• believe what investors do, not what they say
• how capitalism works, the French edition
• revenue-finance business numbers

 

 

---

 

Observations

🤔 It is what it is September already, and I had a quick look at the numbers from this summer, which was really quiet from an investors' doing new deals perspective. The figures from below are for June, July and August and represent deal activity across the European startup ecosystem, tracked via Nordic 9. 

Number of deals 
• 2022: 565+471+232 = 1268 deals
• 2021: 561+462+435= 1458 deals

Money raised
• 2022: 8.4+6.2+2.4 = $17 billion
• 2021: 14.3+7.4+7.1 = $28.9 billion

$100+ million deals (plain vanilla equity)
• 2022: 21+9+3 = 33 deals
• 2021: 29+20+18 = 67 deals

<$5 million number of deals
• 2022: 280+253+123= 656 deals
• 2021: 280+233+248 = 761 deals

That's really just a simple Saturday morning crunching exercise to state the obvious, the pace of deployment has slowed down considerably - it's so bad that you don't even need a fancy graph to get it. And yes, August is when Europeans go vacationing - however, the month (underlined numbers) was so slow even if we're to consider our deal backlogs (i.e. transactions we still need to process and add to the DB, usually a 15-20% margin).

Some quick notes:

• The late stage seems to be in a total freeze, while at the (pre)seed there is a somewhat slowing down.   

• This summer Y Combinator has 34 European startups on their batch, which is 5% of the all the early stage transactions announced in Europe this summer.

• The YC's 30 deals range is roughly the same to what Speedinvest and Seedcamp (the most active seed investors in Europe) did together this summer on the continent.

• So those three investors executed about 10% of the early stage dealflow in Europe.

• The other early stage super active European investor - GFC - didn't stay put either this summer, but they didn't deal as much in Europe (less than 10 deals), rather in Asia and South America, where it's cheaper anyways. GFC also was the only investor in Europe (that I am aware of) that laid off people this summer.

• At the late stage, a quick scan of the actual transactions reveals extensions and bridge rounds rather than growth deals per se - that is funding for making it thru the hump not for accelerated growth. This also explains the higher number of debt deals announced this summer, as CEOs took money on their balance sheet at a higher cost but without having to dilute. The bad macro affects revenues and growth, which implicitly impacts investors desire to take risks. Besides, all the good assets are routinely scrutinized and have been already bought in the boom days - Europe is a fairly small market anyways.

• It is likely that all those late stage investors will increasingly crowd the very early levels - deals are cheaper and it is a good moment to create relationships down the value chain with fellow workers, be them peer investors or startup founders. You don't have to get it at early stages if you have enough money, sometimes you just need to show up and be part of the conversation, and it's the good ol' networking that should pay off anyways.

• Not least important - the money is still there waiting to be deployed. It's the uncertainty that makes fund managers to stay in limbo, and this macro risk is incorporated in deciding on how to act.

• Funnily enough, the narrative is still the same - the 'we back exceptional founders and even more exceptional business' evergreen BS - but the market is not there, making people wary and worried, and even so less likely to buy into a nice ppt and a working demo.

• The VC is a business of public perception though, and, rule of thumb, always look at what investors do, not at what they say, and that's what you have the data for.


💲 How capitalism works Story of the week is Snap closing down Zenly, the French social network it acquired for $213 million in 2017. The French are pissed and I can totally relate, they have a good team and a product that's used by millions of people every month. So why do the bloody Americans have to take such a drastic measure and recklessly close everything down? Let's look a bit into it:

• The product ain't making money. Upon being acquired, Zenly remained a standalone unit within Snap but hasn't exploded its usage metrics - 10X growth in 5 years is still a nice number, 4M to 40M users to date (mostly from Russia and Asia aka hardly monetisable), which makes it a decent tech product for the European market though. But those users are not producing economic value, as Zenly has no business model. And that is simply because it was not conceived that way from the start and it doesn't have it in the DNA, which is another way of saying the product has no business vision. And joining a corporation didn't help changing that.

Let's assume they can try to make it a business over night, what would some low hanging fruits be? You can do advertising, which is costly to implement (you need servers, associated tech tools and people for ad mgmt) and time consuming. The ad market is super competitive and is currently on a downward side of the cycle - say at 40M MAUs, you optimistically have a 20% inventory load and get 25 cents worth of ad $ per user, this would get you to $25 million gross income a year, if there's no middle man, whose cut can be as high as 30-50%.

Or, you can start charging the users - say you manage to convince 1% of your base to pay $50 a year - that would bring in $15 million a year. But anybody who has ever built a business knows that getting 100k people to pay for something is super difficult, and, again, the product was not designed this way, this avenue involves experimentation, which is costly and time consuming.

This is all paper money, so why would Snap, Zenly's mother company, explore any of those two? A costly effort for a 15-20 million a year revenue line, in the best case scenario - real talk is how big can that become, what's the upside of it and how it aligns to the bigger picture of what the company is trying to accomplish strategically. Fact is, it all seems marginal in the current operating scenario and there's not really a convergence, which brings me to the other side of the P&L equation.

• It's costly. The Zenly team has 100 engineers, meaning an overall burn of at least $25-30 million a year range, which is not cheap at all. And the above revenue directions are not an an on/off switch, even if Snap makes the effort to implement them, it would be a long process that hardly offset its costs in a year or two. Time is a factor and the company is listed, meaning it needs to produce now visible results in the P&L in an adverse macro market - btw, the 100 Zenly engineers represent <10% from the overall 1300 individuals that Snap fired, primarily in the US.

• The IP. Snap could put Zenly in the market for sale: a generic social network, decently trafficked - 30 million users - that burns $30 million a year and produces nada revenue. On one hand, you'd have to pitch the professional investors in the current macro, making the same quick exercise from above to evaluate the upside. Very few of them, if any, capable to buy into it, tbh. On the other, it'd be very interesting for the competition - not only for the talent but also mostly for the underlying tech. Let's not forget that Snap bought Zenly for the complementing tech in the first place, which it already incorporated in its own core map product. Keeping two products doing the same thing is redundant, and why would Snap now sell its IP to other competing social networks? Makes no sense.

Just some quick morning coffee thoughts, am I missing something? Going by elimination, the only decision remaining is simply close the thing down. Emotions are never a good proxy for business and, as painful as it is, the writing was on the wall, and if we're to be honest, that's likely why Antoine Martin (CEO and founder) left the company in the spring. Quite sure he and his team got their lessons and will pitch European investors with a new startup soon, and, guess what, they'll raise super easily because they're a good European success story. Hopefully this time they also have a good business vision. 

 

---

 

Tech Tapas reloaded

We have started working on a new edition of Tech Tapas, soon with more details. Related to that - we've been doing pitch preps with a select few founders looking to raise and in need to get feedback as how they're perceived by the other side.

If you're interested (or know somebody who is), we're taking applications for the next session here - super informal, direct and personalised sittings, also free of charge.

 

---

 

Cheat sheet reports

150 hot early stage* startups in Europe
• climate-focused (20)
• cybersecurity (20)
• financial services (50)
• marketplaces (30)
• web3 (30)

*curated from the ones that raised rounds less than $2 million in H1 2022

A curation of 80 deals led by American investors in Europe in H1 2022
• seed (34 deals)
• series A (40 deals)
• series B (16 deals)
+++
• European startups at Y Combinator in summer 2022 (30)

The most active investors in Europe in H1 2022
🇸🇪 in Sweden
🇫🇷 in France
🇩🇪 in Germany
🇬🇧 in the UK
🇺🇸 Americans
🇪🇺 top 250 

Note: the reports are available for Nordic 9 paying customers only. You can become one from here.

 

---

 

Où est la middle class?

 

 

---

 

Watercooler talk

Notes

🇬🇧 The money business is hard Forward Partners, the early stage British investor that's listed on the AIM, announced that it will fold down its Advances unit, one of the first to provide startup financing against revenue in Europe. 
• The numbers are underwhelming - in 2021, the unit made some £370k in revenue out of total originations of £9.5 million. It spent £1.1 million to achieve that this year, out of a total effort of £2.8 million since the beginning, including the costs of winding down.
• Here's an exercise for you, if you want to have fun while understanding where the market is - take some of the revenue-based finance startups contending in Europe and apply those ratios.
• Also worth noting: none of Forward's top 15 investments (9 of which are B2B) from the VC portfolio is profitable, and their average forecast revenue growth is 40% to 60% for the full year. The half-year ventures portfolio value is expected to be at some £92 million, down from 110.

🇪🇺 Politicians as VCs Turns out that the money business is hard for politicians either - the EU, believe it or not, still didn't put to work the money from its equity fund that already has a year since it was trumpeted around. Red tape, as expected, exactly what politicians are good at, right? Except that the money business is not working like that and that is why I would look at the half full side of the glass: not having deployed is the least damage they could have done to the startup ecosystem - imagine founders had those idiots in the cap table, waiting on them to act on the current macro. Scary as hell.

Bonus, here's a lil' nugget to make your Sunday:

Some officials worried that making direct investments in companies directly threatens the Commission’s reputation if/when companies fail.

[stop laughing]

🇪🇺 More EU business It's not all that bad at the EU - look, it just opened a Silicon Valley office to streamline communication with Big Tech. Ya know, to assure those folks that it's not the anti-America sentiments leading to heavily regulating their business - au contraire, the intentions are great, but it's just that this is how Europeans are doing business. That is probably why the American office is not led by a business man, who should by definition knowledgeable and pragmatic, but rather by a diplomat, who can streamline communication. 

🇫🇷 French tax authorities are using AI software to scan aerial images of homes to find thousands of undeclared swimming pools, which usually lead to higher property and residency taxes. They cross-checks the findings with land registry database - the process has uncovered 20,356 pools not declared to the authorities. A typical pool of 30 sqm would be taxed at about an extra €200 a year on top of the property tax.

🇸🇪 Volvo renamed, once again, its car sharing unit, from M to Volvo On Demand, signalling its ambitions to expand it outside Sweden. It is an interesting business with a great product, and I really liked the name M - actually I have been a long time paying customer ever since the service was launched under the name Sunfleet back in 2016. Been also using extensively most of the similar services from across Europe and, product wise, the Swedish one is superior to anything available elsewhere, particularly the app is very well implemented. But otoh it is also a money losing business as it requires complex scale, and the Swedes have experimented a lot with the pricing model and the ops -  currently it's a freemium (you don't need a sub to rent the cars), and have increased the prices significantly at the start of the year (they have 250k user accounts). Scaling it across geographies is very cultural prone, especially in car-centric countries - nevertheless, M's story is also a rather fitting example to Zenly's case from above, showing how PMF requires experiments and time, and how a superior product cannot compensate proper business management and unit economics. 

🇸🇪 More Sweden - Saab's CEO complains that the export expectations for their multirole fighter plane is not a reflection on the quality of the aircraft, but it is all boiling down to politics. That's because, he says, the Americans producing competing planes are not so easy to work against in the market and in politics.

 

Food for thought

• What's the European equivalent of "American Dynamism"? link
• Is EBITDA is a terrible measure of profitability? link
• Small caps are trading at the steepest discount to large caps in decades. link
• Rocket ships and tractors - is revenue really a feature in the startup world? link 

❓ Is this conflict of interest? Gary Tan of San Francisco-based Initialized Capital will be the next leader of Y Combinator - an interesting story because it begs the conflict of interest question: from his YC position would Gary funnel deal flow and other privileged information to the partners at Initialized? The guy was previously a partner at YC and his fund is arguably among the more successful early stage ones in Silicon Valley, so it's all trust and personal judgement, of course - on top of that, should the LPs that just deployed $700 million in Gary's new fund be worried now that the key man of the fund is gone? 

🇺🇸 Silicon Valley doesn't have too many 20-something founders who become household names in tech nowadays. Tech has become a creeping gerontocracy compared to any other industry - but is this a geography problem (it's bloody expensive to live in the Bay Area, and not pleasant/fun too) or is it generational (kids have it easy to make money as social influencers and/or working for big tech as opposed to become filthy rich from building stuff as young as possible)?

 

Quickies

🇨🇳 Tencent needs to produce, apparently, some $14.5 billion in cash fast, under divestments pressure from investors and Beijing’s recent antipathy towards Big Tech.

🇩🇪 Follow the money Another day, another police raid at the German's offices of an investment bank. link

🇯🇵 In Japan, the government declared war on floppy disks and other retro tech such as CDs and minidiscs, still required for around 1,900 different government procedures.

🤡 Oh, the Metaverse Hermès, the French luxury design house established in 1837, reveals plans for Metaverse fashion shows, in a classic marketing move following a tech hype.

💲 Crypto.com refunded a user $10.5 million instead of $100, realized the mistake 7 months later and filed legal action. 7 (seven) months is a very long time, it makes you wonder how things are run around there, and what checks and balances are in place + suing for recuperating lost money because of your own incompetence ... it's a mess. 

🇧🇪 No more Leffe for me Months after Russia's invasion of Ukraine, Inbev (Leffe's mother company) bosses began production in seven Russian breweries by AB InBev Efes, a joint venture between AB InBev and Turkish beer producer Anadolu Efes. Is the bad PR worth the extra business?

🐑 Head scratcher You're not romantically involved with a guy and you don't even have/had sex with him, but you have his kids via IVF. You stick to this story because his name is Elon and you don't want to get him in trouble - that's love, man. 💕

🛒 Expats essentials How to shop Amazon’s national sites across Europe link

 

---

 

Let's have some fun

🧩 I got a lil' quiz for you.

This one is different from the one from last week. Say I gave you €50k to invest in one company today from the following four startups active in the financial service businesses - if you had to pick only one, which one would you invest in, and at what value?

a) insurance for small businesses w/ 1500 customers 
b) pre-launch decentralized finance app w/ 300k users in a waiting list 
c) payroll financing provider w/ 100k users
d) real estate consumer financing doing €200 million in transaction volumes

Those are real companies, with real numbers, which raised real money. The closest answers to any of them, get one month free of the N9 PRO package - simply reply to this email.

-

The answer for last week's quiz is Tiger Global, which did 5 deals in France and 5 in the UK this year. I got 7 answers, 2 of which were right - Jon and Anders.

 

 

 

---

 

Did you find this useful? 🤔

Great    •    Good   •    Meh

 

---

 

Questions or comments? Let us know!