All the signals are pointing to a rocky time ahead for venture capital. Some of the industry’s flagship investments — like Swedish fintech giant Klarna — have had to take hefty cuts to their valuations. Both the number of rounds and overall investment levels are down year on year in Europe. “You’re not profitable” is the new way for VCs to say they’re not interested.
That said, VCs heading out to fundraise don’t seem to have taken the hit — yet. 47 new funds, totalling €8.7bn, were raised between July and September in Europe, including 15 first-time funds. LPs are still writing big cheques.
However, some market watchers are looking at the share prices of publicly-listed VCs — and that picture doesn’t look as pretty. Their share prices are down between 30% and 75% since the beginning of the year.
Is it a sign of tougher times ahead for the Patagonia vest brigade?
The mismatch between listed VC share prices and their portfolio performance
One of the small group of publicly listed VCs, Seraphim Space, released its annual report on Monday covering the year to June. The report details its investments in space tech companies like ICEYE and D-Orbit, which it says “performed well” in the period, “despite the challenging macro-economic environment.”
In the quarter ending in June, when the market really started to slow, the fair value of Seraphim’s portfolio fell just 4.7%. Not such a horrendous drop.
In the year to March, two other listed VCs, the UK’s Molten Ventures and fintech specialist investor Augmentum, saw strong portfolio value growth.
It’s important to note that none of these listed VC investors is a perfect proxy for the market in general. They all invest at different stages, some with very specific theses. And investment really only started to slow in Q3, so we don’t have data about what their portfolios look like today.
But even the most recent data for other listed VC investors suggests we shouldn’t be too doom and gloom quite yet.
You have to detach overall listed market conditions — which have clearly been very challenging and will continue to be so — with the portfolio
UK-based Forward Partners saw the value of existing investments fall 24% in H1. French investment group Eurazeo’s venture portfolio value was basically flat in the first six months of 2022 compared to the previous period. The firm’s managing partner, Matthieu Baret, told Sifted that the firm’s later-stage portfolio had been impacted the most by the market — those are the companies closer in maturity to listed companies.
Okay, the value of those portfolios isn’t skyrocketing — but it’s also not plummeting, while the firms’ share prices are. There’s a mismatch between what stock market investors think of VC and the paper value of portfolios; last week, Seraphim’s share price was trading at a 46.9% discount to its net asset value.
Many investors say it’s likely to be retail investors spooked by news about down rounds and tech layoffs who are selling their shares in VC. Given that trading volumes for these stocks aren’t as high as for large corporations, prices have taken an extra hit.
However, more long-term, institutional investors — think the pension funds, corporates and family offices of the world — seem to still very much believe in European VC as an asset class, as those 47 new funds raised in Q3 demonstrate.
“You have to detach overall listed market conditions — which have clearly been very challenging and will continue to be so — with the portfolio,” says Tim Levene, partner and CEO of Augmentum, declining to speak about specifics of the firm’s performance recently ahead of another disclosure later this year.
So what is everyone so worried about, anyway?
If VCs still have lots of money to invest and are able to raise more of it when they need to, what should we really be worried about?
Deal activity, say some. If it continues to fall, as it has for the last three quarters, the market could run out of oxygen.
One US investor, Abraham Thomas, has posited that VC could have a “Minsky Moment” — a market crash after a period of euphoria. In his view, the flywheels of VC and startup growth are mutually reinforcing. If one slows down, it won’t take long for the other to hit the brakes too.
Eurazeo’s Baret says that the “flywheel stopped completely” during the financial crisis in 2008-9, but that times have changed — VCs have never before had this much dry powder — uninvested capital to spare.
“It’s not the same at all this time,” he says. “There may be no IPOs [initial public offerings], but you have M&A. The funds have dry powder. The ecosystem is here. There are good projects here, good businesses. I don’t see the flywheel stopping, it will just slow down.”
The bid and the offer haven’t met yet, and some founders are still lost in 2021
Augmentum’s Levene says the slowdown is in part due to the valuation reset most businesses are undergoing. Founders want to raise on 2021 terms but investors aren’t willing to agree to lofty valuations at the moment. That speed bump will eventually iron itself out.
“We thought  was overpriced,” he says. “The bid and the offer haven’t met yet, and some founders are still lost in 2021.”
Calling angels instead
All of this is also affecting later-stage companies — Klarna et al — far more than early-stage startups. The flywheel of capital is, you could argue, still spinning extremely fast at the earliest stages.
Only 27 megarounds — deals over $100m+ — were struck in Q3. That's the fewest since Q3 2020, Sifted data shows. Those companies that would have soon been listed on public markets are now stuck in private market limbo.
Angel syndicates love to talk about how they can beat other people to deals by making decisions fast. And there are more of them than ever — with more capital than ever. Just look at 10x Founders in Germany, a network of 200 German entrepreneurs who have pooled €160m to invest.
I recently chatted to a German VC who invests at the earliest stages, which involves speaking to a lot of angels. He told me that he hadn’t seen any slowdown in angel appetite for investment. One French startup this week raised from 100 angels.
These earliest-stage companies will have many more years and maybe even another downturn to figure out their path to a sustainable business. And there is still dry powder across all stages to support them on that journey.
Most of the listed UK funds such as Molten and Augmentum will release more recent performance data in the next few months. It will be another chance to see how fast the flywheel is spinning.