EUVC Newsletter 20.1.24 | Global uncertainty, rebuilding trust & some crypto news
Join us as we digest the week's news in European Tech π°
This week was marked by investment conservatism amidst global economic uncertainties. This shift is marked by a significant 44% drop in European deals involving U.S. VCs in 2023, reflecting a growing focus on domestic markets and existing portfolios. This trend underscores a wider recalibration of risk appetites among investors, influenced by fluctuating market conditions and economic instability across the globe.
Simultaneously, key themes such as the integration of artificial intelligence (AI) and the emphasis on sustainability are shaping investment strategies. The World Economic Forum in Davos, themed "Rebuilding Trust," brought to the forefront issues like global economic fragmentation and the potential slowdown of the global economy. Developments in the cryptocurrency market, particularly the SEC's approval of spot bitcoin ETFs, further underscore the evolving dynamics of the investment landscape.
Highlights
πΌ US VCs Retreat from Europe: US venture capital firm Coatue Management's closure of its London office after just two years is a tell-tale sign of American investors scaling back European ventures. Challenging market conditions and significant losses contribute to this trend, with a 44% drop in US involvement in European deals in 2023.
π Spot Bitcoin ETFs Approved: The SEC's approval of 11 spot bitcoin ETFs signals a potential game-changer for the cryptocurrency industry, with major players like BlackRock and Grayscale in the mix. These ETFs, expected to legitimize and broaden crypto adoption, vary in fees from 0.2% to 1.5%.
π Tech Giants' Layoffs: Large tech firms, including Google and Amazon, are cutting down their workforce, possibly influenced by AI advancements. This trend raises questions about the future of employment in the tech sector.
ποΈ Private Equity's 'Whitelist' Woes: Hedge funds challenge private equity firms' 'whitelist' systems, which restrict lending and buying debt of buyout-backed companies. Rising interest rates and financial liquidity concerns intensify these tensions.
π Lagarde's Views on Trump and Economy: ECB President Christine Lagarde considers Trump's potential re-election a threat to Europe, citing policy differences. She also focuses on ECB's ongoing battle against inflation.
π€ AI's Corporate Integration: With AI's growing influence in corporate sectors, companies like Google invest heavily in AI for enhancing business productivity and competitiveness, potentially leading to job displacements.
πΉοΈ Virtual Reality's Popularity Surge: The holiday season saw a spike in VR headset sales and game downloads, with Meta Quest leading the charge. Apple's upcoming Vision Pro VR product is expected to further shake up the market.
π₯ Healthcare PE's Caution: The healthcare sector sees a cautious approach from private equity firms amid high-interest rates and shifting investment trends, marking a drop in healthcare-related PE deals.
πΏ Climate & Health Innovations: Startups in Virtual Power Plants, decarbonized logistics, and AI applications in health tech are gaining traction, promising significant industry disruptions.
π Investment Banks' Struggles: Goldman Sachs and Morgan Stanley report four-year lows in profits, impacted by downturns in investment banking and bond trading sectors.
π Cybersecurity in Finance: The financial sector's increasing vulnerability to cyberattacks, demonstrated by recent breaches, underscores the urgent need for enhanced cybersecurity measures and strategies.
π± Agtech's Mixed Performance: The Agtech sector shows a varied performance, with some companies like Elanco Animal Health experiencing growth, while others face declines due to macroeconomic factors.
π² Foodtech's Varied Growth: The foodtech industry sees diverse performance across segments like kitchen tech and meal kits, with alternative proteins experiencing a decline in EBITDA growth.
π Healthcare's AI Revolution: The healthcare sector is increasingly leveraging AI, with the J.P. Morgan Healthcare Conference highlighting AI's potential in areas like drug development and glucose monitoring.
π Transport Tech at CES 2024: CES 2024 showcases advancements in electric vehicles, AI integration in transport, and emerging hydrogen power solutions, indicating a rapidly evolving transportation sector.
π European Asset Managers' Warning: European asset managers urge alignment with the US's T+1 settlement cycle to avoid risks in capital markets, emphasizing the need for regulatory cohesion.
π Fixed Income ETFs' Record Inflows: Investors pour record amounts into fixed income ETFs, signaling a shift in investment preferences amid changing economic conditions.
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Deep Dive
Global Economic Uncertainties
The current state of the European venture capital market is deeply intertwined with global economic trends and the evolving attitudes of investors, both domestic and international. The retreat of U.S.-based venture capital firms like Coatue Management from Europe, as seen in their closure of the London office, signifies a broader trend of American investors reevaluating their European commitments. This pullback is reflective of a cautious approach that is becoming prevalent in the VC sector, influenced by broader market conditions and significant paper losses experienced by firms in recent times. The decline in European deals involving U.S. VCs, which plummeted by 44% in 2023, is a stark indicator of this changing tide.
This trend of retraction and conservatism is not solely confined to the European market. The U.S. venture capital scene is also witnessing a slowdown, with firms becoming more selective and focusing on domestic markets and existing portfolios. These developments underscore a global venture capital environment that is cautious, mirroring the general economic uncertainty and the recalibration of risk appetites among investors.
Rebuilding Trust
The World Economic Forum in Davos in 2024, themed "Rebuilding Trust," highlights critical global challenges impacting the venture capital landscape. Chief among these are the weakening global economy and increasing geo-economic fragmentation. Over half of surveyed chief economists anticipate a global slowdown, influenced by factors like tight financial conditions and geopolitical tensions. The emergence of generative artificial intelligence (AI) as a dominant force presents both opportunities and potential risks, especially in terms of its impact on employment and the widening economic divide. Climate change and green financing also emerge as central themes, driving a shift in investment priorities towards sustainability and renewable energy. The presence of influential figures like Elon Musk and Mark Zuckerberg at Davos indicates the increasing role of technology and digital innovation in shaping the future of global finance and venture capital.
Market Dynamics
The SECβs approval of spot bitcoin ETFs and the subsequent market reaction indicate a growing interest and legitimisation of cryptocurrencies. However, this development also brings to light the volatility and speculative nature of these digital assets. The significant trading volumes and the involvement of major financial institutions in these ETFs underscore a shift towards more mainstream acceptance of cryptocurrencies. Yet, the caution expressed by banks like JPMorgan and UBS reflects the ongoing debate about the stability and future of these digital assets.
Artificial Intelligence (AI) has emerged as a significant driver of corporate strategy and investment. The increasing integration of AI in various sectors, from healthcare to financial services, signifies its transformative potential. However, this also brings challenges, including the potential impact on employment and the widening gap between high- and low-income economies. The involvement of major tech companies in AI and its application in healthcare and other areas is reshaping investment priorities and strategies in the VC landscape.
Healthcare, particularly biopharmaceuticals and health tech, remains a key area of interest for private equity and venture capital. However, the cautious approach in 2023, with a significant decline in healthcare-related PE deal value, reflects the impact of high-interest rates and shifting investment trends. This cautiousness, however, is balanced by significant opportunities, as seen in the acquisition of Syneos Health and the focus on emerging areas like pharmatech.
The discussions around climate change, sustainable investing, and the transition to renewable energy sources are increasingly influencing investment decisions. The emphasis on sustainability is not just a moral or environmental concern but also a potential driver of economic growth and innovation. Investment in green technologies, decarbonized logistics, and Virtual Power Plant technology are examples of how sustainability is becoming intertwined with economic progress.
Links & Resources
Sifted: Overview of seed funding deals in December 2022, highlighting investment trends in various sectors and notable seed rounds.
US News: Insights into the rise in US bankruptcy filings in 2023 and predictions for 2024.
Investing.com: Article discussing SpaceX's potential IPO plans and its market valuation.
Reuters: Analysis of the U.S. labor market and its impact on economic trends.
Not Boring: A newsletter covering various topics, including tech investments and market predictions.
The Economist: Discussion on geopolitical events and their implications for global trade and resource distribution.
PitchBook: A report on the state of the venture capital market in 2023 and its global impact.
The Information: Insights into the impact of AI on the 2024 U.S. election and other related tech trends.
BBC: A report on Microsoft and PNNL's discovery of a new substance that could lower lithium usage in batteries.
TechCrunch: News about Duolingo reducing its contractor workforce due to increased reliance on AI.
MSPowerUser: Article on the European Commission's investigation into Microsoft's investment in OpenAI.
PitchBook - US PE Breakdown: A comprehensive breakdown of the US Private Equity market trends and predictions.
PitchBook - Continuation Funds: Analysis of the rising use of continuation funds in the VC market for liquidity solutions.
Financial Times: Insights into the fragility of government bond and funding markets and the related reforms.