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European VC Valuations Report

Author - Nalin Patel Analyst, EMEA Private Capital

Presenting the European VC Valuations report by Pitchbook

That VCs have been pumping money into European startups is no secret.

But what are the effect of Covid-19 - although it will drastically reduce the number of exits valuations remained resilient amid the emergence of COVID-19


In Q1 2020, pre-money valuations across the financing stages remained resilient amid the emergence of COVID-19. However, most VC deals were conducted prior to disruption, and valuations are expected to cool or fall as the year progresses. Valuations tied to new angel & seed and early-stage rounds could fall as managers shift their focus inwards towards existing portfolio companies.

Rapid late-stage valuation growth is expected to taper during the recessionary environment. Nontraditional investment is likely to decrease, adding to downward pressure on VC deal sizes and valuations. Valuations associated with rounds involving nontraditional investor participation will likely fall in the near term, in line with an overall depression in valuations across the board. Nontraditional investors may focus on their primary markets instead of VC during the looming downturn. Aggregate unicorn value growth has been strong, but this may slow. Valuations of high-profile loss-making unicorns could come under scrutiny as avoiding funding gaps and resource management become imperative.

Unicorn valuations are likely to flatten or fall as growth becomes harder to capture in the current environment. Exit valuations continued to fall in Q1 2020, and COVID-19 will drastically reduce the number of exits. Mature startups will seek out follow-on and extension rounds to stretch runways rather than an exit. Exit opportunities will be further hindered by volatility in public equities and strategic acquirers facing financial problem

Angel & seed

Source: PitchBook | Geography: Europe *As of March 31, 2020

Quartile distribution of angel & seed pre-money valuations (€M) The median angel & seed pre-money valuation reached €4.4 million in Q1 2020 to begin the new decade, continuing the impressive momentum from the last five years. The top- and bottom-quartile valuations also recorded increases in Q1, as the effects of the pandemic have not yet cropped up in valuations. However, we believe impacts of the current crisis will emerge over the next two quarters as economic prospects worsen and valuations are recalculated. Angel & seed deal sizes across the lower, middle and upper quartiles all increased in Q1 2020, which follows a five-year trend in the European ecosystem of more capital being used across fewer deals at the stage. Deal count in the angel & seed bucket has fallen every year since 2015, and this is expected to continue in 2020. In addition, deal sizes will likely cool as recessions kick in and dampen investment appetite within the VC ecosystem. The angel & seed stage has evolved as larger rounds have been utilised to develop more mature startups. As a result, startups have grown before their initial funding and have garnered bigger angel & seed rounds at higher valuations. The median time from founding until a completed angel & seed round has steadily risen in the last decade, reaching 2.8 years in 2019. The median time to financing could lengthen further in 2020 as growth opportunities slow, leading to fewer earlier angel & seed rounds for startups pursuing capital earlier in their lifecycle. We believe angel & seed deals and subsequent valuations could see significant declines due to lockdowns in Europe. Deals can involve unfamiliar parties and in-person meetings occur to build relationships to understand the business priorities and vision shared between founders and investors. While strict measures are in place in the short term, we also expect looser restrictions and adjustments to long-term working practices until a vaccine is found. Despite the availability of videoconferencing, this will affect investors’ and founders’ ability to conduct new angel & seed deals more than extension or follow-on rounds between participants with an existing rapport.

The abundance of capital in the VC ecosystem has allowed angel & seed valuations to flourish in recent years, often representing similarities with financial expectations at the early stage. Growth has been exceptional as investors and startups have raised record amounts at towering valuations, in fear of missing out on opportunities. However, as dealmaking decreases across the board and investors become more prudent, we believe angel & seed rounds will command lower valuations as startups lose the

ability to represent rapid growth in a recession. Moreover, as risk-off tactics surface, investors will prioritise inward investments for their current portfolio instead of new angel & seed rounds for unproven startups.

Early-stage VC Source:

PitchBook | Geography: Europe *As of March 31, 2020

Quartile distribution of early-stage VC pre-money valuations (€M) Early-stage pre-money valuations in Q1 2020 maintained growth across the bottom, middle and top quartiles after annual peaks in 2019. The gap between top- and bottomquartile valuations has been pacing at around €16.1 million, widening further from the 2019 figure. The median early-stage pre-money valuation reached €8.8 million in Q1 2020, representative of a quarter that was largely business as usual until COVID-19 spread. We expect earlystage valuations for newly negotiated deals during the remainder of the year to carry significantly less heft as growth estimations are cut. Early-stage VC deal sizes across the lower, middle and upper quartiles remained robust in Q1 2020, with the median reaching €2.7 million. Early-stage VC deal sizes across all quartiles recovered after dipping noticeably in the wake of the global financial crisis (GFC) and remaining comparatively flat until 2015. Early-stage deals have overtaken angel & seed deals as the most common type in the past two years, and this continued in Q1 2020. Furthermore, deals at the early stage accounted for 36.4% of overall VC deal value in Q1, as expanding nontraditional sources of capital entering at the stage have inflated deal sizes. Early-stage valuations and deal sizes are tied to startups optimising product-market fit and total addressable market within their first few years of founding. In most instances, sustainable revenue generation may not be possible and investment rounds are used for longterm R&D efforts. However, early-stage VC rounds are also used to develop scale, whereby significant losses may be incurred, but recurring revenue growth drives valuation in the market. As the economic downturn continues, we believe flat and down early-stage VC rounds will occur more frequently, as launching new offerings becomes increasingly difficult while costs and unit economics become vital for survival. Valuations at this stage are likely to spread wider as startups with different business models—operating in different sectors with varied impacts—negotiate demand fluctuations affecting revenues in the near term. Median early-stage VC valuation step-up multiples climbed to 1.6x in Q1 2020 after posting consistent YoY growth between 2017 and 2019. However, we expect this to fall as valuation haircuts become more common amid the downturn. Rounds closed in Q1 were likely negotiated prior to the spread of COVID-19 or pushed through in anticipation of it. New rounds closing over the next few quarters will reflect market sentiment and the effects of reduced revenues, rising unemployment and deflation. Early-stage VC valuations with limited revenue generation history will be heavily scrutinised. Forecasts

for financial performance in the next six to 12 months will be predominantly based on revenues in 2020, rather than the last three years in which growth was easier to extract. Moreover, as investors familiarise themselves with new market conditions and identify potential dislocations between revenues, it will take longer for them to derive valuation estimates and close deals.

Late Stage VC

In Q1 2020, median and top-quartile pre-money valuations ticked upwards, while the bottom quartile dropped in comparison to 2019 figures. The disparity between topand bottom-quartile late-stage valuations reinforces the perception that prized late-stage startups have pulled away from the rest of the field and continue to attract the bulk of capital. The top quartile surged to €107.7 million in Q1 as multiple mature startups, such as multibillion-euro valued unicorns Klarna and Revolut, closed rounds. Latestage VC has inflated valuations by extending funding runways before exits, leading to a maturation of late-stage valuations for companies that would have already exited the ecosystem a few years ago. We believe COVID-19 will drastically change valuations at the late-stage as the year progresses, leading to a bifurcation in the market. Investors will prioritise solid financials over chasing market share for many loss-making late-stage companies. Overall VC deal value reached €8.5 billion in Q1 2020, with late-stage deals contributing 59.2% of the total. Capital infusions at the late stage from a multitude of nontraditional and international investors have been the main driving force behind climbs in overall deal value and sizes in recent years. The late-stage median size was €8.1 million, with both bottom- and top-quartiles up in Q1. Although most deals were closed prior to the pandemic, early indications from the start of the year illustrated new records were expected in 2020. During the downturn, we predict deal sizes will flatten and constrict as growth decelerates for late-stage companies and investors become more prudent. Late-stage VC rounds that occur

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