe has led to an influx of Limited Partners, many of whom were venturing into the VC space for the first time. Unfortunately, through this period, we have failed to build sufficient understanding that company-building and venture investing is a marathon, not a sprint. Their anticipation of unceasing growth is now colliding with the reality of market downturns. This has led to a surge in secondary sales of LP stakes, a trend that many view as the precursor to a much larger wave. A trend more evident in Europe than our transatlantic counterpart, speaking to the sophistication of our individual LP landscapes.
All that said, in the long term, it is clear that Private capital's role in the investment sphere is on an upward trajectory. We’re witnessing an uptick in interest from private wealth channels, especially as institutional channels are witnessing a slowdown. This burgeoning trend, although in its early stages, holds the potential to invigorate the ecosystem and may even make up for the loss of institutional investors holding out. It's also noteworthy that private banks in Europe are exploring this avenue with increased enthusiasm.
What is more, despite certain hesitations, there's a discernible increase in U.S. funds setting their sights on Europe at the same time as we’re seeing an influx of global talent, counting also high-profile talent from global companies like Lyft moving to European entities. Coupled with Europe's robust developer community and prestigious educational institutions, this bodes well for the continent's future.
Hope this was worth the read! If so, share it with your friends and stay tuned for the next round of insights 👀
Fred Destin on the Dynamics of The Current Market
LP Hypeman’s note: The Punk Rocker of European VC put out a great analysis of the dynamics that are playing out in the current market - and ends on an important note for all to remember:
Remember, this is tougher still for our entrepreneurs. Some are flying high, but many are sailing through a really hard storm and not sleeping very well. They need us as investors to show up at our best, boost their energy and work through this.
Fred Destin, Stride.VC
Much more on Fred’s perspective on VC value add and how to be a better board member in our episode and feature piece on him here 🎧.
For newer managers who haven't been through a downturn before, 2023 is a brutal wake-up call. Just remember (per Samir) that funds don’t settle into their quartile until c. year 7. So do your best work, and keep your eye on the ball. A quick summary:
In 2017-2021 we saw:
(a) incredibly high graduation rates at 80%+
(b) fast markups between rounds, typically 2X+
(c) blitz-scaling strategies based on infinite capital access.
The majority of funds shot up very quickly to 2X+. Managers were forecasting 5x+ net TVPI and communicating this liberally to LPs. Nothing about this was normal. If you're seeing fund multiples degrade quarter-over-quarter, you're not alone.
The question is: are you able to preserve your value creation potential. We're seeing different flavours of downrounds rippling through the market, with more or less severe consequences.
- Version 1: re-rating and markdowns in line with public companies. These are painful for IRR profiles but “OK” as companies *should* drive value over time.
- Version 2: Recaps and cramdowns under large Liquidation Preferences, where larger funds clean up the cap tables. These are almost impossible for Seed Funds to recover from yet often impact the best companies. Ouch.
- Version 3: Hard-won, often contentious extension rounds. Issue: few companies go through near-death experiences and recover to become fund returners, so these may give you a false sense of security.
2015-2017 vintages either made the liquidity window (great!) or got mega uprounds, which can be really hazardous for seed funds in a down market. Post-2018 vintages may have avoided the most speculative uprounds (great!) but the crisis will cost them a solid two years and challenge their return profiles.
On the other side, LPs are nervous about liquidity and clamouring for DPI. Yet we know that DPI harvesting happens late in the cycle if you truly “ride your winners”. They are also concerned that some GPs are not showing them the true value of what is in their portfolio and wonder how much pain is yet to come. And as we know, uncertainty kills decision making.
Bottom line: remember the J-Curve? It's making a comeback. Venture funds normally have to work through the J-Curve, i.e. they drop below 1X due to the drag created by "lemons ripening early" and management fees. Value creation takes time.
This is a genuinely tough time where you just want to hold steady, put one foot in front of the other and work hard to drive value across the portfolio. Do not forget your fiduciary duty to return as much capital as you can to LPs. Every company counts.
Finally, remember aoo this is tougher still for our entrepreneurs . Some are flying high, but many are sailing through a really hard storm and not sleeping very well. They need us as investors to show up at our best, boost their energy and work through this.
On the plus side, 2023 should be a great vintage 😎 .
Europe Has Figured Out How to Tame Big Tech. Can the U.S. Learn Its Tricks? By The Information
First of all. The Information always has great artwork for their articles. But as a European, this must be hands down the best artwork to date 😆
While the U.S. grapples with how to handle the behemoths of the tech industry, the European Union has found its stride. Here's why you should dive into this article by The Information:
Direct Dialogues: When Senator Elizabeth Warren wanted insights on how Europe tamed big tech, she was met with a succinct answer: while Americans litigate, Europeans legislate.
Powerful Tools: Europe's Digital Services Act (DSA) and Digital Markets Act are making waves, prompting tech giants to change their approach and product features. TikTok's new algorithm-free version and Google's transparency centers are just a few examples.
Penalties that Pinch: With the possibility of facing fines up to 6% of their global annual revenue for non-compliance, tech giants are sitting up and taking notice.
Expertise Over Egos: Europe's tech regulators have done their homework. Their deep understanding of the industry, free from media sensationalism and political grandstanding, has earned the respect of even the fiercest tech advocates. The result? Smart regulations, backed by overwhelming majorities.
The article ends on a call for the U.S stating that while big tech lobbying is almost equal per capita in the EU and the U.S., the outcomes are vastly different asking if U.S. can learn from the EU's legislative successes. My only addition might be; should they?
A thought on Follow-on investing: when to stop?
LP Hypeman’s note: Jamie Rhode from Verdis put out an interesting analysis of how the return profile has changed through the rounds of Instacart given its currently expected IPO valuation of $10B. Good case for the typical VC model of follow-ons through the early rounds but definitely some caveats for the later rounds.
With Instacart’s #IPO happening, I think it's an important reminder that one of the key benefits of investing at the earliest stages of #venturecapital is the low-cost entry point. The first check is the lowest entry point possible and it’s important to secure as much ownership as possible at the early stage. Follow-on investments, even into a winner, can be accretive to your return but typically dollar cost averages down your overall multiple.
With an IPO price of $30 a share or a $10B valuation, any investor after the Series F round will lose money on their investment. A $10B outcome is a strong exit for an early-stage venture fund, but a significant discount from its last private valuation of $39B in 2021. Investing at the first institutional check into a startup provides protection against big swings in ultimate exit valuation changes because entry is at the lowest point. A $39B exit would be huge for Sequoia, one of Instacart’s earliest investors. Its $8M investment in 2014 would have been worth $4.2B or a 520x, but with a $10B exit, its first check is now worth $1B or a 125x, a return that any VC Fund would be happy with. The Series B round, which Sequioa also participated in, produced a 10x return and the Series D investment it made of $100M at a $3.4B valuation produced a 1.6x, a return that investors expect in buyout or real estate, not VC.
It is important for early-stage venture funds to factor in the opportunity cost of deploying that follow-on capital into a “winner” like #Instacart or choosing to use that follow-on capital to invest in another company, like a DoorDash or Coinbase. DoorDash's 2014 Series A round produced a 28x at an IPO price of $102 a share and Coinbase's 2013 Series A round produced a 212x at an IPO price of $250 a share. SV Angel invested in all three companies at the early stage.
Shout-out to Tilia for getting first close done on Fund II ✊
Our good friend Andrew Gray and his team at Tilia Impact Ventures have just unveiled their €26 million first closing for their second fund to impactful investments in Central and Eastern Europe. Tilia's focus isn't just on profit but on driving genuine societal and environmental change with an approach that balances returns, people and planet. Few embody this approach as much as Andrew
Huge congrats to the team for getting it done (✊) and a shout-out to the LPs who helped make this possible, amongst which the notable institutional investors EIF and Česká spořitelna Bank and a strong group Czech business leaders: RSJ's Libor Winkler, LINET's Zbyněk Frolik, Credo's Ondřej Bartoš, Pale Fire Capital's Jan Bárta, Siko's Tomáš Vala, Benefit Plus' Václav Kurel.
Shout out to Allocate for raising $10M to increase access to venture
LP Hypeman’s note: We need more capital to venture. Anyone on this mission has our full backing and Samir, with Allocate as well as his podcast Venture Unlocked does this incredibly well. Big shout out to the team. Go read the Axios article here.
Get your discounted Allies Ticket for WVC:E Deal Day Now 🎫
Tuesday 3. October at 09:00 - 16:00 | STATION F • Parvis Alan Turing 5, 75013 Paris, Île-de-France, France
On October 3, the second day of the Summit will be dedicated to men and women investors from throughout the world who are supporting female entrepreneurs. As women currently receive less than 2% of funding globally, we know that casual efforts won’t suffice.
What you can expect:
✨ Hear from experienced female operators and founders
✨ Watch the WVC:E Founder Showcase
✨ Take part in industry networking and pipeline sharing sessions
✨ Enjoy food, drink and a party
✨ DO DEALS
***Please note these tickets are for men-only***