When the market can’t tell the difference
October was another record month (+20% ahead of October last year by value, and nearly +40% year-to-date), with sustained activity both in M&A and fund-raising.
Clearly Europe is growing as a venture destination (hence why US investors are coming). However, we can also diarise the growing bubble by the excesses it generates. Hence the picture above from a recent Financial Times article, which explains how contemporary art market insiders make things look more valuable to newcomers than they actually are and trivial modern art pieces are worth more than those of the old masters. In many ways, the technology investment market is turning (once again) this way. For a recent example, look at the (carefully orchestrated) rumour of Uber’s funding of $1 billion at a $40 billion valuation, more than double its value six months ago (and 50% more than the rumour the week before). This just doesn’t make sense (remember the New Economy and Webvan, Pets.com, etc.?). For examples closer to home, look at the crop of UK AIM listings which made promises they couldn’t keep (Blur Group, Monetise, Quindell, etc.), egged on by advisers more preoccupied by fees than reputation. Or the campaign on Kickstarter to raise money for Lunar Mission One, which aims to drop a capsule on the moon in about 10 years (with anticipated revenues of £3 billion, based on selling the ability to drop SMS messages in a “digital memory box” there). These excesses at the margins of our industry affect the venture market as a whole – and adjustment will no doubt follow.
For what it is worth, our prediction is that the price adjustment will come around mid-next year. As in 2008/09, the decrease in the end will not be so dramatic (it was -30% to -40% across the board then), but it will likely slow down new investment activity for a while, cash will be at a premium and internal rounds will return. Brace yourself – and be ready next year to go into the market aggressively (as investors currently expect and demand!), but also to adjust your expectations as soon as winds start to turn. And of course valuations will go down, simply because companies won’t be able to raise as much money, but will take the same dilution.
October, generally a fairly quiet month between the post-Summer announcements and end-of-year closings, was unusually active, with 50% more deals than last year and 20% more money deployed. In many ways, the Large HTI transactions profiled in the Bulletin reflect what we see in the market as a whole: mobile and Fintech lead the pack, followed by marketplaces and e-commerce technology. Of course late-stage is always on, but we clearly see more Series A and B rounds than we have witnessed for a while.
This buoyancy is illustrated by the number of European funds making progress and announcing first or final closings. In no particular order:
- On the corporate front, Deutsche Telekom doubled up their commitment to venture by setting up Deutsche Telekom Capital Partners (DTCP), a €500 million fund which will make cross-stage investments in Germany and growth equity rounds outside its home country. Furthermore, SAP Ventures rebranded as Sapphire Ventures, culminating their transition from corporate venturer to financial investor.
- Among financial investors, October saw activity across the board, from early-stage (French fund Breega announcing its first closing at €20 million) to late-stage (Keensight Capital closing its Fund IV at €250 million).
- Another interesting development was Singapore’s Infocomm setting up a London-based European fund of €200 million, with a view to creating a bridge between Asia and Europe.
For the first time, there are domains where Europe can claim a lead over the US: fashion e-commerce, gaming, music and now Fintech. A recent Financial Times article explained how European start-ups Azimo, CurrencyFair, TransferWise and WorldRemit are going after their US competitors (Western Union and Xoom) by setting up shop in the US, taking the fight there even before these US competitors come to Europe. The irony, of course, is that most of these European start-ups are financed by US investors such as Accel (WorldRemit), Greycroft (Azimo) or Sequoia (rumoured to be investing in TransferWise).
October was a very active month in European TMT M&A transactions.
Two of the world’s Top 5 transactions involved a European company, which is unusual as most of the world’s top transactions involve US companies. The big news in October was Qualcomm making a move on CSR, in a transaction worth c. €2 billion. CSR, an early entrant in the Bluetooth wireless chipset market, was one of the stars of European venture in the 2000s, and a shining light of the quoted tech sector in the UK and Europe in general. The other big deal was Apax Partners taking Exact private, to accelerate its move to the cloud and growth in general – a classic move for a software company trying to re-engineer itself away from the prying eyes of public markets.
In Europe alone, there were seven VC and PE-backed deals in October, the largest number of transactions we’ve seen so far in one month. What is noticeable is that this does not just concern PE-backed companies, but also some genuine venture companies – including names our readers will recognise such as City Index (a B2C and B2B cloud-based trading platform), Fyber (ex-SponsorPay, an Adtech company), Nimbuzz (mobile IP telephony), Trovit (online classified ads) and Videoplaza (mobile video advertising). The smallest transaction was c. €60 million (i.e. some $75 million) – not far from what used to be the reference in the venture market, a $100 million exit or more.
This is all good news, but we should not rest on our laurels. As much as European venture is making progress, the bar is also being raised. There is no better reading on this topic than Sherry Coutu’s Scale-Up Report. For the first time, a report destined to shape public policy mentions that creating the next startup is NOT the key to wealth creation, but “creating an environment (ecosystem) where a greater number of companies reach scale” should be the priority. We could not agree more, which is why this Bulletin focuses on companies raising $10 million or more.
In our view, however, scaling up needs to be viewed at European or even global level – finding and benchmarking innovative companies against their peers wherever they are. For a picture of the world’s 140 software companies (VC-backed or not) which have reached the billion-dollar mark over the past 10 years, take a look at Atomico’s research. It shows that 79 were from the US, 26 from China and 21 from Europe. This tells you how much progress remains to be made – and therefore the size of the European opportunity given the wealth of intellectual property creation – if only we could connect the dots among our culturally, fiscally and geographically dispersed ecosystem.