Vintage Investment Partners' Tzlil Kovetz on a deep dive about the state of VC market in 2024
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Vintage Investment Partners' Tzlil Kovetz on a deep dive about the state of VC market in 2024
An insightful discussion on the evolving landscape of European VC, emerging trends and opportunities identified in tech investments. Don't miss Tzlil's show notes below. ⏬
Tzlil offers a unique perspective evaluating trends in both the European and U.S. venture markets. Her insights are sure to be valuable for anyone interested in the current state and future of VC.
Watch it here or add it to your episodes on Apple or Spotify 🎧 chapters for easy navigation available on the Spotify/Apple episode.
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Vintage Perspective
As investors in dozens of VC funds and companies across multiple geos and stages, we have a very wide view of the ecosystem
We’re constantly monitoring the markets, as well as over 5,000 companies we’re indirectly exposed to, and more than 20,000 companies in our wider network
We’ve started in Israel more than 20 years ago, but today 80% of our capital is invested in the U.S. and Europe
Perspective on Europe within the global venture market
We’ve been bullish on Europe for more than a decade, investing here for the past 15 years, but the fundamentals today are much better than they were back then, and we are doubling down our attention on it
There are very strong fundamentals in Europe like superb education systems, markets with sector expertise, presence of multinational tech companies, etc.
As evidence, we see some of our best performing funds are European. We recently did a study on our internal data that showed that while the median and average performance of VC funds remained similar across Europe and the U.S., over time as Europe matured, the top quartile European funds started to outperform U.S. funds.
4 trends identified in European venture
There are enough scale-ups across Europe to create a flywheel - many operators that have already witnessed hyper growth are starting their own companies
There are many more interesting venture hubs than there used to be. It’s not just London and Berlin, Paris have became a super hub, and many others are generating massive activity like the Nordics, Netherlands, Spain, even Eastern Europe.
In 2021 many U.S.-firms entered the ecosystem. While some have left since then, some of the more sophisticated venture investors have planted roots in Europe and push the ecosystem forward
While many of the European winners started as local winners in specific countries, we see more and more companies with global aspirations from day one
Deep dive on The State of Venture Market 2024
From 2020 we’ve been through a real rollercoaster in the VC markets
From mid 2020 to mid 2022 we saw an abundance of capital flowing into the market, which drove up multiples and drove companies to grow at all cost
As interest rates started to rise, capital became scarcer and many VC investors pulled out of the party, we saw multiples for software companies declining, and efficiency was prioritized over growth.
In the past year we’re seeing stabilization in the markets
The U.S. and Europe experienced a 30-40% drop between 2022 and 2023, while Israel saw a steeper 55% YoY decline, which is inversely correlated to the growth leading up to 2021
Many of the growth in capital raised came from ‘tourist money’, and the entrance of significant growth capital across all stages
In all three regions capital raised during 1H 2024 exceeded that of 1H 2023
A lot of similarity between the 2021 bubble and the Dot-Com bubble in terms of VC investment patterns, investments in all regions surged in 2020-2021, and then greatly decelerated in 2022 and 2023
If past downturns are any indication, we have reached the bottom in 2023
We would have expected a stabilization, but all regions are already showing signs of a positive outlook for 2024
We attribute this to the AI boom. We see two completely separate motions in the venture market today: AI deals are being done with 2021 mentality, while the rest of the venture market did reach some sort of stabilization
When the markets went down, late-stage adjusted first, followed by growth and early stage
Seed was the most resilient stage, and the latest to adjust. While cross-over funds pulled out of early stage, A round funds didn’t really pull out of seed. It was easier to write smaller checks and start fresh, than to find seed companies that were reasonably priced and well managed to lead an A round in.
The result is that we see the ratio of Early-Stage (Series A & B) over Pre-Seed and Seed stabilizing, but still not back to pre pandemic figures
We see this as an opportunity - we expect to see great deals in A and B rounds in the near future
Europe saw a dramatic fall between 2021 and 2022 in both number and value of IPOs
Since 2022, the IPO window remains almost completely shut, with no signs of reopening seen during 1H 2024. U.S., in contrast, already seeing some (limited) activity with the IPOs of Rubrik, Reddit, Astera Labs, Klayiyo, Instacart, etc.
In Europe we can also see the decline of M&As in 2023 was steeper, and 1H 2024 is not looking Better
We also feel this trend at Vintage, with the demand for secondaries in companies that were expected to exit rising in the past year
That said, we’ve never seen a more robust IPO pipeline in Europe, with some of the best companies out there still being private. We’re directly and indirectly invested in companies like Klarna, Revolut, Monzo, etc. that have the potential to revive the public markets
In general, if we look at a long-term trend, European VC-backed exits are rising. We see higher growth in IPOs vs. M&A, and also a growth in companies targeting IPOs on the U.S. Exchanges.
I actually started my career supporting the Israeli Monetary Committee with economic research. After that I wanted to be in a more dynamic work environment and found myself in Monitor Deloitte doing strategy consulting.
I know consulting is usually considered the dark side, but I actually loved that work. Meeting new people and figuring out new markets and questions every day. I stayed as a manager for 5 years. During that period I worked a lot with tech companies, both scale ups and multi-nationals, and fell in love with the tech ecosystem, and understanding what drives a tech company to succeed
During my maternity leave, I decided to make a change, and looked for a dynamic environment where I can continue to meet great people and learn new things every day, while focusing on the most disruptive technologies and business models - VC was everything I could have hoped for.
Your focus today.
On the investment team we’re all investing across all strategies, both in funds and in companies, both secondaries and directs, and across all geos, but at different times we find ourselves focusing on different deals based on the market conditions
Today, we’re seeing 2 things:
Growth market is starting to revive and we spend much more time looking at growth opportunities. Good companies are finally out again looking for more capital, and prices expectation finally makes more sense.
We see a lot of secondary opportunities right now. With exit markets being closed, many investors, ex-employees, LPs, want to see some liquidation. As we have the patience to wait until the time is right to exit, we can offer a win-win solution for companies and funds.
Our team is also divide by sector, and I’ve been spending more and more time in Fintech. While the general fintech market is down, I personally see a lot of opportunities there.
While some generalist VCs were burned by the crash of unsustainable business models, and are mostly looking to invest today in the ‘safer’ parts of fintech that has a more significant SaaS component (like the CFO stack), I still see fintech specialists VCs investing in interesting lending, payments, and insurance companies. If you invests smartly you can find some very attractive deals in the space.
We see a lot of very interesting companies in the intersection of fintech with other industries like logistics, healthcare, construction. Those present with some massive vertical opportunities for a new era of companies. AI is another big driver for new and massive opportunities.
Europe is even more interesting in that sense, where the finance environment is very different than the U.S., and we see today so many local fintech winners in Europe’s top companies lists. This will create a flywheel, and I believe Europe will become an even stronger fintech powerhouse.
Tips & tricks for emerging VCs fundraising.
Make sure you tell a good story - what’s unique about you, and why will you find, pick and win better deals than others.
Try to identify early on who are the right LPs for you based on your fund’s stage and value proposition - can be strategics, family offices, operators and VCs, FOF or endowments, etc. It will save you a lot of time and efforts.
That said, VC is a long term relationship. Foster relationships with LPs that may be a fit for you in the next 1-2 fund cycles.
Like with companies, there is weight to the source of a deal. Make sure to get quality intros to LPs.
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Vintage Investment Partners' Tzlil Kovetz on a deep dive about the state of VC market in 2024