Four months without a new unicorn (Spendesk, end of January). A few years ago, this delay would not have been abnormal. But in 2021 and until January 2022, French Tech counted no less than 14 startups valued at least one billion dollars, or more than one per month. Since then, the phenomenon that we thought was well underway has come to a surprising halt.
“There have been great operations since January, but overall caution and a wait-and-see attitude are in orderexplains Franck Sebag, partner at EY. Some startups that were preparing to raise 100, 150, 200 million euros or more to obtain unicorn status preferred to postpone their operation, or raise less“, indicates to La Tribune Franck Sebag, partner at EY.
Back to Earth
With a few months delay, French Tech is actually beginning to experience the disillusionment that has plagued American tech since the beginning of the year. After a decade of euphoria, especially the last two years when digital has emerged as the big winner of the pandemic, the sector is experiencing a brutal return to Earth.
Investors now doubt the sector’s ability to maintain its hyper-growth over time. The disappointing financial results of Meta (Facebook), Uber, Google, Palantir or Netflix in the first quarter, doubled by mixed projections for the second quarter, in a tense macro-economic context (sustained rise in central bank rates, galloping inflation, shortage of semiconductors, major geopolitical tensions with the war in Ukraine, zero-Covid policy in China, etc. are heavily impacting global stock markets. And in particular the American Nasdaq, which has chained eight weeks of decline and lost more than 30% of its value since the beginning of the year.
“There is a real market reversal, says Arthur Porré, founding partner at Avolta Partners. Investors are in the process of correcting the excesses of recent years, in particular those of the Covid period when tech had become a refuge due in particular to low rates and the boost of the pandemic for these companies. Today, the macroeconomic environment has changed. And the higher the rates rise, the less is attractive for investors to bet on risky assets like technology“, explains Arthur Porré, founding partner at Avolta Partners.
Cascading effect: the building collapses from above
If American tech stocks started to feel the wind turn at the end of last year, French Tech has recently cooled off. Thus, the first quarter of 2022 marked another record, with 5.1 billion euros raised between January and March, i.e. almost half of the total for 2021 and the entire total for 2020! “The first quarter is historic in absolute terms, but in detail there were weak signals of a slowdown, such as the concentration of most mega-fundraisings in January, which means many of them had were signed at the end of last year“, adds Arthur Porré.
Since then, the slowdown has been contained, but real: 802 million euros in February (below the average for 2021, established at 966 million euros), 1.4 billion in March and, according to estimates by ‘EY, about 760 million euros in April. The month of May should drop again, and the experts consulted by La Tribune are not very optimistic for the summer months.
“There are going to be a few more difficult months because tech was overheating. We are witnessing a movement of re-landing of investors, on a certain number of parameters of rationality. Valuations are falling so entrepreneurs will have to manage their cash in a way more efficient while investors will look more closely at the solidity of the business model”, analyzes Paul-François Fournier, executive director of Bpifrance.
The three-color ecosystem is already noticing the -relative- disengagement of American funds hit hard by the fall of the Nasdaq in the United States. Starting with Coatue Management, Tiger Global Management and Softbank, which have all announced that they are drastically reducing their investments in startups after experiencing a disastrous quarter in terms of financial results.
Softbank, which is partly responsible for the explosion in the amounts raised in 2021 in France, has thus indicated that it wants to reduce by at least half, or even 75%, its investments in startups. Mechanically, the new reluctance of the biggest players in the market, those who also won most of the big “deals”, impacts the entire ecosystem.
“There is a cascading effect because the building collapses on itself, explains Arthur Porré. Investors see that the macroeconomic situation is blocking the exits of startups, in particular IPOs. As a result, those who finance the big pre-IPO rounds are getting tense, lowering valuations and reducing their amounts invested. In turn, hyper-growth financing also takes a hit, and so on until Series A. If they still have cash, entrepreneurs who raised a year ago at very advantageous valuations also prefer to wait. Until the market correction is over, the period is uncertain“.
A recovery in the fall?
For our experts, this global crisis in tech stocks is temporary. All caution against easy comparisons with the dot-com bubble burst of the early 2000s.”The current correction is spectacular but it is above all because the stock market had somewhat lost sight of the criteria of rationality in recent years. When a startup is valued at more than 20 times its annual recurring revenue, it’s not sustainable over the long term.“, relativizes Arthur Porré.
Franck Sebag confirms. “Today the fundamentals of tech are solid. Unlike in the early 2000s, digital is everywhere, it is transforming all sectors, everyone uses it, and we know that most business models work. Let’s not forget that the champions of the sector, the Gafam, are among the most profitable companies in the world. This is not the collapse of a bubble but a return to Earth following excesses“, adds Franck Sebag.
Our experts are therefore not worried that the phenomenon of “zombie unicorns”, that is to say these overvalued unicorns with a wobbly business model, and which are beginning to collapse across the Atlantic, will affect France. Of the 24 active French unicorns, only a handful are really considered to be at risk, in particular Meero – whose unicorn status is also disputed – and BlaBlaCar, which suffered heavily from Covid-19 but which nevertheless found refinancing. last April. The cryptocurrency and fintech sectors are also to be watched as they are particularly vulnerable to the end of the euphoria in the markets.
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