In our previous article, we visited the fact that VC funding levels across Europe were dramatically down in March of 2020 versus previous years.
Whilst there have been some big fundraises in April, including Onfido ($100m), Privitar ($80m), Trade Republic ($65m) & Taxfix ($65m) amongst others, a quick view of the high-level statistics for April across Europe would appear to back up March's perspective.
When we break this down by geographies, we find that a similar trend has continued across all geographies reviewed, with substantial declines since 2018 peaks. In essence - again - no material change from the conclusions we reached in March.
However, this doesn't tell the full story. In the meantime we have seen many governments put in place programs to kick start funding. These are broadly being rolled out throughout May and so it will be interesting to see how this impacts funding volumes and how effective the different programs are across Europe. On this basis we feel that our next inflexion point is likely to be the figures we start to see for May and June. We will revisit the topic in due course and hopefully start to see some upward movement in volumes.
Why aren't VCs investing?
In talking to many members of the investor community, there is still an appetite to do deals. Very few have said outright, new deals are off the table. Yet, whilst investment does continue, and some investors remain very active, the reality is that volumes are down dramatically.
It seems that many investors are using this period to first focus on their existing portfolios, and then to look to build out their pipeline of new deals. What we are not seeing is as many investors pulling the trigger on those deals... yet!
We are finding that a consistent theme is that many investors are holding fire on completing new deals until there is greater certainty in the market. There is still limited clarity as to when and how we will come out of lock down, and what the new norm will look like. Beyond this there is the threat of second waves of the virus, and the uncertainty around Brexit and other poltico-economic factors, all of which add layers of risk. The government investment plans will mitigate some of this risk, but broader market changes are also likely to be necessary before investment volumes return.
Another material factor, which may seem more mundane, is that investors like to meet teams face to face. Investors place enormous store in the teams they back and so like to spend time with them formally to see the business in action and informally to get to know who they are really backing, before committing their time and money. A video meeting is just not the same as pressing the flesh. Many investors will need to decide whether they can overcome this challenge before recommencing investments.
As one investor I talked to explained, they have completed deals during the lock down, but only where they have already had substantial face to face interaction with the team. The next step will be deciding whether they are happy to make investments where they have not been able to spend time with the team in person... and on this point only time will tell.
Yet, when we consider:
The abundance of capital dedicated to the technology market;
The fact that many potential investments are being diligenced but not completed; and
The need for investment for technology businesses to survive and grow
then it is easy to envisage this period of low volumes being followed by a glut of new funding rounds when market conditions become more favourable. We may find the emphasis has moved away from certain sectors (travel being an obvious contender) and towards others (virtual working by way of example). Whilst it is too early to predict if and when this wave might happen, we would certainly not be surprised to see a dramatic increase in the volume of deals towards the back end of this year as the new norm becomes established.