Riding through uncertain market conditions

The European venture and growth market is finally starting to slide – but is still way ahead of 2014. The global venture and growth investment industry entered the holiday season in the context of a slowdown, partly due to macro considerations, partly due to the feeling that the venture industry got ahead of itself, particularly in the US.

Witness Uber in effect selling its Chinese operations to rival Didi Chuxing or Rocket Internet disposing of some of its Asian holdings on the back of core shareholders (Kinnevik, PLDT) revising the value of their Rocket Internet shareholding down.

From a numbers standpoint, for the first time in five years, the European market is down in value by about 20% for July year-to-date, i.e. accelerating the softening trend in June, according to Go4Venture. To put things in perspective however:

• The European venture and growth market is still way ahead of the same point in 2014 – in fact by more than 50%. So some of the ‘decline’ looks more like a ‘correction’ for the overheating of 2015.
• Preliminary figures for August 2016 are better than the same period the year before, which brings the market down 15% rather than 20% at the end of August 2016.

It is difficult to find clear trends but it is worth noting:

• Ecommerce/marketplaces are not as popular as they once were (with exceptions, such as Deliveroo’s mega round). On the contrary more specialised fintech B2B and security tech seem to be more the flavour of the moment, i.e. the market is moving from B2C/revenue growth to more B2B/unit economics.
• New players are moving into the market, either from adjacent segments or across geographies, e.g. private equity firm KKR leading the Series C round for cybersecurity software company Darktrace, or Warsaw, Poland-based MCI Capital leading the B round for UK online factoring supplier Market Invoice.

So expect the European venture and growth market to remain uncertain for months to come, which will generate the usual effect: fewer deals and stampede to quality and later-stage, with a handful of braver investors backing ambitious early-stage companies started by serial entrepreneurs. What is different however compared to previous cycles is that forces are at work to keep the venture and growth market more level than in previous cycles:

• Innovation & growth is everybody’s mantra – nowhere is it more true than in the corporate world; it means corporates invest but also buy. In July Walmart splashed $3.3 billion on Jet.com, a company with the ambition to compete with Amazon (and NEA and Bain Capital Ventures as credible long-term investors). And of course Verizon bought Yahoo for $4.8 billion. In fact, in 2016 non-tech buyers became more likely to buy tech companies of >$1 billion rather than tech companies themselves.
• Returns in other markets are absolutely abysmal: the pressure cooker of low bond and public equity returns is pushing investment managers to put more money into venture and growth financings, despite illiquidity and risk - because they have nowhere else to go.

One of the debates of course is whether dumb money is following tech money. This is the traditional gripe that tech VCs have with corporate ventures, even though corporates now represent around 20% of the total amount invested in venture and growth companies worldwide. In fact, data shows that non-traditional VCs (i.e. corporates, family offices, private equity funds, pre-IPO institutional investors) get involved in 2 out of 3 European financing transactions >$20 million.

Rather than seeing these two worlds in competition, there is a growing need for non-traditional sources of capital aiming to co-invest with VCs, and tech VCs increasingly making use of this additional source of non-intrusive capital (and possible future LPs). To find out more about how this is happening, read the latest Go4Venture European venture and growth market bulletin here.