Venture Capital: European Deep Tech Opportunities PDF

Venture Capital The special opportunity in European deep tech as the orphan child of VC Dr. Hendrik Brandis May 6th 2024 European Tech VC has been one of the best performing asset classes in terms of returns … Horizon pooled return (net) by fund index in %, as of Dec. 20221) MSCI Europe Index...

Venture Capital The special opportunity in European deep tech as the orphan child of VC Dr. Hendrik Brandis May 6th 2024 European Tech VC has been one of the best performing asset classes in terms of returns … Horizon pooled return (net) by fund index in %, as of Dec. 20221) MSCI Europe Index Europe Developed PE Index +28,6 US VC Index +25,4 30,1 Europe Developed VC Index 27,5 25,0 +15,4 22,5 20,0 18,7 17,9 15,2 16,0 4,6 2,1 1,5 10 year 5 year 3 year 1) Fund-indices calculated based on data for 1986-2022; Samples: 428 large and mid-cap EU companies; 2,350 US VC funds; 1,059 European PE and VC funds Sources: Cambridge Associates; State of European Tech 2 … even with significantly more conservative tech valuations in Europe than in USA Revenue multiple valuations for SW companies in Europe and US1) Europe 5,5x US 9,9x Analysis considers 95 Europe-listed and 97 US-listed SW companies between 2006 and 2020, for which there is historical analyst consensus data from Refinitiv Source: Businesswire via Refinitiv 3 but German Startup Eco-System still way behind Total value of startups of gdp in % USA 16,0% UK 13,5% France 6,9% Netherlands 6,0% Germany 4,7% Total Value 168 bn € Source: Erster Fortschrittsbericht zur Umsetzung der Start-Up-Strategie der Bundesregierung 2023 4 4 trends fuel the boom of the European Venture Capital Industry Trends in the European technologic market Acceleration of Increasing scalability Activation of Mature VC markets platform technologies of new businesses non-urban regions push to Europe › A new disruptive › Unicorn status is achieved › Physical hubs become › US funds increased their technology every 2-3 with only 50% of the less important: share of EU venture years, previously every capital invested 5 years Virtualization of work, investments from 22% to 10 years ago teams and networks leads 37% over last 10 years2) › (Generative) AI among the › Period until 1 million to the “activation” of › 75% of globally raised most impactful platform users: non-urban regions funds in VC come from shifts of the last decades › Netflix: 3,5 years › # of EU cities with US and Asia2) › Facebook: 10 months unicorns surged from 8 to › ChatGPT: 5 days 65 over last 10 years1) › Threads: 1 hour Sources: 1) & 2) Dealroom 5 AI will decrease the “cost of experimentation” and allows companies to achieve more with less ILLUSTRATIVE Cost of experimentation Internet Cloud AI Marginal cost of distribution Marginal cost of storage Marginal cost of generation 1980 2000 2020 2040 Source: Cost of Experimentation and the evolution of VC (Ewens, M. et al) 6 Impressive scalability for online businesses driven by technology advancements Time it took selected online companies to cross the 1m user line Netflix (1999) 3,5 years Kickstater (2009) 2,5 years Airbnb (2008) 2,5 years Twitter (2006) 2,0 years Foursquare (2009) 13 months Facebook (2004) 10 months Dropbox (2008) 7 months Spotify (2008) 5 months Intagram (2010) 2.5 months ChatGPT (2022) 5 days Threads (2023) 1 hour* * 2 million signups in 2 hours Source: Statista (via Company LinkedIn pages and Business Insiders) 7 Creative minds become the new bottleneck for innovation, driving the democratization of innovation Bottleneck for Creative Minds Global number of developers on R&D staff in GitHub MSCI world tech companies 56m 1.9m Source: Earlybird Analysis 2021, Github User Data 2020, MSCI World 2018 8 Virtualisation of Eco-Systems empower the non-urban regions Number of European Cities with at Least One Unicorn 65 8 2011 2021 Source: “Startup cities in the Entrepreneurial Age“ Dealroom 2021 9 Recently, however, there has been a significant decline in VC investments due to inflation and rising interest rates European VC investments – Deal Value (in €B) 108,9 91,6 61.3 49,4 51,0 39,8 31,0 25,4 19,2 19,1 12,4 7,0 6,8 7,5 9,3 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Source: Pitchbook 2023 European Venture Report; State of European Tech 10 Increased capital demand from startups now faces shortage of capital supply from VCs, eventually creating a strong buyer market Estimated venture capital demanded to supplied multiple, 2017-20221) 2,5x 2,4x Early stage VC Late stage VC Venture growth 2,0x 1,6x 1,5x 1,5x 1,0x 0,5x Q3’18 Q4’18 Q1’19 Q2’19 Q3’19 Q4’19 Q1’20 Q2’20 Q3’20 Q4’20 Q1’21 Q2’21 Q3’21 Q4’21 Q1’22 Q2’22 Q3’22 Q4’22 1) As of December 31, 2022 (Geography: US) Source: Pitchbook 11 That market shift translated into a downturn cycle starting in November 2021 The Thomson Reuters (Refinitiv) Venture Capital Research Index1) 25.000 20.000 -50% 15.000 10.000 5.000 0 10 11 12 13 14 15 16 17 18 19 20 21 22 1) As of 25.05.22, The Refinitiv Venture Capital Research Index leverages data of 22.000 private company firms constructed from observed valuations of venture-backed firms at discrete points in time, such as during funding rounds, acquisitions, and exits. Sources: Earlybird Analysis; Google Finance 12 The VC-cycle follows public markets and typically takes 3 years Impact of the Financial Crisis 2008/09 on US VC Valuations1 & the NASDAQ Index2 approx. 3 years 20% 10% 0% -10% -20% -18% -30% -36% -40% -39% -50% 2007 2008 2009 2010 2011 VC Early Stage VC Later Stage Nasdaq Index 1) Pre-money valuations, 2) For public and private market annual medians are used; 2008 is used as point of reference (2008 = 0%) Source: Numis Growth Capital Solutions; Macrotrends, NASDAQ 45 Year Historical Chart 13 Public capital markets are already leading the way out NASDAQ Composite1) 18.000 16.000 14.000 12.000 ~-15% 10.000 8.000 6.000 4.000 2.000 0 2010 2012 2014 2016 2018 2020 2022 2024 1 As of 28.08.23 Source: NASDAQ 14 The recovery of venture capital valuations in the next phase is foreseeable Venture Capital Cycle Current environment 2024+ › Valuations › Valuations › Public market: declining › Public market: high › Private market: high › Private market: growing › Investment/fundraising: declining › Investment/fundraising: high Intrinsic value › VC dry powder: high › VC dry powder: increasing creation through › Number of exits/distributions: › Number of exits/distributions: high innovation and declining new technologies › Valuations – largely independent › Valuations › Public market: recovering and constant › Public market: depressed › Private market: low › Private market: declining › Investment/fundraising: recovering › Investment/fundraising: low › VC dry powder: low › VC dry powder: shrinking › Number of exits/distributions: low › Number of exits/distributions: low but first transactions unfolding 2023 2022 Source: Earlybird Analysis 15 Now is the time to invest! Funds from crisis years have historically shown more than double returns Comparison of VC performance, international VC funds cumulative return1), % Period Capital gains in % 2005 - 2007 77% 2008 - 2010 173% 2,25x 1) Cambridge Associates: all developed early stage venture markets – outside US, 6 years after initial close Source: Cambridge Associates; Earlybird Analysis 16 Hardware is the orphan child of VC and even more underfunded Ratio Software & Services to Hardware in percent (USD) 100% 40 Software & Services (1,7T) 90 97 (685B) (#>1.000) Hardware 60 (2,5T) 10 3 (70B) (#