EUVC Newsletter 24.03.24 | The great debt-venture, beyond the old guard and fortress Europe
Join us as we digest the week's news in European VC 📰
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European Women in VC is launching The European VC Impact Survey for VC partners and LPs, in partnership with Founders Forum Group, to highlight the broad and transformative impact of venture capital on European tech, business, and society.
The fundamental goal is to catalyze funding allocation from institutional investors into venture, growth capital and more.
The results will be used to inform the European VC Impact Report, published in June, launched at SuperVenture by Informa and presented at major tech conferences, including, Founders Forum Group Global and London Tech Week, and distributed amongst our high-profile community of top founders, investors, corporate and government leaders.
Have your say and help us boost funding for European VC.
Highlights
🍽️ Foodtech Famine: A consecutive annual drop in VC investment in foodtech reflects market recalibration but leaves room for innovation in plant-based proteins and e-commerce.
🌍 MENA Momentum: The Middle East and Northern Africa's 21.2% increase in PE deal activity to $15.7B underlines a shifting focus from traditional Western markets.
🇪🇺 EU Defense Drive: European Union countries' push for EIB defense funding amid Russian aggression points to potential new VC interest in the defense sector.
🌀 Offshore Energy Surge: VCs are channeling significant investments into offshore wind, recognizing its potential not just as a mature renewable resource but as a beacon for Europe's energy independence and sustainability efforts.
💧 Hydrating Innovation: With VC funding surpassing $1.7B, there's a clear tide towards innovative water management technologies, emphasizing solutions for treatment and climate resilience in the face of global water challenges.
⚡ Navigating Digital Seas: The maritime sector's digital transformation is in full sail, with over $4B invested since 2016 in digital solutions for shipping and ports, highlighting a strong VC commitment to efficiency and sustainability in maritime logistics.
🏥 Value-Based Healthcare Venture: The shift towards value-based care in the US healthcare system is influencing European VC investment strategies in healthtech.
🏦 Venture Debt Revival: Post-SVB, the venture debt market's recovery, albeit with more competitive terms, suggests a cautious optimism among European VCs.
🌱 Sustainable Startup Ecosystems: The rise of startup hubs in non-capital regions like Lille's Euratechnologies reflects a growing VC interest in geographically diverse innovation centers.
🌐 AI Scrutiny: The SEC's crackdown on misleading AI claims by investment advisers highlights the growing scrutiny in the use of AI within financial services.
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Martin Mignot on LinkedIn
Partner at Index Ventures
🔍 My short-term prediction: we’ll see activity normalize at a lower level than 2021 but significantly higher than 2022 and 2023.
The past couple of months represented a catch-up from the 2022 and 2023 markets that were well below historical trends. Great companies didn’t want to fail to raise or raise in bad conditions, so they held off going to market until late last year. With companies trading better in the public market and a renewed sense of optimism, many saw a renewed opportunity, leading to the flurry of activity we’re seeing now.
➡️ My long-term view: the VC industry will continue to grow steadily. Tech waves build on top of and compound each other, creating bigger opportunities and faster paths to value creation for startups and their investors. Right now for example we’re seeing a lot of promising companies getting started in AI applications, consumer healthcare or cybersecurity, all built on the foundations of the previous cloud and mobile waves.
Borrowers are Having the Last Laugh
The venture debt market has experienced a notable recovery a year following the collapse of Silicon Valley Bank (SVB), a significant event that shook the venture banking sector. However, the resurgence has not been uniform across all participants, with borrowers benefiting disproportionately from the current market conditions.
Increased competition among lenders in the venture debt market has led to more favorable terms for borrowers. Brad Ellis of Stifel highlighted the surprising competitiveness given the current state of the equity market, noting a trend towards larger debt packages with minimal financial covenants for preferred borrowers. This competition has also resulted in tighter credit spreads, indicating lenders' willingness to accept lower returns in exchange for winning high-quality deals.
Stifel, aiming to expand its venture lending operations post-SVB, has significantly grown its venture banking team and committed substantial funds to startup borrowers and VC funds. This aggressive expansion reflects a broader trend of financial institutions looking to fill the void left by SVB and capitalize on the recovering venture debt market.
The current market is increasingly borrower-friendly, with companies receiving multiple term sheets.
The recent surge in new originations suggests a warming market, with early signs of a "thaw" in venture debt activities. This is a positive shift from the tighter credit conditions and higher interest rates that previously deterred borrowing.
Despite these positive developments, the venture debt market has not fully rebounded to its pre-collapse levels. PitchBook data indicates a decline in the total value and count of US venture debt deals compared to the peak in 2021, with early-stage companies being the most affected. This suggests that while the market is recovering, it still faces challenges, particularly for companies at earlier development stages.
Companies that have recently secured equity funding and are demonstrating strong performance are likely to receive more favorable debt terms due to the competitive landscape. Conversely, companies with outdated equity rounds and limited growth face a more challenging environment, with lenders demanding more structured terms or showing reluctance to engage.
The current market dynamics particularly favor companies operating in high-growth sectors like artificial intelligence (AI), which continue to attract significant investor interest. These companies are likely to find it easier to secure venture debt, benefiting from the competitive push among lenders to capture high-potential deals.
Generational Wealth Manager
The impending transfer of approximately $100 trillion in wealth over the next 25 years represents a pivotal moment for family offices and the venture capital (VC) sector. This transition is poised to significantly reshape the landscape of family office investments, introducing a substantial influx of capital into both traditional and emerging investment arenas. The shift in wealth from the older generations to millennials and Generation Z is expected to bring about a profound change in the investment strategies and preferences of family offices, which have historically maintained a conservative approach to portfolio diversification.
Surge in Family Office Participation in Venture Capital
Over the past decade, there has been a notable increase in the involvement of family offices in the VC space. This trend is illustrated by the growth from 6% of global VC investment in 2012 to 14.4% in 2022, signaling a broader acceptance of venture capital as a viable component of a diversified investment portfolio. This rise reflects a strategic move by family offices to explore higher-risk, higher-reward opportunities beyond traditional investment domains. The anticipated wealth transfer is expected to further accelerate this trend, as the incoming generations exhibit a greater propensity for engaging in venture capital endeavors, driven by a desire to tap into the potential of burgeoning sectors like artificial intelligence and climate technology.
The Role of Millennials and Generation Z
The generational shift in control of family office wealth is set to introduce a new investment ethos, characterized by an increased willingness to embrace risk and innovation. Millennials and Generation Z, having been nurtured in an era of rapid technological advancement and digital fluency, bring a fresh perspective to investment strategy formulation. Their comfort with technology, coupled with a more global outlook, predisposes them to seek out investment opportunities that promise not only financial returns but also societal impact, particularly in areas such as sustainable energy and next-generation tech solutions.
Increased Financial Acumen and Autonomy
The heirs to family office fortunes often come equipped with substantial financial expertise, garnered through experiences in investment banking, consulting, or tech entrepreneurship. This background equips them with the tools necessary to undertake more hands-on investment management practices, reducing the reliance on external advisors for deal sourcing and due diligence. Moreover, their exposure to a variety of industries enables a more eclectic investment approach, not limited by the traditional sectors associated with their family's wealth. This self-reliance and breadth of interest are likely to redefine the scope and nature of family office investments in the VC landscape.
EU's Bold Bid to Bankroll the Barricades
The recent initiative led by Germany and France, in collaboration with 12 other European Union (EU) countries, to request an increase in defense funding from the European Investment Bank (EIB) is a significant development in the EU's strategic response to heightened geopolitical tensions, particularly due to Russian aggression. This collective move, articulated through a letter addressed to key EU leaders and the EIB President, underscores the urgency perceived by these nations in bolstering the EU's defense capabilities. The timing of this initiative, against the backdrop of Ukraine's ongoing challenges in securing sufficient military aid and ammunition, further accentuates the broader security concerns within the EU.
Expanding EIB's Defense Financing Scope
The focal point of the request is the proposed expansion of the EIB's investment mandate to include defense projects beyond the current limitation to dual-use (civilian and military) initiatives. This suggests a strategic pivot towards a more inclusive definition of projects eligible for EIB funding, which could have far-reaching implications for the EU's defense industrial base. The call to re-evaluate the criteria for dual-use projects and excluded activities indicates a potential broadening of the scope for defense-related investments, moving beyond the traditionally narrow confines of EIB financing.
Implications for Private Sector Investments
A significant aspect of this initiative is the potential to unlock further private sector investments in the defense sector. By setting a precedent for the EIB to engage more directly in defense funding, there could be a normalization effect, encouraging private banks and financial markets to consider defense projects as viable investment opportunities. This shift could lead to increased liquidity in the defense sector, facilitating greater innovation, and development within the EU's defense industrial ecosystem.
Nurturing European Sovereignty
Expanding the EIB's mandate to include defense projects necessitates a careful ethical balance. The bank must navigate the fine line between contributing to the EU's security and ensuring that its investments do not inadvertently escalate military tensions or contribute to global arms races. This involves a thorough ethical assessment of potential projects, considering their intended and possible unintended uses, and the broader implications for peace and security. The challenge lies in developing a framework that allows for the advancement of technology and enhancement of security while adhering to ethical principles that discourage the proliferation of offensive military capabilities.
The expansion of the EIB's defense financing role could be a pivotal moment for Europe in terms of retaining technological sovereignty and preventing the drain of cutting-edge innovations to other regions.
By fostering an environment that supports the development and commercialization of dual-use and defense technologies within Europe, the EU can enhance its strategic autonomy. This involves not only funding but also creating a supportive ecosystem that includes regulatory frameworks, market access, and synergies between civilian research and military applications.
For dual-use technologies, the exit and go-to-market strategies must be carefully crafted to align with European values and security interests. This entails a strategic approach to licensing, partnerships, and global market expansion that considers the potential military applications of the technology. The goal should be to promote the use of these technologies in a manner that enhances global security and stability, rather than contributing to militarization. European companies, supported by EIB funding, should prioritise routes that reinforce EU strategic interests, including strengthening ties with allied countries and regions that share similar ethical standards and security objectives.
🗓️ 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