The Go4Venture Advisers’ European Venture & Growth Equity Market Monthly Bulletin provides a summary of corporate finance activity among emerging European TMT companies. In the current edition the authors list signs for an overheating of the venture capital market. They expect a correction but not a collapse.
The current edition of the Go4Venture bulletin covers the month of August. It was the most active August month on record. And all this at a time when the macro environment is turning negative, with geopolitical risk at its highest for some time, emerging economies slowing down, Europe stalling, and the US (and UK) planning to raise interest rates. No wonder some of the investment transactions are starting to raise eyebrows – because contamination is now touching public markets, as exemplified by the Alibaba and Rocket Internet IPOs. And the best VCs are starting to take note, with Bill Gurley of Benchmark Capital widely quoted saying “the venture-capital community […] is taking on an excessive amount of risk right now – unprecedented since ‘99”.
August was impacted by the €768mn raised by Rocket Internet in the run-up to its IPO, no less than 20% of the total recorded by the Headline Transactions Index (HTI) last year. This is for a company whose 11 “proven winners” had €727mn in revenues in 2013 (a three times increase) but EBITDA losses of €436mn. Remember that not so long ago, IPO’ing an unprofitable company was an obvious no-no.
In addition there were six other companies that managed to raise over €100mn, i.e. close to €20mn each. So, beyond the headlines, there is a general level of activity.
This is a development concerning mostly internet, mobile and software. Regarding other industries the authors of the bulletin write: “In other areas, more traditional metrics prevail and one could argue that the internet phenomenon is crowding out venture funding, with corporates, business angels and punters (see crowdfunding) stepping in to replace VCs busy elsewhere.”
However the authors don’t think that that history will repeat itself. “In any case, we believe that this time round it will be more a question of mispricing – so we expect a correction, rather than a collapse. And investors may go back towards traditional IP-led innovation, rather than disappearing altogether. In this era of poor returns, investors need growth.“
The bulletin can be downloaded from the website of Go4Venture.
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