How ‘tourist’ venture capital investors scarpered and popped the valuation bubble
A flood of so-called ‘tourist’ cash flowing into the venture capital industry has dried up over the past 12 months and helped trigger a plunge in the valuation of UK and European startups, new research has shown.
Startup valuations rocketed to lofty highs in late 2021 as low interest rates and steady markets tempted in a wave of new investors who saw a chance to make bumper returns.
Big name non-traditional investors including corporate venture capital firms, hedge funds and private equity firms, dubbed tourists by some in the industry, edged into the space and helped push up valuations with a wave of new cash.
Firms like storied New York hedge fund Tiger Global were at the forefront but have since suffered mammoth losses as the market soured on loss-making high-growth startups.
Interlopers have now pulled back from the market en masse and sparked a wave of ‘down rounds’ in the UK, where firms are forced to slash their valuation to raise money, research from investment firm Pitchbook, compiled for City A.M., has shown.
Some 24.5 per cent of UK fundraising so far in 2023 was done at a lower valuation than was previously attached to firms, Pitchbook’s data shows, a marked uptick from 17 per cent a year prior.
Valuations across Europe more widely have been dealt similar haircuts, with the proportion of down rounds ticking upwards to 26.2 per cent from 19.8 per cent in the first quarter of 2023, according to Pitchbook research.
Analysts at the firm said the downturn had in part been caused by the flight of non-venture capital investors. Overall cash put into deals by non-traditional investors across Europe sat at €18.7bn (£16.1bn) in the first six months of this year, compared with €27.8bn in the second half of 2022.
“We note nontraditional investor activity synonymous with peak valuations in recent years, has notably retreated from European VC markets,” senior private capital analyst Navina Rajan told City PM
“We’ve therefore seen a notable uptick in the prevalence of downrounds in Europe at 26.2 per cent of deal count in the second quarter of 2023, compared to 19.8 per cent in [the first quarter.”
Rajan said that the UK “is no different” and both regions were well ahead of the US where downrounds accounted for just 15.2 per cent of deals in the first half of the year.
“Going forward, companies are likely to try to quietly manage such cuts to valuations,” Rajan added.
Retreating tide
Valuations of tech firms in the UK have become something of a political drum to bang in recent years as Rishi Sunak and top political figures hailed the amount of so-called unicorns, firms worth more than $1bn, raised in the country. Sunak dubbed the UK ‘Unicorn Kingdom’ in a recent speech to business leaders.
However, analysts at data firm Beauhurst told City PM the pull back from non-VCs was now dragging down the market after the lofty peaks of 2021.
“At the time there was a lot of talk of rising tides lifting all boats, and the same is definitely true when the tide goes out,” Henry Whorwood, head of research and consultancy, told City PM
“It’s worth noting that those new players were also doing a lot of secondaries, so a lot of liquidity has left the market.
“Add in declines in acquisitions and IPOs, re-pricing downwards is a likely side effect. The investors still investing have to price in longer waits for exit, partial or otherwise,” he added.