Uli Grabenwarter, head of venture capital at the European Investment Fund, started off his presentation during a conference in Luxembourg on 3 May with a shocking admission: “75% of all the fund in their book are not top quartile.”
As for the Nasdaq, which lost a third of its value in 2022, the VC market also experienced market correction in the second half of 2022 with “a relatively significant decline in valuations,” said Grabenwarter, not a surprising development as “the technology market is the [closest] benchmark to the venture capital industry.”
It is not fund managers chasing portfolio companies but it is portfolio companies chasing money from VCs
He added that the sector affected the most were in the information communication technology (ICT) and “surprisingly” in the energy and environment segment. Yet, despite a dip in 4Q22, fundraising for VC posted “a record year [in 2022] pretty much across the globe including Europe,” but he added that the situation in the first quarter of 2023 was “very different.”
Is market timing relevant?
The volatility of the market invites speculation on the best timing to invest in VC funds. The main reason why the EIF is outperforming “any other venture capital fund of funds in the European context is because we are [a] policy driven investor,” commented Grabenwarter.
He explained that the EIF invests “almost constant[ly] across the market cycles, which means that in relative terms we get overexposed to vintage years that are tough to fundraise [for companies].” Those are the years when the valuations are the lowest as “it is not the fund managers chasing portfolio companies, but it is portfolio companies chasing money from VCs.”
To support his assertion, Grabenwarter mentioned that the “most attractive” periods in terms of cash returns observed since the technology crash in 2000 have been the 2006 and 2007 vintage years. The vintage years 2020-21-22 are currently displaying disappointing performance as they are “very, very young.” However, he would not be surprised to see those portfolios displaying, “at least” the returns observed in “2007 and 2008.”
He warned, though, that the current crisis, which suggests that assets may be at the “bottom of valuations and [that] we can surf the wave and pick up the value that is created just by market dynamics,” is not a guarantee of success. In his opinion, the geopolitical, the environmental and the demographical elements “are probably exposing us to an unpredictable succession of crisis and any crisis that we’re going through, is potentially not going to be over before the next one starts.”
Rounds of fundraising “over the last two three years have led to record levels of dry powder in the system,” Grabenwarter noted. “If today valuations are coming down, it is not so much because there is already a shortage of capital in the market” but rather because there is a “shortage of courage” to deploy capital in an uncertain environment on valuation in the next six to 24 months.
A paradigm shift for the risk profile of VC?
Grabenwarter invited the investors at the conference to adopt a rather counter-intuitive perspective when looking at VC, which is very often perceived as very risky. Discussing about the volatility of the asset class, he suggested that venture capital-backed companies in information technologies and life science may be “almost a natural hedge” against fundamental challenges facing other industries on production, energy and raw materials.
Indeed, he argued that the business model of the latter group will need to adopt the technologies of the former group. That is a bold statement given that it is not new that the agile VC industry has been around before to cater to the needs and the challenges of the “real” industries of their time.