Private Equity & Venture Capital See a Shift of Gravity

Innovation and Tech Week Review 14/2022

The Observer

A lot happened in the first quarter of 2022. It is the right time for a recap and outlook of what's next at the beginning of the second quarter.

Many economists expected the inflation rate to revert to normal in January and February. The reopening of the economy should have brought the supply chains back to normal. With the biggest disruptor gone away, the spike in inflation rates should have reverted to the mean.

Vladimir Putin had other ideas and attacked Ukraine on February 25, 2022. From the Russian perspective, what should have been an operation similar to the taking of Crimea in 2014 evolved in a completely different direction.

The President of Ukraine, Volodymyr Oleksandrovych Zelenskyy, decided not to give in and fight back.

I believe Putin and other people in the western world expected the usual — run and lead from asylum — but not this time.

The Ukrainian President successfully brought the invasion to a halt and inspired the western world to take drastic economic actions against Russia.

As a result, global energy prices are soaring, supply chains are further disrupted, and an extension of debt cycles seems to be looming already—the perfect environment for soaring inflation rates.

What effect does that have on the Western World regarding Private Equity, Venture Capital, and the Startup Landscape?

Military Sector Private Equity

“The fact that Europe is waking up to the real threats of war at its door means that you’ll have many, many years of bigger budgets.”

“Some investors, especially in Europe, have shied away from defence, but the pendulum could shift as a result of what has transpired in the last few weeks”.

In the last 30 years, I believed that people that trade together stay together is the key ingredient to a peaceful world in which significant wars like WW I and WW II don't exist anymore.

From the 90s onwards, it seemed that all European companies and politicians started to travel the world to create such economic ties — from the US overall European countries with the European Union to Russia, China, India, and the African States — the whole world went global.

Things changed on February 25, when Russia showed that the "trade together and coexist peacefully principle" is a value proposition of lesser importance in their belief system.

The peaceful times from 1945 to 2022 resulted in a tight military budget since many people believed that the old days of constant warfare were over.

We were wrong, which now brings more public and private funds to the military sector again.

Private equity renews interest in military sector amid Ukraine invasion
Geopolitical tensions, reputational risks, and complex contract negotiations: investing in the global defence industry…www.fnlondon.com

Annual Valuation Report

European venture capital (VC) pre-money valuations set record highs at each quartile and across all financing stages in 2021. Numerous records were broken, including overall deal value across regions and financing stages as well as exit value. Pandemicinduced growth enabled tech businesses to prosper, and VC investors competed fiercely to participate in outsized rounds that drove up valuations. — Nalin Patel Senior Analyst, EMEA Private Capital

Knowing your territory isn't only a military principle; it is also a must in the startup world.

Similar to the stock market, private equity markets have their bull and bear cycles that are yet more challenging to observe.

The major indices in the public market report daily the state of the global market capitalization like a fever curve.

Before the internet observing private markets was an exercise of constant 1:1 conversations. These days organizations like Pitchbook also monitor private equity investments, especially in the tech area.

One of the key metrics in fundraising is valuations. Founders should know the current valuations levels in their markets, as should private investors like Business Angels, Venture Capital, and other PE entities.

Pitchbook has issued the VC valuations report from the Pre-Seed stage up to IPO.

Everything looks exponential in the report. Bear in mind:

Everything that goes up will come down again.

Deep Tech and Tech already saw a significant valuation reset in the last six months, with many stocks with a shaky business model down by 80–90% from their peak valuation.

When this translates into lower IPO valuations, combined with the rise in PE valuations, it could result in a more investor-friendly environment in the coming quarters.

2021 Annual European VC Valuations Report | PitchBook
Frenzied European dealmaking drives valuations through the roof European VC valuations continued to break records in…pitchbook.com

The All-in Podcast discusses "Why down rounds should be avoided" from minute 22 onwards.

Is Nuclear the solution?

“In France, where about two-thirds of power comes from Électricité de France’s nuclear plants, the electricity component of inflation has risen by 4% in the past 12 months, but by an average of more than 27% in the eurozone generally.”

One of the first observations in the Russian-Ukraine war was that Putin considered the European and NATO army weak.

The second one was that some European countries are dependent on Russian resources for up to 80–90%—of Russian pipelines fuel, primarily the Oil and Gas consumption in Europe.

Europe's politicians stated that Europe needs to become less dependent on Russia and the big question is:

Where should the energy come from?

When I look at France, I see a far below average inflation rate since two-thirds of the energy demand is fueled by nuclear power plants, and a potential answer to the current problems seems obvious.

It is like everything in life — achieving all goals simultaneously is impossible. Going for one goal has mostly negative trade-offs toward other goals.

When carbon neutrality and independence from gas and oil is the primary European goal in the coming two decades, I believe wind, solar, and nuclear will be the future.

Lower inflation, better jobs ... in France la vie est belle
hile the UK, US and much of the EU are gripped by a cost-of-living crisis heightened by Russia's invasion of Ukraine…www.theguardian.com

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2 Podcasts from this week:

#71: Heike Schoen - How To Rescue Your Clinical Trial When at Risk to Fail