Dear all,
A lot has happened in the Tech world since last month’s newsletter where I expressed a positive note as regards to the many opportunities for “bold” investors to invest in companies enabling Digitalization, Decarbonization and Sustainability. While I wish to stay on this note as we approach the end of 2022, I would like not to nuance the message, but to express caution within it.
The FTX implosion that unraveled last month will have long-lasting impacts in my view, that go well beyond the Cryptocurrency + Blockchain vertical. What FTX has taught us so far is that the valuation of a company ($32B in the case of FTX per its latest fundraising in January 22) is in no way an indicator of a company’s maturity: though it had attracted well established non-traditional investors, accustomed to financing pre-IPO deals, FTX was clearly still an Early-stage company with a lack of controls and governance, which I think we all agree on at this point. Yes, investing in high-growth and disruptive companies requires a different framework of assessment as the risks on a company that has leaped from one financing round to another are demultiplied. There are certainly other FTXs to come, though not with the same magnitude, and caution needs to be widespread, which does not go against the thesis of investing in high-growth companies as a whole, but forces to take a different approach.
First, FTX has put due diligence front and center of investors mind. If in some cases it is just needed as it had disappeared (..), the more complex question is that of what kind of a diligence is needed on those high-growth companies. To put it simply: investors don’t just need due diligence: they need the right due diligence, one that is able to assess the robustness of a company’s growth engine, through a focus on the fundamental financial and operational KPIs of a given business model/vertical, and spot relevant material legal and ESG risks that are dealbreakers if not resolved pre-transaction. This is a new category of diligence, one that is specific to high-growth and disruptive businesses. We call it Hybrid Growth Diligence at the firm and are proud to pioneer this approach.
Second, while agreeing that valuing these high-growth and disruptive businesses is a challenge, its appears necessary to reset the valuation methodology by linking it to economic fundamentals. Notably by their ability to foster “efficient growth”.
So with (much) more caution and solid fundamentals, let’s embrace the opportunities and challenges we will face going into 2023 as this might be the best time to continue to invest in Tech and drive disruptive innovation.
European Unicorns: where do we stand now?
European Tech has undergone a highly challenging year in sharp contrast to 2021. 2022 has been a year of unprecedented change, with a brutal awakening for Tech companies which started at the beginning of the year with the fall in valuations of unprofitable publicly-listed companies, across all verticals, and which has continued all year-round in a context of adverse macro-economic conditions – of which predominantly the rise in interest rates – and geopolitical uncertainty. It has taken almost a year for the translation of these events into late-stage financing and the effects are being seen with increasing clarity. We dive into more detail building on Pitchbook’s latest European Venture Capital Q3 figures.