deal data doesn't lie
• numbers are looking better than the investors sentiment
• an overlooked niche but juicy European vertical
• yet another European country discovers that startups are cool
Observations
As there's ongoing discussions about the macro environment that's deteriorating and affecting the startup investment ecosystem from Europe, I had a closer look at the granular numbers of private investments deals closed in Europe in April-June 2022.
Here's what I got from Nordic 9's databases, where we have tracked almost 3500 Euro deals worth $55bn+ for the first part of 2022.
all deals 2022 2021
• April 445 deals/$7.8bn 500 deals/$6bn
• May 554 deals/$6.7bn 568 deals/$10.2bn
• June 539 deals/$8.4bn 554 deals/$14.3bn
TOTAL 1538 deals/$22.9bn 1622 deals/$30.5bn
< $1M deals 2022 2021
• April 62 deals/$30M 86 deals/$45M
• May 88 deals/$43M 106 deals/$53M
• June 72 deals/$34M 81 deals/$44M
TOTAL 222 deals/$107M 273 deals/$142M
$1-5M deals 2022 2021
• April 165 deals/$411M 153 deals/$341M
• May 219 deals/$510M 157 deals/$385M
• June 196 deals/$482M 196 deals/$478M
TOTAL 580 deals/$1.4bn 506 deals/$1.2bn
$5-10M deals 2022 2021
• April 46 deals/$315M 48 deals/$324M
• May 63 deals/$407M 59 deals/$411M
• June 70 deals/$460M 47 deals/$342M
TOTAL 179 deals/$1.2bn 154 deals/$1.1bn
$10-20M deals 2022 2021
• April 44 deals/$590M 37 deals/$481M
• May 61 deals/$792M 48 deals/$661M
• June 54 deals/$703M 67 deals/$892M
TOTAL 159 deals/$2.1bn 152 deals/$2bn
$20-50M deals 2022 2021
• April 36 deals/$1.1bn 31 deals/$911M
• May 42 deals/$1.3bn 36 deals/$1.1bn
• June 48 deals/$1.4bn 40 deals/$1.2bn
TOTAL 126 deals/$3.8bn 107 deals/$3.2bn
$50M+ deals 2022 2021
• April 37 deals/$5.5bn 32 deals/$3.9bn
• May 31 deals/$3.7bn 36 deals/$7.5bn
• June 37 deals/$5.2bn 43 deals/$11.4bn
TOTAL. 105 deals/$14.4bn 111 deals/$22.8bn
If you look closer at the number dynamic, it doesn't seem that bad of a situation, does it? There's 8 billion or 30% less money spent in Q2 this year vs 2021 but only about 5% fewer done deals. The numbers are in line with the investors appetite, btw.
The cause for the big dollar gap comes from the 50M+ deals, where the late stage is at - both the deal number and the absolute dollar values are significantly lower than the ones from the same period last year. That's simply because the valuations have dropped as investors lost the betting exuberance provided by having deep pockets in a good macro environment.
Betting 30-50X at 1-2M sales has become betting 5-10X at 3-5M, if that. In other words, people are still willing to trade but not at the same multiples from last year and that is evident from all the other numbers, which are consistently higher than last year, with another notable exception at the <$1 million deals. That's where the pre-seed is at - and likely the drop is caused by the same bad macro impacting the late stage, with investors simply not willing to take risks. At the pre-seed it's all conviction and no traction, and an adverse macro is a serious deterrent for investors backing yet another pre-everything consumer SAAS targeting a hipster niche.
The seed pipeline ($1-5M) seems super solid in Q2 2022, with a nice 15% deal number growth from the similar Q in 2021. Also notably there's a bigger deal # gap at the $5-10M levels while the absolute $ number remained flat - that's probably because the series A valuations also went down, closer to the 2019-2020 levels.
This is more evident if you simply compare the months of June - the $10-20M deal number went down to 54 in 2022 from 67, whereas the $5-10M for the same periods went the other way around, up to 70 this year compared to only 47 transactions closed in the bracket in June 2021.
So what's next? Nobody knows. :-) If Klarna's 85% haircut valuation from 2021 is any indication, the market can go as down as 85%. Klarna is a particular case, of course, but it's easy to imagine a scenario following a similar pattern and the late stage deal numbers will keep going down in Europe - particularly the startups that took series A money at hefty valuations on the promise of high-paced unprofitable growth will have a difficult time to get to the next levels. While the seed to series A and series A to B conversions seems reasonably healthy this year (~20%) and the seed pipeline is stronger than last year - the series A/B deal number is also likely to go down, as a bad (presumably) market will affect a sales growth story that should compel investors to spend.
Most of the investors will focus on short term stories and favour consistent traction and/or profitable assets, with a preference to verticals insulated from the economy, until at least there'll be an equilibrium point in the market. The cost of capital is going up and its trajectory evolution ain't becoming predictable soon since there's multiple uncertainty points caused by the overall de-globalisation trend from across the world. China's supply chains and its upcoming fall elections, the way Russia is playing the entire European continent on its fingers, and the American technical recession announced this week are some mega subplots that are developing as we speak and major concerns for the period to come.
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Watercooler talk
💲 In case you missed it - the full list with 250 investors doing at least a deal in Europe every month, together with the breakdown for each country. (N9 subscribers only)
🇪🇺 Startup markets everywhere. In Europe there's 34 private companies providing rail services in Europe, with four distinct profiles:
• 3 greenfield good service quality
• 8 offering a franchised service
• 12 low cost, low quality
• 11 active in niche markets
It's arguably the same story of the airlines business from the past decade. There is a favourable context - the Euro market is being deregulated and rails are a cleaner way of transportation compared to airlines. Business wise, segmenting the market can go you a long way - budget operators don't steal existing demand but create new one, just like the low cost airlines did in Europe. There's also challenges, particularly related to inter-country infrastructure and there may be high entrance costs i.e build a fleet, but there's cases of operators not owning a single train (Flixbus). The most competitive route in Europe: Madrid-Barcelona. video
🇩🇪 What does it take to raise capital, in SAAS, in 2022? Here's a survey done by the team from Point Nine Capital based on a sample of 95 transactions.
• Not surprisingly, the overall conclusion is that the investors sentiment switched from asking their portfolio companies to grow unprofitably to building profitable operations - this is recurring in every downturn cycle and is a result of their risk appetite being correlated with the macro environment.
• Note that when you build a business, you need to lay out a profitable foundation in the right way regardless of what some investors will tell you based on their personal circumstances.
• On a related note, here's what kinds of early rounds larger firms may actually consider until end of 2022.
🇮🇹 Uber looking for growth in Italy, as it did a deal with Italy's biggest taxi dispatcher, meaning it’s now possible to hail a cab via the app.
• It is looking for more growth by aggregating demand, as mentioned already back in spring, when it said to add trains, buses, planes and car rentals to its UK app.
🇸🇪 Sebastian Siemiatovsky doing PR rounds in order to build cred on the American street after the spectacular valuation decline priced by his investors last month.
• In the meantime, also in the States, the regulators are looking closely at the BNPL space now that Apple announced it's building it to be one of its future revenue drivers.
👀 Inflation everywhere - Amazon will raise fees for its delivery and streaming service Prime in Europe by up to 43% a year.
• in the UK: £95 from £79
• in France: €69.90 from €49
• in Germany: €89.90 from €69
• in US: $139 from $119 (announced in February)
🇨🇭 Lastminute.com's CEO and COO were arrested over covid fund misuse claims this week, and prosecutors had blocked $7.26 million in the company accounts. Fabio Cannavale, the CEO, has also been an active investor in startups, mostly in Italy, in the past 24 months.
🇩🇪 Startups are cool in Germany Germany is the most recent country in Europe discovering that the startups may be the future for its economy and has pompously announced unlocking €30 billion to be deployed in the local ecosystem by 2030.
• While the money cannot hurt, of course, somebody should tell them that the problem for German startups is not the lack of money but the legislation - namely a combination of heavy bureaucracy and high taxation, remnant from the 1980s-1990s period.
• In other words, Germany needs to be reformed up and down otherwise the money will be spent in vain.
• Fwiw, in spite of an adverse environment, the $$ invested in German startups went up almost 4X yoy in 2021 to roughly $18 billion.
🇪🇺 High on Europe's startups Here's Saul Klein saying that Europe will still remain an emerging market in the global startup ecosystem for the next ten years so.
• The video was taped pre-announcing PCG, another iteration of Klein family's investment holding focused on building and extracting value from an ecosystem that's having similar dynamics to Silicon Valley. They call it the New Palo Alto and builds on the premise that London should become a hub polarising tech startups within a 4-hour train ride, including Paris, Brussels, and Amsterdam. Kinda difficult to take form considering the opposite de-globalisation efforts made by the UK starting with Brexit.
• The man has a vision that started 15 years ago when he did Seedcamp in an effort to create the YC of Europe, which was later transitioned from a startup accelerator into a seed VC fund. Now, with LocalGlobe turned into PCG, Saul and his father have built one of the more connected investors group from London that's still independent. How many investors with a good compelling vision do you know to build business in Europe?
⚡ In London, property developers may be prevented from working on larger multi-tenant properties due to current strains on the electricity grid caused by nearby datacenters from a few hoods in West London. The electricity grid is reaching capacity because too many data centers are taking up too much electricity and hogging available fiber optic cables.
• The Great London Authority says that it may take another decade at least to bolster the grid capacity for three of the more affected boroughs - Hillingdon, Ealing, and Hounslow.
🏋️♂️ Brexit ain't easy - UK wine wholesaler moves to France due to red tape, in line with the UK government’s own suggestions and was the only way to get around the “incredibly complicated” process and paperwork for importing alcohol from the EU to the UK after Brexit.
🇩🇪 The city of Hanover (500k population) is the first city in Germany to switch to cold showers in public buildings, making hot water unavailable for handwashing and other uses in government facilities, gyms, and swimming pools.
• The city will also turn off public fountains, reduce heating in public buildings, as well as stop lighting up public buildings during the evenings. The goal is to reduce the energy consumption by 15% as the EU has agreed in principle to cut gas use by 15% across the continent from August to March.
🤔 How much should you expect your startup to slow in 2022? On average, Google Cloud, AWS and Microsoft recorded a 21% decline in growth rate in Q2, so expect at least a 21% decline in growth rate for your base plan for the remaining two quarters of 2022, especially if you're an infrastructure startup.
😈 Ranting about Facebook - strong piece about the struggles of one of the more pathetic tech companies of this decade:
Meta is a company bereft of vision, creativity and joy, with products we tolerate rather than love - its constant focus is on trying to find ways to trick users into engaging with products rather than giving them a reason to.
🤔 How much does your privacy cost? Would you agree to make available your location tracking location data for a year if you got a free hot drink and a pastry as settlement?
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Sunday CET
Notes and commentaries about what matters in the European space - concise, no non-sense insights, interesting stories and implications for founders, investors, employees from tech companies or government representatives.
Published every Sunday morning by Dragos Novac and emailed to investors, founders and decisions makers from 50+ countries who want to understand the ecosystem from Europe.