Venture capital trends and implications
Dystopian works of science fiction?
The world continues to be full of surprises and, although few would argue that the last few years have been completely unprecedented, a lot has happened to make us shake our heads in disbelief. Back in 2018, if you had laid your hands on a copy of the "news almanac 2019-2022" – perhaps blown from the window of a passing DeLorean – you would have mistaken it for a dark and dystopian work of science fiction.
I don't know what the future holds, but what I do know is that it will continue to surprise us and ultimately impact the VC world and all those supporting it. We will all need to remain on our toes and alert to both the challenges and the opportunities as they arise.
Crystal balls and DeLoreans aside, as an administrator we work closely with many VC Limited Partners (LPs) and General Partners (GPs). Our job is to continually listen to our clients, observing the market and evaluating what support and value we can add, both now and in the future.
In this article, I share my top five trends and implications for VC, as we roll through the rest of 2022 and beyond...
For some, VC and tech are two sides of the same coin. As a sector, tech has proven itself to be resilient, representing an increasing and – some might say – disproportionately large chunk of global market capitalisation.
Many traditional industries remain ripe for significant technological innovation and disruption; for example, in the retail, finance and healthcare sectors.
There's no doubt venture capital will continue to shape and drive innovation and growth in the broader technology sector. Ten years ago, 20% of unicorns were venture backed, now this figure is more like 80%.
On the flip side, there is potential for tech valuations to come under scrutiny as the broader macro picture becomes more challenging. Loss making, non-cash generative tech businesses have commanded high valuations in frothy markets. When cash is king, they could be impacted. Clearly the other challenge is to ensure that cash requirements within tech portfolio companies are sustainable.
Much of this will be about communication between GPs and their portfolio companies, with a healthy dose of financial management thrown in too. As an administrator, anything involving valuations, cash flow reporting and forecasting has implications for us. We also need to keep on top of increasing complexity, transparency and regulatory requirements; all of which continue to evolve at phenomenal pace.
European venture capital has come of age in recent years; largely driven by a supercharged tech sector.
Europe's tech ecosystem surpassed US$3tn for the first time in 2021, with the same capital deployment in Europe as in California – the home of Silicon Valley and, to many, the centre of the venture capital universe.
Europe has established its credentials as a mature venture capital ecosystem, successfully attracting capital at all ticket sizes. Therefore, it shouldn't come as a surprise that we are seeing more global tech 'winners' coming from Europe than ever before. As of today, there are more than 300 European 'unicorns', compared to around 20 in 2010.
The big, predominantly US, players who may have invested opportunistically in the past, are now establishing deeper strategies and substance in the region.
Most commentators are predicting more challenging market conditions ahead. If that transpires, then liquidity will be near the top of most managers' agendas. Expect to see time and resources being spent on risk assessing portfolio companies – and capital allocations following those assessments to ensure that portfolio companies can weather the storm. Cash will be king.
Depending on the extent of the runway, we may see some strategic rounds at down or flat valuations. We've already seen examples of this, most notably, Klarna in its latest round of fundraising.
Financial governance will also be crucial, and there may well be a need to build in some deployment risk hedges.
As administrators, we will be focused on fund governance, cashflow monitoring and other bespoke reporting to ensure that managers have the necessary space and support.
4. Family offices
Family offices continue to be attracted to the superior returns in private markets and remain a growing capital base for managers and founders to tap into.
If market conditions become more challenging, then it is likely that we'll see managers elongate their raising cycles at the same time, as institutional investors pull back on sector allocations – thus providing further opportunity for family offices to invest in the sector.
Challenging conditions will drive distressed situations, close IPO exit windows and heap pressure on liquidity; all of which may constitute fertile ground for secondaries to acquire seasoned assets at attractive prices. Secondary markets will also become an important part of the ecosystem as a liquidity release mechanism.
At the top end of the market, where information is more complete, secondary activity transactions will be smoother. At the lower end of the market, information may not be as deep – impacting valuations and pricing and increasing the complexity and success of secondary deals.
One thing that's for sure, is that we can expect to see more secondary activity and strategies in the market.
In conclusion: yesterday's is just that!
"The slow one now will later be fast, as the present now will later be past" – Bob Dylan
In an ever-changing world, yesterday's news is just that; as new challenges and opportunities arise, my top five may well look very different in a short space of time. Whatever the future holds, the key to success is to remain nimble and in tune with the market and adapt to changes; those that don't, generally get left behind. Don't dwell on what might be, because if the last two years have taught us anything, it's that nothing is for certain.
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