Four months without a new unicorn (Spendesk, end of January). A few years ago, such a delay would not have been abnormal. But in 2021 and through January 2022, French Tech had at least 14 startups worth at least $1 billion, or more than one per month. Since then, the phenomenon, which we considered well begun, suddenly ceased.
“Since January, large operations have been carried out, but general caution and a wait-and-see attitude are necessary.explains Frank Sebag, partner at EY. Some startups preparing to raise 100, 150, 200 million euros or more to achieve unicorn status have chosen to postpone their work or raise less“, points out La Tribune Frank Sebag, partner at EY.
Back to Earth
With a delay of several months, French Tech is actually beginning to experience the frustration that has plagued the US tech sector since the start of the year. After a decade of euphoria, especially in the last two years when digital has emerged as the biggest winner of the pandemic, the sector is experiencing a brutal return to Earth.
Investors now have doubts about the sector’s ability to sustain its hypergrowth over time. Disappointing Q1 financial results for Meta (Facebook), Uber, Google, Palantir or Netflix, doubled by mixed Q2 forecasts, in tense macroeconomic context (steady rise in central bank rates, runaway inflation, semiconductor shortages, severe geopolitical tensions due to war in Ukraine, the zero-spread policy of Covid in China, etc. have a strong impact on global stock markets, and in particular the US Nasdaq, which has started eight weeks of decline and has lost more than 30% of its value since the beginning of the year.
“There has been a real market reversal, says Arthur Porre, founding partner of Avolta Partners. Investors are in the process of correcting the excesses of recent years, in particular the excesses of the Covid period, when technology became a safe haven, in particular due to low rates and the rise of the pandemic for these companies. Today, the macroeconomic environment has changed. And the higher the rates rise, the less attractive for investors to bet on risky assets such as technology” explains Artur Porre, founding partner of Avolta Partners.
Cascading effect: the building is collapsing from above
While US tech stocks began to feel a change late last year, French tech stocks have cooled off lately. Thus, the first quarter of 2022 was another record: from January to March, 5.1 billion euros were raised, that is, almost half of the amount for 2021 and the entire amount for 2020! “The first quarter is historic in absolute terms, but in detail there were weak slowdown signals, such as the concentration of most megafunds in January, meaning that many of them were signed at the end of last year.“, adds Artur Porre.
Since then, the slowdown has been contained but real: €802m in February (below the 2021 average of €966m), €1.4bn in March and around €760m in April, according to ‘EY’ estimates. . May should fall again and experts polled by La Tribune are not very optimistic about the summer months.
“There are still a few difficult months ahead because technology has overheated. We are seeing a movement of re-landing investors along a certain range of rationality parameters. Valuations are falling, so entrepreneurs will have to manage their money much more efficiently, while investors will be more attentive to the soundness of the business model,” analyzes Paul-François Fournier, chief executive of Bpifrance.
The tricolor ecosystem is already noticing a relative backsliding of US funds, hit hard by the Nasdaq crash in the United States. Starting with Coatue Management, Tiger Global Management and Softbank, which have announced they are sharply cutting back on their startup investments after a disastrous quarter in terms of financial results.
Thus, Softbank, which is partly responsible for the sharp increase in the amounts raised in 2021 in France, has indicated that it wants to cut its investments in startups by at least half, or even by 75%. Mechanically, the new reluctance of the biggest players in the market, those who also won the most big “deals”, affects the entire ecosystem.
“There is a cascading effect as the building collapses on its own, explains Artur Porre. Investors see that the macroeconomic situation is blocking the exit of startups, in particular IPOs. As a result, those who fund large pre-IPO rounds are tensing up, lowering valuations and reducing their investment amounts. In turn, hypergrowth funding also suffers, and so on up to Series A. If they still have the money, entrepreneurs who raised a year ago at a very favorable valuation also prefer to wait. Until the market correction is over, the period is not defined“.
Recovery in the fall?
For our experts, this global crisis in technology stocks is temporary. Everyone warns against simple comparisons to the bursting of the dot-com bubble in the early 2000s.”The current correction is impressive, but above all because in recent years the stock market has somewhat lost sight of the criteria of rationality. When a startup is worth more than 20 times its annual recurring income, it cannot be sustainable in the long run.“, relativizes Arthur Porre.
Frank Sebag confirms. “Today, the foundations of technology are solid. Unlike in the early 2000s, digital is everywhere, it is transforming all sectors, everyone is using it, and we know that most business models work. Let’s not forget that industry leaders, Gafam, are among the most profitable companies in the world. This is not a bubble collapse, but a return to Earth after excesses” adds Frank Sebag.
Therefore, our experts are not worried that the phenomenon of “zombie unicorns”, that is, these overvalued unicorns with a shaky business model that are starting to crumble across the Atlantic, will affect France. Of the 24 operating French unicorns, only a few are truly considered at risk, notably Meero, whose unicorn status is also in dispute, and BlaBlaCar, hit hard by Covid-19 but nonetheless found a refinance last April. The crypto and fintech sectors also deserve attention, as they are especially vulnerable to the end of the euphoria in the markets.