If you’re a founder looking to raise this year, you'd better have your management team in shape. That’s according to a new report by VC firm Speedinvest, which offers an insight into the attitudes of Europe’s investors towards the current conditions of the continent’s tech industry. The survey also has some sobering news for unicorns.
Speedinvest spoke to 437 investors across Europe for the survey, 84% of which worked at institutional investors. 65% of the firms represented invest in early-stage startups, with 16% focused solely on growth or late-stage companies.
Here are five main takeaways.
1. Management teams make or break investment decisions
Management teams are a major focal point for investors deciding whether or not to invest in a startup; 49% of respondents highlighted the team as the main selling point. 51% of investors also said that amid the downturn they were now more focused on the management team than they were before.
A lot of weight is put on management teams in general: 64% said it was the biggest contributing factor to a startup's success, and 71% of investors said that management teams were primarily to blame if a startup failed. First impressions were also highly influential: 42% of investors surveyed made a decision after the first meeting with a management team, based on gut feeling.
2. Most VCs believe unicorns are overvalued
A huge 84% of respondents said that they believed unicorns were overvalued, and there was no difference in opinion between those who didn’t have a unicorn in their portfolio and the 57% who did.
When it comes to VCs valuing a company, responses were split fairly evenly between three major factors: an anticipated exit, desired ownership stake and the valuation of similar companies. While only 30% named ownership stake as a factor, 65% of those surveyed said that they had previously set a valuation based on the ownership stake they wanted.
Many VCs have ownership targets that influence the post-money valuation range they invest in, Speedinvest says. The amount invested and target ownership stake then become part of the valuation discussion, depending on things like the total round size and the stage of the company.
3. Co-investment rests on your reputation
Investors said that around 80% of their deals were syndicated, where firms invest in collaboration with others. 47% of those who considered partnering with other firms on a term sheet did so based on complementary expertise, 24% did it to share the risk of investment and 21% did it because of capital constraints.
When considering a co-investor for a deal, 31% said reputation came into consideration, with relevant industry or sector expertise also important.
4. Pro rata rights can upend a deal
Once a deal has been sourced and negotiated, term sheet rights have to be agreed before any cash is seen. Pro-rata rights — where companies give investors the right to contribute to future rounds — were the biggest sticking point, with 78% of investors saying they weren’t flexible on the topic. More than half won’t budge on liquidation preferences or vesting.
But 54% of investors said they were very or extremely flexible on dividends, and just over a third would be open to changes when it comes to the option pool.
5. Europe’s exit environment is holding it back
Europe’s biggest advantage, according to investors surveyed, is in the quality of its education and research institutions (which 75% of VCs highlighted), followed closely by the quality of talent available across the continent (62%).
Its biggest weakness, according to three quarters of respondents, is its capital markets and exit environment — Dealroom data shows that Europe saw exits equal to the value of $227bn in 2022, compared to the US’s $832bn. 62% also think the ecosystem isn’t developed enough to compete, which contributed to 41% saying that the lack of experienced entrepreneurs is holding it back.
