We’re seeing greater inflows of capital coming from non-traditional investors and a more diverse range of capital sources. At the late stage, investors are willing to pay a premium to participate in pre-exit rounds which are boosting valuations.
Beyond traditional equity capital, over $11bn of venture debt has been raised across Europe in the year to date; almost $4.5bn of that has been raised by innovation businesses in the UK alone, as European businesses embrace a hybrid approach to financing growth. Also, entrepreneurs who are on their second or third venture are more comfortable with using venture debt to reduce the cost of capital and ownership dilution, while the number of providers of debt has grown substantially. US investment entering the UK is also a factor as venture debt is used in nine out of ten rounds in the US. As US participation grows, levels in Europe will change.
Thanks to the rapid tech acceleration catalysed by Covid-19 there’s never been a better time to build and scale a technology company. Whilst the supply of companies has grown exponentially as a result, the supply of capital, particularly into new and emerging managers hasn’t grown anything like so quickly. There’s enormous headroom for expansion; for example, there are still fewer than 50 European pre-seed funds and far fewer dedicated fund of funds or endowments investing in European Venture. I’m hopeful that in 2022 this will catch up and we will see many more new emerging and diverse funds with differentiated strategies successfully raise.
Many of this year’s European listings were priced and traded at a discount to US peers with significant dispersion in public performance. While clearly some of this was idiosyncratic, in the main it was also a reflection of the currently more limited appetite and analyst coverage of European public markets for high growth technology listings. Nonetheless, the latest volley of IPOs also attracted some of the highest interest yet from international investors.
As with any dislocation, this capital demand and supply gap is a huge opportunity for the right investor base. This should increasingly include sophisticated private investors adding crossover vehicles to go full stack given their informational advantage on the public pipeline, as we have already seen, as well as global public technology investors expanding capital allocation in Europe.