The BEAR and the VCs - Part I

The market is down. The world is in turmoil. Again. The VCs are investing less. Doom, doom, doom, disaster.

That's what you hear when you read a lot of tech blogs, journals, and magazines. But is the Great VC pullback real?

Summary:
Here are 4 key things you’ll learn in this article.

  • Are VC investments really down?
  • How much money is there in the system?
  • What stages are hot right now to the VCs
  • Why have scale-up and growth company valuations tanked?

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Much of life is not a yes or no answer, it's not black and white, and the answer to the question about the great VC pullback is the same. It lives in the grey areas.

Let me be clear, there is a lot of capital flowing around the tech world. We might be down 18% in Q1 2022 over Q4 2021, but that was up 7% ($9bn) on the same period last year. So there is not less money, only that it is being invested in different areas.

There have been some insane deals done recently, like a €200m debt package to Spanish based RITMO.

Why did a company that had sales in 2021 of €200k manage to do a round of 200million in 2022?

Sales were up (according to crunch base) by 12 x but they must have been pre-profit. Debt is cheaper than equity and if they have a clear path to profit debt is the best way to go.

Let's unpack some of the market drivers. One of the biggest issues facing venture capitalists and private equity investors at the moment is the time it will take for a company to go from growth to exit. The markets are down which means an IPO is not attractive at the moment.

Many later-stage investments are stuck…….

 

IPOs and SPACS are down 45% Globally

 

EXITS IPO and SPAC

Why should that matter? Can’t they just suck it up and hope it gets better?

Well… when a VC invests they will have a timeline for which they want to have a capital tied up with your business. With the current climate that timeline has increased to an unknown level. So this has changed their investment strategy.

A wise investment for them on a growth (series A/B+) goes on a probability of success over a timeline for IPO / exit (through sale, buyout etc,). Or they invest early but with more investments in smaller companies, spreading their risk but on a more predictable timeline.

We have seen that early-stage investment is still going strong. Growth companies have a shelf life of 3-5 years. They also have an investment of €10m - 200m. Seed is longer with typical investments being sub €6m.


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