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Start-Up Ecosystem Taking the Pulse in Europe
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00:14Hello again and thank you for joining us here on stage 3.
00:18Now this next session is going to zero in on current investment trends here in Europe
00:23and the impact of geopolitical and macroeconomic development on venture capital.
00:28It's titled Startup Ecosystem Taking the Pulse in Europe, a presentation led by Nalin Patel,
00:35lead private capital research analyst at PitchBook. Please give him a warm welcome.
01:05Good afternoon everyone and welcome to this session. So we're going to be taking the pulse
01:10on European venture capital in this session and we're going to be looking at deal making,
01:15exits, fundraising, valuations, returns, quite a lot of topics. We've got a few slides as well.
01:20For those of you not familiar with PitchBook, we are a research and data provider, specifically
01:26covering PE, VC and M&A, as well as emerging technologies. We're sponsoring the Investor
01:32Lounge here at VivaTech for the second time this week and I am part of our research team,
01:38so lead a mere private capital analyst. Before we get started, the slides will be available
01:45via a QR code. So for those of you taking photos of the deck, don't worry, we will have a
01:49QR code
01:50again for you to download the presentation and get the interesting insights that we share
01:55today. So to kick things off, let's start with deal making. So in terms of European, US and
02:04Asian VC deal value, you can see that over the past decade, it's increased across the globe
02:10in the major VC ecosystem. So really peaked in 2021, where we can see the enormous kind of
02:17teal, orange and dark blue skyscrapers there. Hundreds of billions of euros invested into
02:23startups across the globe. Continuing in 2022 as well, in the first half, but also slowing
02:29as well. You can see that the peaks have declined a little bit. And then in Q1 2023, we've actually
02:33seen a retreating of capital. So capital invested across countries and ecosystems has declined
02:40quite considerably in line with market expectations.
02:44Looking at Europe, obviously, we had a record amount of capital invested into startups, 110.2 billion
02:50invested into companies based in Europe, over 13,000 deals. Again, really, really strong figures
02:56in 2022. We've now kind of come a bit crashing down in 2023 with around about 11 billion invested
03:03into companies. So definitely a slower market at the moment. And that's in line with market
03:09expectations, a lot of macroeconomic volatility, as I mentioned, rising interest rates, inflation,
03:14as well as geopolitical tension, impacting on investment decisions and deal making across
03:19the board. Looking at France specifically, we are in Paris and Paris is the largest VC ecosystem
03:25in France. No real surprises there. The majority of that 2.5 billion invested has been in Paris
03:30based startups, a record amount of 13.2 billion last year. So even though things did deteriorate
03:36in 2022, we still saw strong amounts of activity. And this is across the board. And we've seen
03:42in Europe, the main ecosystems largely being the UK, Germany and France. And that has tended
03:47to be the case over the past decade as well. As you can see, the capital really increasing
03:51over the past decade and deal count also increasing on a more flatter slope.
03:56So that concludes dealmaking. On to valuations now and how valuations have been playing out
04:02over the past decade across different financing stages. So we tend to break out the financing
04:07stages by angel, seed, early, late and venture growth. Venture growth is a new financing stage
04:12we've created in the past six months to better understand the late stage part of the ecosystem.
04:18So we're looking at companies that are seriesy onwards, six years old, seven rounds of financing,
04:23things like that. So the really mature and potential unicorns that we're seeing in the
04:28market as well. And as you can see from the orange line at the top, valuations have come
04:32down slightly. So we've seen the peak of 32.2 million, and that's come down to 25.3 million
04:38in Q1 2023. So pacing slightly lower. Interesting to hear yesterday when we were hosting a panel
04:44that valuations are kind of coming down. They've been a bit mixed. As you can see, the other lines
04:49there, they haven't necessarily come down, they've flattened. But we've definitely seen
04:53a decline and potentially overheated valuations cool from the highs that we've seen in recent
04:58years. And this could be a fact of what's going on in the market, but also potential for valuations
05:04to come down even further and potential longer periods of declines in valuations as capital
05:08has been so readily available for the past few years. Looking at down rounds, which is probably
05:14everyone's favorite topic at the moment and what we get a lot of questions about. People want
05:18to know how many people are raising down rounds, how many are flat rounds, how many are up rounds.
05:21You can see that the orange section at the top here is representing the number of down
05:25rounds. Now the sample size is a lot smaller because companies don't necessarily have to
05:30disclose their valuation when they do close a round, but around about 19% of rounds closed
05:35in Q1 were down rounds. So the valuation was lower than before, about one in five. And that's
05:41up slightly from last year where it was 15%. Now, as I said, sample size is a bit lower and
05:46we're probably going to get more accurate data as the year progresses because more companies
05:49are going to run out of financing. They're going to have to secure capital. And that's
05:53when we'll get a clearer picture on down rounds and the market as a whole. Having said that,
05:57we are seeing that slight increase already in Q1. Moving on to exit. So this is probably
06:04the part of the market which has reflected the largest declines and fluctuations given what
06:09has been taking place and the shift in investor sentiment. I think we've skipped ahead there.
06:14So, and this is showing the annual trend. So this is showing the exit value generated from
06:20European-based companies. And as you can see, there's an enormous bump in 2021 when market
06:26conditions were great for public listings. We had pandemic-induced growth. We had a lot
06:30of companies rushing towards an exit. Companies such as Deliveroo, AutoOne, Wise, and so on and
06:37so forth. And that really culminated in a glut of activity, everyone rushing towards an exit. And
06:43that spilled over into 2022 a little bit. And exit value came down. So it's fluctuated quite a bit.
06:49That 48.1 billion in 2018 was largely driven by Spotify's exit. So as you can see, large outlier exits
06:56tend to skew the figures upwards or downwards. We're not seeing that general upward trend that we are seeing
07:02with deal making. And in Q1, you can see only 1.6 billion exited. So really, really quiet exit
07:07environment at the moment. No one's really looking to exit. Everyone's kind of keeping their cards quite
07:11close to their chest and looking to secure capital extending runway. Looking at it on a quarterly basis,
07:17this is a more granular level. Look at what we've just shown in a more short-term look at it.
07:22You can
07:23see that the real spike occurred in Q1, two, three of 2021, where we saw a lot of public listings,
07:28M&A buyouts, a lot of companies rushing towards an exit. And it's really, really slowed down in the
07:34second half of 2022 and in 2023 as well. Again, looking at France, you can see that it's mirroring
07:41what the trends are showing in Europe with value being skewed by outliers really and oscillating
07:48significantly over the past few years with large exits skewing the total and moving the needle in
07:54in a particular direction. Now on to fundraising. So fundraising is probably the area that is the
08:01most consistent in Europe. This is capital that is raised by VC funds that are domiciled or based in
08:08Europe. And as you can see, it's been consistent rather than spectacular in recent years. Around about 25
08:15billion euros on average has been raised in funds over the past five years. Again, different trend to deal
08:22making where we saw the upward trajectory and then exits where we've seen the oscillation.
08:25Here, we've seen a steady increase. And I assume you could probably say that a ceiling has been met
08:31in terms of 25 billion. Again, on a panel this week, we were asking the question, what is required to
08:36break the ceiling? Is it government support? Is it an increase in international investors looking to
08:40expand into Europe? It's probably a billion dollar question. But at the moment, we're definitely seeing
08:45fundraising remain relatively flat. And that's reflected in cooler numbers as well in 2023,
08:51with only 22 funds closed. If we carry that run rate through to the whole of 2023, potentially less
08:59than 100 funds will close this year, which is significantly lower than the figures we've seen
09:04in recent years, where in excess of 200 funds have closed, raising about 25 billion euros. So something
09:10interesting to definitely take away from this is that fundraising is slowing, exits is slowing, and deal
09:15making is also slowing. Now, this chart is looking at something that is, I guess, looking at capital
09:23supplied versus capital deployed. So here we have capital invested, which is the large blue section,
09:31and capital raised by VC funds, which is the kind of turquoise section. So what you can see is that
09:36a lot more
09:36capital has been invested in startups in recent years, there's been an excess of about 80 billion
09:42in 2021 and 2022. And this has been largely driven by non-traditional investors who have inflated VC
09:49rounds. So we've seen VC capital be raised by traditional VC funds, but we've also got the
09:54non-traditional element. And we define non-traditional investors as PE firms, sovereign wealth funds, hedge funds,
10:00funds, anyone who isn't a traditional VC fund. And these sources of capital have been able to inflate
10:07round sizes and fund startups and back companies. A typical example is a CVC investor. They may have
10:13a VC arm, but they've got an overall operational entity. It could be Amazon or Google or Alphabet,
10:20any of the big tech players, for example, or it could be an energy company looking to invest in clean
10:24energy
10:25solutions. These types of companies have got VC arms and they're looking to invest into VC, looking to
10:30fund startups and back a new wave of and generate longer term returns and value for their business
10:35and grow their business. And then later down the line, they could potentially exit that company or
10:40they could acquire it fully and fold into their existing operations. So what we've seen in terms
10:44of capital supplied versus capital deployed is this large gap. And this all could also have longer term
10:50ramifications. So if exits do decline drastically over the next few years and continue to be depressed,
10:56then we could have a potential shortage of capital. Dry powder levels have been relatively high in
11:01recent years. But if the amount of capital raised does not match what has been pumped into startups,
11:06we could have a bit of a crunch in coming years. However, we are probably a few years off that
11:10anyway,
11:10at the moment. And now looking at returns. So this is the kind of final section of this presentation.
11:19And what's interesting here is you can see that because of the glut of activity in 2021 returns
11:25really, really spiked. So venture capital is the turquoise line on this on this chart now. And you can
11:30see that the global rolling IRRs by strategy we've got on this slide. And it was about 74% for
11:37VC in Q1,
11:38Q2 2021. That's really come down now. And we've seen some of the returns actually become negative. Now,
11:45obviously, VC is a long term, illiquid, high risk, high reward strategy. But to see the returns really
11:51spike and now come down to more, I guess, longer term, and potentially, you know, not great levels,
11:57is a reflection of the exit market. So very, very quiet exit market. If this continues, returns are
12:04obviously going to be harmed in the long term. But at the moment, you can see the exits really,
12:08really picked up. And it's not just the case of VC, it's also across all alternative asset spaces. So we
12:13cover kind of all terms of asset spaces, we wrote research on PE, VC, M&A, as well as real
12:19estate,
12:19and we do a bit of fundraising as well. And that's where we can kind of see how the funds
12:24are performing and how performance is being evolved as well. Looking at a more, I guess,
12:29this is probably a more useful chart and a more accurate chart of how returns are looked at in
12:33the industry. You can see that what I was talking about in terms of the negative returns in recent
12:38times. I don't think a VC fund is looking to generate return on a quarterly basis or an
12:43annual basis or on a one year period. VC funds tend to have a life cycle of seven to 10
12:47years.
12:48And as you can see, the returns are still really, really strong in the long run, about 25% over
12:53the three year period, 21% over the five year period, and 17% over the 10 year period in
12:58terms of IRR
12:59returns. And comparing across different asset classes, you can see VC has tended to outperform
13:04along with PE. And that's what's been driving the influx of non-traditional capital from investors
13:09that may not be experts in VC or looking to gain exposure to VC because they're looking to get the
13:14returns that are on offer. The returns in VC tend to be concentrated in a select few investments and
13:20follow a power law. So everyone is trying to look for the billion dollar company, the next unicorn,
13:25because the returns are so great. If you can invest in that startup relatively early,
13:29you're going to generate significant returns and value back to your investors and LPs and GPs,
13:33and you continue that cycle of capital within the industry.
13:37That concludes the presentation. I'll leave the QR code up for a few seconds for those of you
13:43to download it. If you just take a photo or open up your camera app, you'll be able to get
13:50the QR code
13:50and I believe it takes you to a webpage too. You just fill in the details and you'll be able
13:54to
13:54download the presentation. And if you've got any questions, feel free to reach out to me.
13:59We're also at the Investor Lounge. If you've got any questions,
14:01feel free to come try and grab one of us. But that concludes our presentation.
14:06Thank you all for attending. I hope you found that insightful. And have a good rest of your day.
14:11We'll see you.
14:11Thank you.
14:12Thank you.
14:13Thank you.
14:14Thank you.
14:15Thank you.
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