The Future of Valuations for European VCs

We were delighted to co-host alongside our partners Mountside Ventures leading VC’s, LPs and start-up founders for a lively discussion on how the pandemic is impacting the valuations throughout the European Ecosystem. Here is a summary of the key discussion points and insights:

What is happening in the current climate

Valuations

To date, the impact for valuations has seen a significant disparity between later stage and early stage investors. The data suggests that early stage fund rounds have stayed similar to pre-pandemic levels, which was matched by sentiment from attendees. The data is likely to be caused by a combination of the following factors:

  • Deals closing in the previous quarter will most likely have been sourced pre-pandemic
  • There remains a delay in reporting deals, which is likely to be seen in the next quarter
  • Government Support – Future Fund in the UK, amongst similar schemes throughout Europe, have supported valuations
  • We are yet to see many “down rounds” and those raising in the previous quarter have been focused on growth markets.

For later-stage investments, the picture is significantly different with valuations being reported as low as 30% down on pre-pandemic levels. There are a number of contributing factors including balance sheet resilience and substantial changes to company gearing. The most prominent points highlighted throughout the group include:

  • Exit Valuations dropping as pandemic impact is anticipated to exist for several years
  • Decline in M&A activity across the economy
  • LP’s altering portfolio’s and appetite in alternative investment.

Activity Levels

Interestingly, the sentiment in the room suggested that opportunities for exits still existed with corporate VC’s describing successful deals sourced pre-pandemic. Some of these deals have been strengthened where they have coincided with growth markets created by the pandemic.
In contrast, many VC’s were looking to use fund capital to strengthen existing investments through future rounds rather than through new portfolio businesses. This was mirrored in expectations over the next 6 months with fewer new deals anticipated.

What should we expect in 6 months?

There is an uneven distribution throughout markets, with expectations for particular markets remaining bullish, compared with others in worrying peril.
Valuations

Broadly, the data and group agreed that macro valuations are expected to fall, with some suggesting this could be by as much as 30%. For early stage investment, we expect valuations to fall and for there to be residual impact for 1-3 years. In Europe, there has been strong ecosystem development over the past few years, which will continue to make a material impact throughout the recession, particularly when compared with the 08/09 recession.

The fall in valuations will be a reflection of slightly reduced levels of capital available as LPs re-evaluate risk profiles, the previous delays in reporting following through into the data and with more ‘down-rounds’ or deals sourced post-pandemic.

Activity Levels

It is anticipated that the volume of transactions will reduce and there will be pressure on ticket values for early stage investment. Partly, this will be due to VC’s decision-making between strengthening existing portfolio’s and sourcing new deals.

Interestingly, the market suggests that this is an excellent time to deploy capital as valuations remain supressed and strong upside opportunities in the medium-long term existing on exit. There is a distinction made between VC’s who have a fund raised and ready to deploy, and those seeking to raise – which may prove more challenging in this market due to LP decision-making.

Conclusion

Overall, the underlying conditions suggest that it remains an excellent opportunity to deploy capital. Opportunities exist through growth in both existing and new markets. There is, however, likely be increased scrutiny during selection for new deals. Deal-flow will begin to slow compared to the same period in preceding years which is will be mirrored in both exits and new-rounds.