EUVC Newsletter 17.03.24 | Money magnates in monocles and the quest for invisible money
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Highlights
🏦 Fundraising Fortitude: Despite a challenging fundraising environment in 2023, sectors like secondaries and private equity demonstrate resilience and adaptability.
💔 SVB Ripple Effects: The aftermath of Silicon Valley Bank's collapse reshapes the venture debt market, with startups and lenders adjusting strategies.
📈 Investor Dominance: Over 95% of equity deals in Europe now come with consent rights for investors, signalling a stronger grip on portfolio companies.
🛠️ Founder Promises: Founder-backed warranties are making a comeback, involved in 39-44% of deals, defying the past trend towards company-backed warranties.
👁️ Observer Overload: A staggering 80% of 2023's deals awarded board seats to lead investors, contributing to an overcrowded board scenario.
📝 SaaS Snapshot: A resurgence in enterprise SaaS funding, led by CRM innovations, highlights a sector adapting swiftly to evolving business needs.
🤖 Automation Ascension: The industrial automation sector's growth, with a projected market size of $115 billion by 2025, signals a technological transformation in manufacturing.
💰 Nordic VC Watch - The Shape of the New Nordics report highlights a vibrant pre-seed to Series A investment landscape, with a spotlight on diversity and repeat founders.
Read the deep dive below.
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Escalation of Investor Oversight
A striking 95% of equity deals now feature consent rights for investors, indicating a pervasive desire among investors to exert control over critical decisions within portfolio companies. This trend represents a significant departure from the traditionally founder-friendly climate, signaling an era where investors are keen on safeguarding their interests by maintaining a tight grip on strategic, financial, and operational facets of the business. Such consent rights typically cover a range of pivotal areas, including budget approvals, key hires, and M&A activities, effectively giving investors a veto power that can shape the company's trajectory.
We are witnessing a noticeable return to founder-backed warranties, with these contractual assurances about the business's state featuring in 44% and 39% of transactions in 2022 and 2023, respectively. This marks a reversal from the recent movement towards company-backed warranties, advocating for a shift in liability away from individual founders to the company at large. The persistence of founder-backed warranties in negotiations underscores investors' preference for a personal guarantee on the veracity of the company's representations, thereby heightening the accountability and risk shouldered by founders.
The crowded boardroom scenario complicates decision-making processes and may hinder swift, agile responses to market challenges.
The drive for investor representation on boards has led to a scenario where 80% of deals in 2023 facilitated board appointment rights for lead investors. This influx of investor-appointed board members has resulted in larger, potentially more cumbersome boards. While investors argue that such representation is crucial for providing oversight and strategic guidance, the increasing board size can dilute the founders' influence and lead to operational inefficiencies.
Implications for the Ecosystem
The increasing investor oversight and control can have profound implications for founder autonomy. The essence of entrepreneurship lies in the ability to take calculated risks and innovate freely. However, the encroaching investor control, manifest in consent rights and board representation, could stifle this spirit, potentially leading to a more risk-averse, slower-moving culture that may inhibit innovation.
On the flip side, increased investor oversight can enhance governance and ensure a more disciplined, strategic approach to company growth. Investors bring a wealth of experience and networks that can be invaluable in steering the company towards sustainable growth. The key lies in striking the right balance, where investor expertise is leveraged without unduly constraining the entrepreneurial drive.
The trends highlighted in the Orrick report also signal a shift in negotiation dynamics, with investors wielding more power in dictating terms. Founders may find themselves in a position where they need to concede more ground to secure funding, particularly in a climate where capital is not as freely available. This power shift necessitates a more strategic approach from founders in fundraising discussions, emphasizing the need for preparation, clarity on non-negotiables, and, where possible, diversification of funding sources to reduce dependency on any single investor group.
Venture Debt Post-SVB Crisis
The venture debt landscape has experienced a seismic shift following the collapse of SVB in March 2023. Historically, SVB stood as a cornerstone in the tech and life sciences sectors, providing crucial financial support and banking services to nearly half of the VC-backed companies in these industries as of 2022. The bank's downfall has not only disrupted the venture debt market but also redefined the relationship between startups and debt providers. This essay explores the aftermath of the SVB crisis, the changing venture debt landscape, and the strategic recalibrations required from startups navigating this new terrain.
SVB's collapse was more than a financial incident; it was a watershed moment that shook the very foundations of venture lending.
In the immediate aftermath, startups and investors scrambled to reassess their financial strategies and dependencies. The reliance on SVB, underscored by its preferential lending terms tied to exclusive banking relationships, was suddenly spotlighted as a significant risk. The fallout prompted a swift migration towards non-bank lenders as startups sought to mitigate similar vulnerabilities. However, this transition was short-lived.
As the dust settled, a paradoxical shift occurred. Despite initial inclinations towards non-bank lenders, startups began gravitating back towards traditional banks, lured by the prospect of less expensive loans. This return was facilitated by a stabilization in public equities and a general anticipation of the Federal Reserve's cessation of interest rate hikes, which collectively restored banks' appetite for lending. Yet, the venture debt landscape was irrevocably altered, with SVB's dominance significantly eroded – its market share plummeting from 50% to an estimated 20%, despite the bank's contestation of these figures.
The reverberations of the SVB crisis have been particularly pronounced for seed and early-stage startups. In the wake of the upheaval, lenders recalibrated their risk appetites, moving upmarket and tightening lending criteria. The result has been a contraction in venture debt deal volumes, especially for early-stage companies in sectors like fintech and consumer tech, where valuations had previously skyrocketed. The heightened scrutiny from lenders now necessitates not just a term sheet from heavyweight VCs like Sequoia or Khosla Ventures but a more compelling demonstration of business viability and growth potential.
Navigating the New Venture Debt Landscape
One of the critical lessons from the SVB crisis is the risk of over-reliance on a single financial institution. Startups must diversify their banking and lending relationships to mitigate similar risks in the future. This approach not only provides a safety net in times of financial instability but also empowers startups with more leverage in negotiating loan terms.
Startups seeking venture debt must now undertake more rigorous due diligence and financial planning. This includes a thorough assessment of potential lenders' stability, the terms and conditions of debt offerings, and the strategic alignment of these financial instruments with the company's growth trajectory.
In the current climate, the ability to secure venture debt is increasingly contingent upon a startup's equity backing. Demonstrating strong support from reputable VCs can serve as a crucial leverage point in debt negotiations. Startups must strategically showcase their equity support to enhance their attractiveness to potential debt providers.
🗓️ The VC Conferences You Can’t Miss
There are some events that just have to be on the calendar. Here’s our list, hit us up if you’re going, we’d love to meet!
0100 Conference Europe | 📆 16 - 18 April | 🌍 Amsterdam, Netherlands
TechChill Riga 2024 | 📆 17 - 19 April | Riga, Latvia
SuperVenture | 📆 4 - 6 June | 🌍 Berlin, Germany
Nordic LP Forum & TechBBQ | 📆 September | 🌍 Copenhagen, Denmark
North Star & GITEX Global | 📆 14 - 18 Oct | 🌍 Dubai, UAE
GITEX Europe 2025 | 📆 23 - 25 May 2025 | 🌍 Berlin, Germany