Venture capital is a little-known enabler of our daily lives. We would not use Meta’s social networks, the neobank Revolut, OpenAI’s ChatGPT, the Airbnb accommodation platform or the Uber VTC application – to name but a few – without the decisive financing from capital funds. risk at the start of the life of its companies. But this industry is on the verge of an abrupt transition. For many start-ups, venture capital was a necessary step to quickly obtain funds capable of withstanding losses during the period of creation and marketing of a product, with progressive financing rounds: seed, then series A , B, C and beyond.
This model developed in Silicon Valley has spread across the world as the best way to quickly grow businesses by aligning the interest of financial investors with those of talented entrepreneurs. The asset class has grown exponentially. According to Preqin, a financial information provider, venture capital today stands at around $2,000 billion under management, compared to $200 billion ten years ago. Over the past decade, 1,200 venture capital funds have emerged, marking one of the most remarkable periods in the technology sector.
This era saw hundreds of billions of dollars pour in from seasoned investors, lured by staggering promises of returns. The years 2021 and 2022 blew through the roof with record fundraising exceeding $300 billion. It must be said that the period made it possible to list numerous companies, often unprofitable, on the financial markets at extremely high valuations.
The output environment is too uncertain
The correction in 2023 was even more severe. Fundraising is at its lowest level since 2015. Investors, who initially expected venture capital returns around four or five times, are now willing to liquidate their stakes for returns of two times. Three-quarters of them also believe that the exit environment is too uncertain to position themselves. Their concern? Having to wait for a new bubble, like the one we experienced with the ultra-expansionary monetary policies deployed after the confinements, to achieve the expected performance.
It turns out that many companies actually don’t have a venture capital-friendly model. Their sector is too regulated, preventing deployment outside their domestic market. Their activity requires too much labor. Marginal costs are not decreasing. In any case, even the leader of a market will never create a competitive advantage sufficient to win the bet. There is therefore no point in overinvesting in marketing and the sales force. Initial financing is enough to launch the machine and the company can then follow profitable growth, finding additional financing – private debt or bank debt – or even falling into the hands of a private equity fund which will be responsible for consolidating the sector through mergers and acquisitions. The outlook is not exceptional and cannot accommodate crazy valuations.
Europe is adapting… to yesterday’s world
Only companies that are tackling a major problem or developing a disruptive technology still fall into this category. But they are experiencing a real race for size and in this case, they escape the traditional progression of financing rounds. The risk is immense and we need investors with deep pockets ready to follow entrepreneurs who have already succeeded in this type of bet.
Beyond the theme of the fight against climate change (climate tech) which is driven by regulatory aspects, this typology of investors is mainly found in Silicon Valley. This is also where the potential outlets for a stock market listing, and therefore monetization of the investment, are concentrated. North America represents 70% of the overall value of releases and this share is increasing. While Europe thought it was catching up in the creation of growth companies by copying the venture capital model, it is perhaps already a reflection of the world of yesterday.
Robin Rivaton is Managing Director of Stonal and member of the Scientific Council of the Foundation for Political Innovation (Fondapol)
.