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A dog dressed as a unicorn. Because unicorns. © PA
Last week, German N26 fintech announced that it had raised an additional $ 170 million in its latest round of financing, bringing its total investment to date to more than $ 680 million, according to Crunchbase, and raising its value to $ 3.5 billion. This is the case for a company that claims that "profitability is not one of our key parameters" and whose annual turnover is estimated at about $ 17.5 million (a price / sales ratio from … 200).
In the coming months, the London-based company Revolut, which has already raised nearly $ 340 million in 12 rounds, hopes to reap another. half a billion dollars, which would give the company a valuation of over $ 5 billion. It is for a company that not only makes no profit, but has also gone through a series of embarrbadments and controversies in recent months, including being forced to admit that it had "wrongly" disabled a system allowing to detect money laundering potential for several months last year and is being investigated for misleading advertising.
And will soon be the time of the exit door for Revolut, four years old? Not really. The CEO, Nikolay Storonsky, said he hoped the company would reach a valuation of between $ 20 and $ 40 billion before being floated on the stock market.
It might not be so difficult. We have just achieved a record quarter in venture capital investments in European technologies, with more than $ 10 billion invested in start-up companies on the continent between March and June, according to Dealroom, and four fundraising of more than $ 500 million, among which was the favorite of Alphaville. Deliveroo and, uh, Alphaville's favorite Greensill.
So everything is fine, right? What should a flourishing European technological ecosystem look like? While the United States still has a lot to do – as well as Asia – but venture capital companies are finally investing the necessary funds in Europe and start-ups are doing the same. What does not love?
Take a look at this chart, prepared by Magister Advisors, a technology-based commercial bank. It shows the number of medium-to-high level fundraisers ($ 25-500 million) for European "high-tech companies" – that is, companies whose core business is based on Internet – since 2013, compared to the number of high-level releases (the chart does not include the last round of N26, nor of course the next Revolut increase):
Funding rounds increased by more than 350% between 2013 and 2018 and, six months later, the number of tours of $ 25 million and more is already 20% higher than last year's, at 207. The total capital raised followed a similar evolution. trajectory: it has increased by more than 300% during the same period, from $ 2.9 billion to more than $ 10.5 billion, and has already almost reached this level in 2019.
But take a look at the darker line of the chart, which shows the outflows of M & A. During the same period, they only increased by 80%. And having been about the same number as the fundraising funds founded in 2013, they have now exceeded their goals: until now, in 2019, there have been only 40 merger and acquisition among European technology companies, less than a fifth of the number of fundraisers.
Victor Basta, founder and managing partner of Magister Investors, told us:
Three, four or five years ago, all of our work was results-based. And then people started to ask us: can you help us do bigger rounds? At first, it was an experience … and now, more than half of our work is fundraising.
The problem with start-ups collecting more and more money in this way and reaching such stratospheric badessments is that they are preparing for a herculean sales trial task. They can save time, but they mortgages themselves.
Here is Basta, again:
People are raising more, and more, because they can. All good. But raising bigger and bigger rounds is a treadmill. You have to go out a little bit of time. You start raising this type of tour and all of a sudden these companies have to be sold for billions. We do not want high quality European companies that are forced to aim high and risk igniting … It is not enough to go bankrupt for everyone.
Basta says that Europe has a particular problem here, because of the level of experience of most of its founders. While in the San Francisco Bay Area – an existing technology ecosystem for about 50 years – entrepreneurs are surrounded by a tremendous amount of expertise that they can tap into, the European founders of technology are actually the first generation and therefore do not have access to the type of guidance that might discourage this type of ceaseless fund-raising and intensive use of money.
Another problem with this trend is that early investors have to wait much longer than expected to access their cash. This means that they are sometimes forced to sell their shares in the secondary market – see the recent sale of shares in TransferWise, eight years old, for example – much less attractive proposition than selling to a buyer strategic in the context of a merger and acquisition transaction. would be an expectation of a premium. And with such a change in the dynamics of fundraising A and B, investors' decision-making about where their capital will go is also likely to change.
According to Basta:
Among investors in categories A and B, the level of frustration increases. They entered these businesses five, six or seven years ago and expected them to get a good exit. What happens is that people are on the treadmill because they can continue to increase, but the investors of the previous round – how are they doing? And they were the ones who financed these companies – they really helped them to reach that point …
This has implications for how they collect future funds, how they think about how they enter and leave, about the future of the venture capital industry in Europe. If it is a feeder for subsequent cycles rather than an accelerator for companies to be worth real money, which was the starting point, it's a different company.
Of course, it is natural for some of these companies to spend huge sums of money without worrying too much about profits, in order to expand their business models in a sustainable way (and this is in fact the justification for the huge investments in companies like N26 and Revolut), but many of these business models have not been tested.
It remains to be seen whether Europe's billions of dollars price tags can translate into real money for the company's early investors and founders. But being "worth" a billion dollars and going out for a billion dollars are two different things. A quick glance at Square's IPO can tell you that.
Related links:
Revolut growth pains growl – FT Alphaville
N26 reaches its majority – FT Alphaville
Technology sector is over – FT Alphaville
Private Equity – The best kept secret of technology – FT Alphaville
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