Europe Outpacing the USA in Post-Covid Resurgence

  The aftermath of the Covid-19 pandemic has propelled the global Tech sector into a tumultuous journey, with Europe emerging as a swifter and more robust player in the recovery.

 Commencing with a new gold rush from September 2020 to June 2022, an influx of substantial capital surged into the tech ecosystem. Heavyweight speculators, including Softbank, Tiger, Coatue, and others, were drawn by the scent of potential high returns, facilitated by cash nearly flowing freely due to negative interest rates.

   However, the narrative took a turn as inflation materialized, prompting central banks to swiftly raise interest rates. This catalyzed a sharp downturn in the valuation of public tech stocks, subsequently applying downward pressure on private tech valuations. The period from June 2022 to December 2023 evolved into one of the most challenging phases for tech companies globally, particularly those that secured capital during the gold rush at valuations that defied rationale.

  Currently, inflation in the US has dwindled to 3.1%, suggesting the potential for central banks to consider a reduction in interest rates in 2024. Notably, the BVP Nasdaq Emerging Cloud Index, a key indicator of public tech valuations in the US, exhibited an impressive +45% surge in 2023.

   These developments are interpreted as early signs of recovery, anticipated to fuel growth in VC fundraisings in 2024.

   However, the intriguing aspect lies in the contrasting trajectories of VC fundraising between Europe and the US. In Europe, there has been a notable resurgence with €45 billion raised, reflecting a substantial +30% increase compared to 2020. Conversely, the US total amount raised in VC remains below the 2020 level, with €130 billion as opposed to €160 billion in 2020 (-20%).

   Moreover, Q4-23 fundraising in Europe reached €20 billion, marking the highest since Q2- 22 and signaling a robust rebound from the nadir observed at €12 billion in Q1-23.

   A closer examination of the French landscape reveals stark disparities between sectors basking in hype, such as sustainability (Verkor, etc.), AI (Mistral, etc.), and deeptech (Aledia, etc.), and others, such as Fintech, which experienced an 80% reduction in the total amount raised in 2023.

Arthur Porré, Founding Partner, Jan. 5th, 2023

Is the Great Rebound underway?

    Recent Developments from the USA Front Show Promise.

   The BVP Nasdaq Emerging Cloud Index, a barometer of public tech valuations in the US, reveals an impressive +17% surge from January through September. However, a somewhat concerning -10% net change in Q3-23 warrants attention.

   September witnessed significant IPOs on the NYSE, notably the highly anticipated $55bn offering of the British Softbank-owned chip-designer Arm, marking the largest IPO on the exchange in two years, alongside marketing software giant Klaviyo at $10bn.

   These triumphant IPOs are poised to pave the way for more to come, reigniting ambitious aspirations among private market investors.

   Turning our gaze to France’s private market, signs of recovery are emerging. The colossal €2.2bn secured by electric battery manufacturer Verkor in September, comprising €850m in equity, €600m in debt, and €650m in subsidies, bodes well for the sector.

   Moreover, the cumulative funds raised by French Tech startups have plateaued at approximately €2bn for a fourth consecutive quarter. M&A activity in Q3-23 reached a total deal value of €1.6bn, marking one of the highest quarters in the past two years.

   In terms of capital increase multiples, Fintech and Medtech have experienced the most pronounced impacts, with an approximate 30% decline in their EV multiples compared to the previous year, whereas other sectors have seen positive shifts.

   Regarding exits, the subscription model is receiving more acclaim than ever, with a +16% EV multiple expansion year over year.

Arthur Porré, Founding Partner, October 4th, 2023

Postponing the inevitable: Is an IPO frenzy on the horizon for 2024?

    The global Tech industry remains in a state of recuperation, and as always, we turn to the United States for insights into what lies ahead for Europe.

   To begin, US inflation saw a modest increase of only 4% in May, marking the slowest annual pace since March 2021, according to data from the Bureau of Labor Statistics. Moreover, for the first time since early 2022, the Federal Reserve opted to maintain steady interest rates at its recent June meeting.Furthermore, the BVP Nasdaq Emerging Cloud Index, which monitors public tech valuations in the US, witnessed a 26% surge from January through the end of June.

   However, when we examine the Tech industry on a global scale, particularly in terms of exit value, 2023 is likely to be remembered as one of the worst years in recent memory due to the dearth of significant IPOs.

    But does this spell disaster for the venture capital (VC) ecosystem?

    In the short term, VC returns are poised to be lackluster, if not non-existent, in 2022 and 2023. This will inevitably affect their capacity to secure new funds and invest in emerging companies.

   Looking further ahead, the survivors who skilfully navigate this crisis will emerge stronger than ever, boasting enhanced financials and having consolidated their competitors and ecosystems. Many of these survivors have deliberately abstained from exiting under current market conditions, instead choosing to wait for favourable tailwinds. They seek a time when trading and transaction comps. align more sensibly with their most recent valuation rounds and expectations.

   This sizable backlog of IPOs, originally slated for 2022 and 2023 but delayed due to declining valuations, is expected to materialize in 2024 as soon as valuation levels attain more reasonable multiples. It is easily foreseeable that VC-backed startups will seize this window of opportunity with great urgency, driven by the fear that it may swiftly close should another crisis befall the Tech industry.

Arthur Porré, Founding Partner, July 4th, 2023

Fintech’s Wild Ride: From Darling to Downturn

   After basking in the limelight as venture capitalists’ favourite for a couple of exceptional years, the fintech industry has returned to more familiar territory. The sudden plunge in public tech valuations since November 2021 has brought forth a wave of massive down rounds and significant staff reductions. Klarna illustrates perfectly this paradigm shift. In July 2022, the company raised €730m at a valuation of €6.1bn, marking an astonishing 85% drop from its €40bn valuation just one year prior.

   The trend observed in 2022 continued into Q1-23, with a meagre €1.7bn in total venture capital investments— the lowest since Q4-18— and a mere €300m in total exit value, matching the dismal figures seen during the Covid-19 quarter of Q2-20. Forecasts indicate that Q2 and Q3 of 2023 are likely to mirror this subdued performance.

   However, there is a glimmer of hope on the horizon. Public tech stocks have exhibited signs of recovery since January 2023, with the BVP Nasdaq Emerging Cloud Index, a gauge of public tech valuations in the US, rising by an impressive 28% during this period. This resurgence in public markets may also reignite activity in Europe’s private market, including venture capital investments and mergers and acquisitions, potentially gaining momentum from Q4-23 onwards.

   Looking ahead to 2024, a pivotal moment looms for the European tech landscape. Many fintech scale-ups and unicorns are anticipated to reap the rewards of their labour by achieving profitability. This milestone holds the key to facilitating successful exits, particularly through initial public offerings (IPOs). As such, 2024 could usher in a transformative phase for the European tech scene.

Arthur Porré, Founding Partner, June 20th, 2023

Have we reached the bottom?

   When January is up, the year is up. Let’s hope this saying will come true as the BVP Nasdaq Emerging Cloud Index, which tracks public tech valuations in the US, rose 11.9% in January (and even 25.8% if measured until Feb 3rd).

   However, the optimism was short-lived, as SVB, Signature Bank and Credit Suisse collapsed in March. Despite this crisis, the EMCloud Index has surprisingly shown some resilience, still up by 13.9% since the beginning of the year.

   Looking forward, macroeconomic conditions are not promising for 2023. The International Monetary Fund predicts inflation to remain high at 6.6%, compared to 8.8% in 2022, while global GDP growth is expected to remain low at 2.9%, compared to 3.4% in 2022. The situation in Ukraine appears stable, but there is still the possibility of escalating tensions, which could drive up global food prices.

   In the Tech industry, Q1-23 saw a decrease in startup funding, with only $90bn raised, the worst quarter since Q1-20 and a 50% drop from Q1-22. However, there are signs of stabilization, as Q1-23 only saw a 9% decrease compared to the previous quarter.

   French Tech experienced a similar trend, with only €1.8bn raised in Q1-23, a 66% decrease from Q1-22, its all-time high. Despite this, the sector is showing signs of stabilization, with a 13% decrease from the previous quarter. Q1-23 also saw 129 exits, an all-time high, but only €615m in total exit value.

   Expectations are that the next two quarters will remain slow, but the market may pick up at the end of the year if the IMF’s 2024 forecasts hold true, with GDP growth expected to increase to 3.1% and inflation to drop to 4.3%.

Arthur Porré, Founding Partner, Apr. 4th, 2023

After an exceptional 2021, when money was virtually free, startups around the world have experienced a brutal year in 2022.

As inflation started to ramp up and central banks increased rates, the BVP Nasdaq Emerging Cloud Index, which tracks public tech valuations in the US, saw a 50% drop in one year, bringing valuations back to pre-Covid levels. This drop in public tech valuations had a knock-on effect on private tech valuations with €500bn in total funding in 2022 (a 33% decrease from the previous year) and just €73bn in Q4-22 (a 65% decrease from Q4-21).

France, however, has managed to weather the storm somewhat, possibly due to the support of the BPI (the French State Bank), which has invested massively in the French Tech ecosystem for the last ten years. As a result, France saw an all-time high in total funding for 2022, reaching almost €14bn, though the €2bn total raised in Q4-22 suggests that the trend is now much lower. French Tech exits also returned to their long-lasting trend of €5bn in total annual deal value with no real outlier apart from Deezer, which lost 50% of its value from its initial quotation at €1bn six months ago.

As we look towards 2023, the question on everyone’s mind is: what’s next?

Public tech valuations appear to be stabilizing in H2-22, with the BVP Nasdaq Emerging Cloud Index only dropping by 5%. In addition, as inflation and interest rate increases show signs of stabilization at the end of the year – the US consumer price index (CPI) rose only 0.1% from October to November – some VC investors and acquirors may anticipate an upturn in the economy in H2-23.

Arthur Porré, Founding Partner – Jan. 3rd, 2023

How come France always stands out as a country at odds with the rest of the world?

While VC funding has plummeted in 2022 YoY in almost all countries (US: -29%, China: -56%, UK: -19%, Germany: -27%, etc.), France boasts a staggering, almost insolent growth of +30%.

Now, can we jump to the conclusion that the French Tech ecosystem is more resilient than others? Or is it simply a lag of the bear market, which is just about to hit France?

Looking at quarterly metrics, VC funding in France fell from €5bn in Q1-22 to €2.5bn in Q3-22. The number of deals also failing by almost 50% to 150.

Digging deeper, the Top 10 deals were fairly normal, amounting to €1.7bn. Yet oddly enough, the early stages rounds dropped significantly. The usual leading industries such as software and fintech remained stalled, while sustainability-related startups flourished with startups such as Bump, Zeplug and Innovafeed raising considerable sums.

In the end, we still expect 2022 to be an all-time high for French Tech VC funding, reaching €15bn.

Meanwhile, French Tech exits have returned to their pre-2021 norm of around €5-6bn in total exit value. Deezer’s troubled IPO was instrumental for Q3, reaching €1.8bn, the best quarter of the year so far.

We do not expect any real improvement in the total exit value, which is driven by (multi-)billion euro IPOs, as long as public markets remain in bearish mode.

Yet, small-to-mid-cap Tech M&A remained very active in Q3 with 100 deals, thanks in part to the huge wave of consolidation by scale-ups – often backed by PE funds – which are feeding this consolidation strategy with their dry-powder.

Arthur Porré, Founding Partner, Oct. 3rd, 2022

After a record Q1-22, €5bn in total funding for French Tech, and in the midst of what could be one of the worst economical crisis of the decade, most people have been bracing for impact in Q2-22. However, the data was rather (positively) surprising as total funding for Q2-22 reached €3.6bn, which represents the 3rd best quarter in French Tech history.

In total, H1-22 is the highest semester ever with €8.6bn in total funding. So, for now, in France, market positive drivers – mainly the huge amount of dry-powder available – are resisting against the negative ones – bear market in Tech, war in Ukraine, inflation.

The latest French presidential elections will also play a role on the ecosystem, as President Macron only got a simple majority at the French Parliament and might be less able to enact new laws favourable to French Tech as he did in the last 5 years.

In Europe, the trend is rather stable with €30bn in total funding per quarter, stable – slightly down – compared to 2021. Europe seems to be more resilient so far than the US, which saw Q2-22 down to €60b in total funding, compared to €100bn in Q4-21.It is very difficult to predict the future in such an uncertain environment, but it is very likely that the bear market will have a greater impact on venture capital funding in Europe in the coming months, as it has already done in the US in H1-22.

On the M&A front, the impact of the current economic crisis on the French Tech is much more noticeable. Q2-22 total exit value was €1.2bn. Added to a super low Q1- 22 at €800m, H1-22 is one of the worst semester ever in total exit value for French Tech.

Nevertheless, some indicators are reassuring for the future of the ecosystem:

Arthur Porré, Founding Partner, Jul. 6th, 2022

With almost €5bn in total funding Q1-22 sets the pace for a new record in 2022 for the French Tech, which had already reached a record in 2021 at €11bn – already a 2x growth from 2020.Yet, some external factors could throw a spanner in the works.
Obviously, the uncertainty around the war in Ukraine, rate hikes and global inflation hitting its highest level in decades, will influence the French Tech funding in the next months.
In addition, the recent public market correction on Tech stocks has been steep (i.e. -33.3% for the BVP Nasdaq Emerging Cloud Index in the last 6 months compared to +1.3% for the S&P 500 on the same period) and might impact private companies’ valuation when they seek for new capital.
The Presidential elections in France on April 10th and April 24th could also change the game if President Macron, who clearly displayed his support to the French Tech during this last 5 years, was not to be re-elected, as potential alternatives seem less enthusiastic, to say the least, about the technology industry.

On the other hand, VC’s dry-powder has never been so high with $430bn in cumulative overhang globally in 2021, growing 3x since 2014 (according to Pitchbook). The new $20bn growth equity fund raised by US-based Insight Partners represents perfectly this abundance of capital for startups.
Besides, VC returns continue to display the benefits of the robust VC exit market over the last few years. The rolling one year IRR for VC rose to a staggering 65.5% as of Q2 2021 (according to Pitchbook).

In the end, VC money will keep on flowing only for a handful of over-funded startups, making early rounds ever more challenging for most entrepreneurs that don’t fit exactly all the VCs’ criteria.

Arthur Porré, Founding Partner, Apr. 8th, 2022

With €500bn in global VC funding, the industry‘s overall funding has grown twofold vs. 2020.

Europe has also hit a new high-water mark with €100bn in funding (incl. Israel) crossed for the first time ever. This is a staggering 2.5x increase vs. 2020. The UK and Germany are the clear winners of the year with respectively €30bn (2.5x vs. 2020) and €16.5bn (3.2x).

More specifically in France, 2021 is a watershed: for the first time VC funding and exit deals have reached their highest levels ever with €11.1bn (+100% vs. 2020) in VC funding and €10.2bn (+112%) in exits.

What should we expect for 2022?

Even with rate hikes on the horizon and potential economic downturn, more records in VC funding are expected globally. The reason is simple: investors have no alternative but to keep on investing their cash, which is reaching record levels. Otherwise, LPs will pressure to get their money back and seek other alternatives.
VC money will keep on focusing on a handful of over funded companies. Thus, making it more and more challenging for the growing bulk of entrepreneurs to fund their start-ups.

On the exit front, France has proven its capability for >1€bn IPOs, which is a very good lead indicator, but this market still has a huge margin of improvement to match its European peers.

Yet, 2022 might not be the big year for exits in France as unicorns have little trouble finding funding in private markets as Dataiku, Sorare, Qonto as the rest of the herd has proven in 2021.

Arthur Porré, Founding Partner, Jan. 10th, 2022