Duet Partners
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Weekly Briefing Note for Founders

8th June 2023

This week on the startup to scaleup journey:
  • Preparing for the September funding 'push'
  • What the 2023 Midas List reveals
  • Nontraditional investor decline in Europe

Preparing for the September funding 'push'

In Elad Gil's authoritative paper on the outlook for startup funding back in February, he asked, "When will companies run out of cash?" The conclusion; "Many companies are about to meet a hard reckoning. This is likely to start by the end of 2023 and accelerate through end of 2024 or so. It is based on when companies last fundraised at scale and how much runway they raised." Many startups raised 2-4 years of runway in 2021 (and 1Q22). A company typically needs to fundraise when it still has 9-12 months of cash left, so if these parameters held, then cash-out dates are now starting to come into view for many. Having already done everything possible to grow into the last valuation and realising that ultimately you can't save your way to success, boards are once more starting to assess options following the big VC reset. This is being helped by the first signs of stability in May's funding figures, as we note below. From our special vantage point, we are seeing increasing numbers of founders dusting off funding plans that were put on hold months ago, looking to recalibrate them for the very different funding environment that has emerged. This effort, driven by the absolute need to raise more cash for survival, will take several months of preparation. But before we know it, the September 'push' will be underway for new campaigns - and savvy founders want to be in pole position.

As we now approach the mid point of 2023, there are some early indications that funding momentum has stabilised after the precipitous slide through 2H22 and 1Q23. Figures from Crunchbase show that for the past two months, global venture funding has levelled off above the $20B mark. Global funding almost reached $22B in May 2023, up marginally month over month, although still significantly down, around 44%, compared to May 2022. The funding setback has now impacted all three funding stages — seed, early- and late-stage venture — with each stage down between 41% and 48% in a year-over-year comparison. For new unicorns in May, Crunchbase counted 10 companies — double the count in April, although much lower than the 34 that joined the board in May 2022. This is the first month since November 2022 for new unicorns to reach double digits. Following the record highs in 2021 and 1H22, current monthly funding seems to be stabilising around amounts seen in the years 2018 to 2020 — which were up from prior years. Projections for the full year 2023 suggest around $50B+ across Europe, a 50% drop on the record high of 2021, but still 35-40% ahead of 2020 and 2019. Despite all the market doom and gloom, Europe is on track to have its third largest year in terms of VC investment.

For those startups that have had the runway to keep going but now must raise, the pressing question becomes valuation. Some may have been able to grow into the valuation of their last round, but many won't: Some will be at or above the terminal long-term valuations for the company. Many companies that raised in the heyday of 2021 are currently worth the most they will ever be worth over all time. As Gil comments: "These companies may [have to] consider writing down their stock price to (1) provide more upside for future employees (2) reissue stock to keep their teams focused and motivated and (3) make fundraising and going public easier in the future. There are many pros and cons to be weighed says Gil, but adds; "It is worth noting that roughly every public company (Snowflake, Shopify, Airbnb, and others) just survived a massive “down round” in the public markets - as their stocks dropped 50-90%. The public markets provide ongoing up rounds and down rounds on a daily basis, and yet these companies work just fine." The big picture now across Europe is that we are seeing a clear reversion to long-term (5 to 10 year) valuation averages following the 2021 outlier year. This is now the adjusted market reality that everyone must eventually face.

What the 2023 Midas List reveals

Produced by Forbes in partnership with TrueBridge Capital Partners, the Midas List has long tracked VC performance. It has become the definitive ranking of the top 100 tech investors. What makes this particularly insightful is that this is at the individual, rather than firm, level. Midas analyses which investors have earned the strongest returns – that is, their portfolio companies have gone public, had an M&A transaction or raised rounds of financing at an increased valuation. A highly data-driven list, it is produced from a combination of public data sources and the submissions of thousands of investment deals from hundreds of investors over a 5-year horizon and is updated every year. It provides a very useful resource for founders, not just the league table positioning per se, but the profiles of the individual investors (including their net worth!). It offers a rare window onto the inner world of VC and the startups that have propelled these investors to prominence. In addition to the global list, Forbes also now produces the Midas Seed List, which profiles the top 25 seed-stage venture capitalists in the world, as well as the Midas List Europe.

A secondary analysis on the 2023 list by communications advisory firm, Milltown Partners, looks at how some of the most successful investors approach external communications. This provides further insight into VC 'archetypes' and how they carry their messaging to the market. Some of the results are counterintuitive and thus really helpful in guiding founders to where they can seek further background information that may help them in investor due diligence. VCs are often hailed as having some of the most active social media voices, but 47 of the 100 Midas 2023 investors were not active on Twitter at all — only four in the group tweeted several times a day. Though 90% of the list had a LinkedIn profile, only half posted on the social network on a regular basis. VCs are increasingly turning their hand to blogging: 8 out of the top 50 Substacks are written by VCs, though none of those investors appear on the Midas List - yet. But podcasts are where the gold currently lies: 50 VCs on the 2023 Midas List appeared on a podcast last year. The most popular choice was 20VC, where 12 current Midas List investors appeared. If you want to know more about how VCs think, podcasts are hard to beat.

There are now over 46,000 VC investors globally, home to over 300,000 VC executives, according to Pitchbook, and they are all jostling for attention. Founders that don't have access to this or a similar platform - that provides in-depth, individual investor profiles - have to be especially resourceful. As the data makes clear, and industry insiders have argued, success and a noisy public profile are not always correlated. But with IPOs and exits continuing to dry up, ‘quiet’ investors might need to consider more thoroughly how they signal to the market that their portfolios are performing and that they are still open for business, according to Milltown. This is especially true for those focusing on hot emerging sectors such as Biotech, AI & ML, Web3, Health Tech and others, where investment activity levels remain relatively elevated and the competition for the best deals is the strongest. It is likely that more investors will try to increase their public presence a result, providing founders with ever-greater insights into their thinking.

Nontraditional investor decline in Europe

In 1Q23, European VC deal value with nontraditional investor (NTI) participation reached €8.0B according to Pitchbook. This is the lowest total since 2018 and mirrors the overall decline in VC funding. During the first quarter, 67.6% of overall VC deal value (and 37.4% of VC deal count) involved some form of nontraditional investor, underlining the importance of this NTI group in the bigger European picture. These non-VC investors primarily include corporate VC arms (CVCs), certain private equity (PE) funds and sovereign wealth funds (SWF). Such investors are typically most active in supporting growth-stage companies. They play a crucial role in filling the late-stage funding gap in Europe where the indigenous VC funds just aren't big enough to play. But they also invest selectively at early-stage, particularly where there is some form of strategic rationale. The level of NTI participation has not changed significantly as a % of the whole during 1Q23, but the reasons for the pull-back vary by type of investor and are important for founders to understand if NTIs are a target for funding.

Corporate VCs (CVCs) account for a large proportion of nontraditional investors in VC. As further reported this week, while traditional VCs are curbing their deployment due to a lack of exit prospects, the reasons for CVCs differ. A CVC's capital deployment is linked closely to its parent organisation. Because of recent market volatility and uncertainty over future market conditions, several parent companies have been forced to improve their balance sheets, resulting in a lower allocation to VC investments. CVCs typically invest in companies to obtain a strategic edge rather than profits alone. As a result, in the face of market uncertainty, corporations are now primarily focused on enhancing their own profitability rather than entering into VC partnerships. Some are even withdrawing from the market entirely - at least for now. This week, Total Energies, the French oil and gas conglomerate, announced that it was closing down its corporate venture capital division. The firm will sell its stakes in portfolio startups to French VC firm Aster. Considering the economic uncertainty, it is likely that CVCs will continue to decrease their participation in European VC deals as the year progresses.

By contrast, private equity firms are sitting on record amounts of dry powder, and recent spikes in energy prices mean that sovereign wealth funds are well equipped to invest more into tech. So far in 2023, SWF participation in global VC deals is retreating, but as analysts recently told Sifted magazine we could see a divide between corporates and SWF and PE money appear further into the year. The latter two may look to seal opportunistic deals with startups desperate for cash. Mainstream VC is not the space where PE funds typically play, preferring to take majority or control positions. But certain PE funds will selectively dabble in VC, especially when they are following a strongly thematic approach that is aligned and they see the potential for a bargain. As Nitin Patel of Pitchbook commented, “If you’ve got the dry powder to deploy, now is a great time to gain exposure to a VC-backed company that was growing at a really high rate and may now be facing a valuation comedown. It could work out very well for them — two to three years down the line, they’ll have a larger return than they would have gained at the peak of VC market competition in 2021.” 

Happy reading!

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