Fintech’s Wild Ride: From Darling to Downturn

   After basking in the limelight as venture capitalists’ favourite for a couple of exceptional years, the fintech industry has returned to more familiar territory. The sudden plunge in public tech valuations since November 2021 has brought forth a wave of massive down rounds and significant staff reductions. Klarna illustrates perfectly this paradigm shift. In July 2022, the company raised €730m at a valuation of €6.1bn, marking an astonishing 85% drop from its €40bn valuation just one year prior.

   The trend observed in 2022 continued into Q1-23, with a meagre €1.7bn in total venture capital investments— the lowest since Q4-18— and a mere €300m in total exit value, matching the dismal figures seen during the Covid-19 quarter of Q2-20. Forecasts indicate that Q2 and Q3 of 2023 are likely to mirror this subdued performance.

   However, there is a glimmer of hope on the horizon. Public tech stocks have exhibited signs of recovery since January 2023, with the BVP Nasdaq Emerging Cloud Index, a gauge of public tech valuations in the US, rising by an impressive 28% during this period. This resurgence in public markets may also reignite activity in Europe’s private market, including venture capital investments and mergers and acquisitions, potentially gaining momentum from Q4-23 onwards.

   Looking ahead to 2024, a pivotal moment looms for the European tech landscape. Many fintech scale-ups and unicorns are anticipated to reap the rewards of their labour by achieving profitability. This milestone holds the key to facilitating successful exits, particularly through initial public offerings (IPOs). As such, 2024 could usher in a transformative phase for the European tech scene.

Arthur Porré, Founding Partner, June 20th, 2023

Have we reached the bottom?

   When January is up, the year is up. Let’s hope this saying will come true as the BVP Nasdaq Emerging Cloud Index, which tracks public tech valuations in the US, rose 11.9% in January (and even 25.8% if measured until Feb 3rd).

   However, the optimism was short-lived, as SVB, Signature Bank and Credit Suisse collapsed in March. Despite this crisis, the EMCloud Index has surprisingly shown some resilience, still up by 13.9% since the beginning of the year.

   Looking forward, macroeconomic conditions are not promising for 2023. The International Monetary Fund predicts inflation to remain high at 6.6%, compared to 8.8% in 2022, while global GDP growth is expected to remain low at 2.9%, compared to 3.4% in 2022. The situation in Ukraine appears stable, but there is still the possibility of escalating tensions, which could drive up global food prices.

   In the Tech industry, Q1-23 saw a decrease in startup funding, with only $90bn raised, the worst quarter since Q1-20 and a 50% drop from Q1-22. However, there are signs of stabilization, as Q1-23 only saw a 9% decrease compared to the previous quarter.

   French Tech experienced a similar trend, with only €1.8bn raised in Q1-23, a 66% decrease from Q1-22, its all-time high. Despite this, the sector is showing signs of stabilization, with a 13% decrease from the previous quarter. Q1-23 also saw 129 exits, an all-time high, but only €615m in total exit value.

   Expectations are that the next two quarters will remain slow, but the market may pick up at the end of the year if the IMF’s 2024 forecasts hold true, with GDP growth expected to increase to 3.1% and inflation to drop to 4.3%.

Arthur Porré, Founding Partner, Apr. 4th, 2023

After an exceptional 2021, when money was virtually free, startups around the world have experienced a brutal year in 2022.

As inflation started to ramp up and central banks increased rates, the BVP Nasdaq Emerging Cloud Index, which tracks public tech valuations in the US, saw a 50% drop in one year, bringing valuations back to pre-Covid levels. This drop in public tech valuations had a knock-on effect on private tech valuations with €500bn in total funding in 2022 (a 33% decrease from the previous year) and just €73bn in Q4-22 (a 65% decrease from Q4-21).

France, however, has managed to weather the storm somewhat, possibly due to the support of the BPI (the French State Bank), which has invested massively in the French Tech ecosystem for the last ten years. As a result, France saw an all-time high in total funding for 2022, reaching almost €14bn, though the €2bn total raised in Q4-22 suggests that the trend is now much lower. French Tech exits also returned to their long-lasting trend of €5bn in total annual deal value with no real outlier apart from Deezer, which lost 50% of its value from its initial quotation at €1bn six months ago.

As we look towards 2023, the question on everyone’s mind is: what’s next?

Public tech valuations appear to be stabilizing in H2-22, with the BVP Nasdaq Emerging Cloud Index only dropping by 5%. In addition, as inflation and interest rate increases show signs of stabilization at the end of the year – the US consumer price index (CPI) rose only 0.1% from October to November – some VC investors and acquirors may anticipate an upturn in the economy in H2-23.

Arthur Porré, Founding Partner – Jan. 3rd, 2023

How come France always stands out as a country at odds with the rest of the world?

While VC funding has plummeted in 2022 YoY in almost all countries (US: -29%, China: -56%, UK: -19%, Germany: -27%, etc.), France boasts a staggering, almost insolent growth of +30%.

Now, can we jump to the conclusion that the French Tech ecosystem is more resilient than others? Or is it simply a lag of the bear market, which is just about to hit France?

Looking at quarterly metrics, VC funding in France fell from €5bn in Q1-22 to €2.5bn in Q3-22. The number of deals also failing by almost 50% to 150.

Digging deeper, the Top 10 deals were fairly normal, amounting to €1.7bn. Yet oddly enough, the early stages rounds dropped significantly. The usual leading industries such as software and fintech remained stalled, while sustainability-related startups flourished with startups such as Bump, Zeplug and Innovafeed raising considerable sums.

In the end, we still expect 2022 to be an all-time high for French Tech VC funding, reaching €15bn.

Meanwhile, French Tech exits have returned to their pre-2021 norm of around €5-6bn in total exit value. Deezer’s troubled IPO was instrumental for Q3, reaching €1.8bn, the best quarter of the year so far.

We do not expect any real improvement in the total exit value, which is driven by (multi-)billion euro IPOs, as long as public markets remain in bearish mode.

Yet, small-to-mid-cap Tech M&A remained very active in Q3 with 100 deals, thanks in part to the huge wave of consolidation by scale-ups – often backed by PE funds – which are feeding this consolidation strategy with their dry-powder.

Arthur Porré, Founding Partner, Oct. 3rd, 2022

After a record Q1-22, €5bn in total funding for French Tech, and in the midst of what could be one of the worst economical crisis of the decade, most people have been bracing for impact in Q2-22. However, the data was rather (positively) surprising as total funding for Q2-22 reached €3.6bn, which represents the 3rd best quarter in French Tech history.

In total, H1-22 is the highest semester ever with €8.6bn in total funding. So, for now, in France, market positive drivers – mainly the huge amount of dry-powder available – are resisting against the negative ones – bear market in Tech, war in Ukraine, inflation.

The latest French presidential elections will also play a role on the ecosystem, as President Macron only got a simple majority at the French Parliament and might be less able to enact new laws favourable to French Tech as he did in the last 5 years.

In Europe, the trend is rather stable with €30bn in total funding per quarter, stable – slightly down – compared to 2021. Europe seems to be more resilient so far than the US, which saw Q2-22 down to €60b in total funding, compared to €100bn in Q4-21.It is very difficult to predict the future in such an uncertain environment, but it is very likely that the bear market will have a greater impact on venture capital funding in Europe in the coming months, as it has already done in the US in H1-22.

On the M&A front, the impact of the current economic crisis on the French Tech is much more noticeable. Q2-22 total exit value was €1.2bn. Added to a super low Q1- 22 at €800m, H1-22 is one of the worst semester ever in total exit value for French Tech.

Nevertheless, some indicators are reassuring for the future of the ecosystem:

Arthur Porré, Founding Partner, Jul. 6th, 2022

With almost €5bn in total funding Q1-22 sets the pace for a new record in 2022 for the French Tech, which had already reached a record in 2021 at €11bn – already a 2x growth from 2020.Yet, some external factors could throw a spanner in the works.
Obviously, the uncertainty around the war in Ukraine, rate hikes and global inflation hitting its highest level in decades, will influence the French Tech funding in the next months.
In addition, the recent public market correction on Tech stocks has been steep (i.e. -33.3% for the BVP Nasdaq Emerging Cloud Index in the last 6 months compared to +1.3% for the S&P 500 on the same period) and might impact private companies’ valuation when they seek for new capital.
The Presidential elections in France on April 10th and April 24th could also change the game if President Macron, who clearly displayed his support to the French Tech during this last 5 years, was not to be re-elected, as potential alternatives seem less enthusiastic, to say the least, about the technology industry.

On the other hand, VC’s dry-powder has never been so high with $430bn in cumulative overhang globally in 2021, growing 3x since 2014 (according to Pitchbook). The new $20bn growth equity fund raised by US-based Insight Partners represents perfectly this abundance of capital for startups.
Besides, VC returns continue to display the benefits of the robust VC exit market over the last few years. The rolling one year IRR for VC rose to a staggering 65.5% as of Q2 2021 (according to Pitchbook).

In the end, VC money will keep on flowing only for a handful of over-funded startups, making early rounds ever more challenging for most entrepreneurs that don’t fit exactly all the VCs’ criteria.

Arthur Porré, Founding Partner, Apr. 8th, 2022

With €500bn in global VC funding, the industry‘s overall funding has grown twofold vs. 2020.

Europe has also hit a new high-water mark with €100bn in funding (incl. Israel) crossed for the first time ever. This is a staggering 2.5x increase vs. 2020. The UK and Germany are the clear winners of the year with respectively €30bn (2.5x vs. 2020) and €16.5bn (3.2x).

More specifically in France, 2021 is a watershed: for the first time VC funding and exit deals have reached their highest levels ever with €11.1bn (+100% vs. 2020) in VC funding and €10.2bn (+112%) in exits.

What should we expect for 2022?

Even with rate hikes on the horizon and potential economic downturn, more records in VC funding are expected globally. The reason is simple: investors have no alternative but to keep on investing their cash, which is reaching record levels. Otherwise, LPs will pressure to get their money back and seek other alternatives.
VC money will keep on focusing on a handful of over funded companies. Thus, making it more and more challenging for the growing bulk of entrepreneurs to fund their start-ups.

On the exit front, France has proven its capability for >1€bn IPOs, which is a very good lead indicator, but this market still has a huge margin of improvement to match its European peers.

Yet, 2022 might not be the big year for exits in France as unicorns have little trouble finding funding in private markets as Dataiku, Sorare, Qonto as the rest of the herd has proven in 2021.

Arthur Porré, Founding Partner, Jan. 10th, 2022

fter a bumpy but promising 2020, 2021 has been the true blossom of the European Tech ecosystem. With more than €60bn in funding at the end of Q3-21, it already represents almost a 2x growth from the 2020 full year figure (€32bn). On the current trend, Europe should reach €80bn in total funding, i.e. a 2.5x growth. Europe also became a substantial contributor to the worldwide herd of unicorns with 115 members (incl. 39 newcomers in 2021) out of 850 worldwide.

   France has contributed to the European growth and one can clearly see that the French Tech ecosystem has matured with €8.2bn in total funding YTD and 11 new unicorns. On the current trend, France would be around €11bn at the end of the year. Quite impressive! Yet, that’s only a 2x growth vs last year. Less that Europe’s 2.5x. Less than UK’s 2.4x (€28bn expected for 2021).

   And less than the astonishing Germany’s 3x (€15bn expected for 2021). In a broader perspective, we expect worldwide VC funding to rise up to €500bn in 2021, growing 2x from 2020 – just the same trend as France.

   On the exit-side, we’ve seen some encouraging developments with the Believe IPO on Euronext Paris for €2bn and the expected IPO of OVH in Q4-21 at €3.5bn. 2021 should reach €7.6bn in total exit, which would be the best year ever for the French ecosystem.

Arthur Porré, Co-Founder and Managing Partner, Oct. 11th, 2021

If anyone still had lingering doubts about the French Tech’s ongoing success , Q2-21 is convincing proof of this. French startups have raised 2x more in Q2-21 (€3.2bn) than in Q1 21. In the first 6 months of 2021, they raised €4.6bn, which is almost identical to the 2020 full year figure (€5.4bn).

So why such a rush? 3 main reasons to that:

  1. A startup-friendly legislation since 2013 has created a positive framework for Tech investments in France
  2. Funding is no longer an issue for French startups: due to its business enhancing legislation, France has become more attractive for foreign high profile investors
  3. French founders can be much more confident and aggressive in the way they run their businesses knowing funding will not be as challenging an issue as in the past (if that is they meet VC’s very specific investment criteria). Building a €bn startup out of France is no longer a delusional dream

In terms of market exits, significant improvements are appearing with Believe Digital’s IPO, aka the first billion € Tech exit (€1.9bn at opening) on Euronext Paris since Dassault Systèmes (1996) and Worldline (2014) went public.

Arthur Porré, Co-Founder and Managing Partner, Jul. 9th, 2021

Following a strong late 2020, this year’s Q1 has had a flying start. Not a single day goes by, without someone telling me how hectic the Tech ecosystem has become. Professionals in the Tech industry have adjusted effortlessly to the pandemic: 100% digital deals are the new norm. Vaccination campaigns in the Western countries have already been impacting the public at large and for likes of Israel, life seems to have resumed its normality, with shops and restaurants re- opening.

   With already 173 deals and €1.45bn in VC investment in Q1-21, 2021 is on track to be a new record year both in value and in volume for la French Tech. Top 10 deals are still driving a significant part (c. 50%) of the total VC investment. Especially the top 3 deals: Vestiaire Collective (€178m led by Tiger Global), Ecential Robotics (€100m led by BPI France) and Payfit (€90m led by Eurazeo).

   On the other hand, Q1-21 saw a surge of smaller deals, which is an extremely positive sign for the future performance of the French Tech.

   Oddly enough, Tech exits were disappointing (again!) in Q1-21. This in spite of the number of exits reaching the high-water mark of 80 (the record ever for a single quarter in France). The total exit value was only €658m, with no major exits. The largest being Photonis sold to HLD for €370m. Stateside, an ex-French Tech company*, Talend was bought out of Nasdaq by Thoma Bravo for €2bn.

Arthur Porré, Co-Founder and Managing Partner, Apr. 14th, 2021