2022: A year of turbulent waters for the VC market
2022 is so far representing a tedious year for the VC world. VCs have slowed down first investments in early-stage, pre-revenue and capital-intensive startups and reserved more capital for their existing portfolio companies. At the same time, investors are asking those startups to freeze the hiring, scale back on the expansion plans, slow their growth, pause new projects. Essentially, they ask them to try to make the most with what they have today, and if they really need more capital, they face lower valuations. An example for all is the Swedish company Klarna, Europe’s most valuable startup in June 2021, when it was valued at $46 billion. In February 2022 Klarna was exploring a valuation of about $50 billion to $60 billion and is now looking to raise money at a lower valuation of around $30 billion, as reported by Bloomberg.
Following these suggestions could mitigate the difficult situation we are living in. The geopolitical conflicts, mainly the Ukraine war, increases in fuel and food prices, a pandemic that is now well into its third year, are hitting so hard that investors fear ungovernable inflation, increasing interest rates, and a recession at the same time. According to a presentation publicised by Sequoia Capital, one of the legendary venture firms famous for investments in Google, Apple, Airbnb, Whatsapp, Youtube, Dropbox (just to name a few), the difference from previous recessions is that this time there is no “quick-fix policy solution.” The normal tools that governments use to tackle these situations, such as pouring more money into the economy or buying bonds, have been exhausted.
VC fundraising record in 2022
On the other side, while VCs are slowing down on investments to see how the geopolitical climate will evolve, they went back to the market to raise more money. As a consequence, VCs never had as much money as now. An analysis carried out by Pitchbook shows that so far this year, as of July 2022, VC funds in the US have closed on $137.5 billion. This amount almost reached the total closed in 2021, $142.1 billion, which already represented a record.
According to Pitchbook’s Q2 European Venture Report, in the first half of 2022 Europe raised €12.3 billion. This follows the 2021 trend, considering that the total amount raised during the past year was €24.8 billion. However, as the year goes by, fundraising is likely to become more difficult due to the increasing inflation and the ongoing conflicts that do not give hope of a ceasefire. So towards the end of the year there might be a decrease of total European funds raised compared to 2021.
The EIC Accelerator: the largest European deep-tech fund?
To sum up, currently, VCs have money but are not investing, waiting for calm seas after the storm. However, as the charts show, it’s no secret that Europe clearly lags behind in terms of availability and size of funds compared to the US, and China. For this exact reason, the European Commission established the European Innovation Council (EIC), to support the commercialization of high-risk and game-changing technologies where the private market would have not taken such a risk. The EIC Accelerator proposes a funding scheme of a €2.5 million grant, topped up by a potential equity investment of up to €15 million. The EIC Fund was established with the scope of delivering equity investments.
In theory, the EIC Fund has the potential to become the largest deep tech investor in Europe, and it was, at least on paper. The 140 Term Sheets signed worth over €600 million only in the Pilot phase in 2020, as recently stated by the EIC Board, were “successfully attracting private investors to co-invest in early stage deep-tech startups”. However, the reality is quite different. There are no references on the exact number that was actually invested from the committed money, but from our estimations it is not even half. Moreover, since the beginning of Horizon Europe in 2021, out of the 205 Grant First and Blended Finance winners awarded in 3 cutoffs, only one EIC Accelerator winner has received the investment.
Hiccups started when the European Commission proposed to move the fund from direct management of the EIC, structure that was also running during the Pilot phase under Horizon 2020, to indirect management under the European Investment Bank in order to reduce risks and potential liabilities that would come from a wrong investment or wrong valuation of a company. During the transitional period from direct management (of the EIC) to indirect management (of the EIB), as a temporary measure, the Commission decided to delegate the decision on each investment to the College of Commissioners, the “highest level of bureaucracy at the Commission”. Since the beginning of Horizon Europe, this decision slowed down the entire process, causing the European Parliament to directly intervene. MEPs underlined two main problems: 1) the bureaucrocatic slowness of the decision-making during the transitional period; 2) the indirect management of the EIC Fund itself as a strategy to delegate the decisions to a third-party.
MEPs urged the Commission to, first of all, fix the current problem of the delays, otherwise they threatened to completely withdraw the 2023 budget dedicated to the EIC Accelerator. Such a drastic “pause” in the programme would only undermine even more the current situation, hitting directly both previous Accelerator winners that are yet to receive the funding and future winners that do not have many alternatives in these uncertain times for investments. However, the main issue would still remain: in order to unlock the EIC Fund investment (assuming everything would work correctly on their side), companies still need to find a co-investor to lead the round. It’s true that half a loaf is better than none, but leading the investment would represent the real meaning of bridging the famous funding gap. Therefore, the main question is: can the EIC Fund represent a real game-changer? For this reason, the European Parliament on the 1st of September suggested to establish an “independent union body” by 2025 as the “main entity responsible for the implementation of the EIC”, perhaps also acting as sole or lead investor.
Alien Investor Days
While we hope for a quick turnaround at a political and structural level, at Alien Innovation Consulting we are doing what is in our power to support Blended Finance and Grant first winners by directly putting them in contact with investors that fit their investment needs. On the 8th of September, we are hosting our first Alien Investor Day that will see 12 EIC Accelerator winners - with the potential of shaping the future of the European and worldwide healthcare sector - pitch in front of specialist investors. Future events will be dedicated to other sectors, as we try to tickle the interest of investors from Europe, UK and US.
While the future of the programme is still uncertain, it is very clear that the potential impact of the EIC Accelerator in supporting European deep-tech startups is huge. Let’s hope it will not be wasted by the blame game of the EU institutions. The quality of the companies being awarded by such a competitive funding is in general significantly higher than the average assessed by VCs in the EU. This instrument has proven to have a real traction with disruptive startups and ambitious entrepreneurs. We experience it every day and this make us convincingly support the continuity of the programme.