Man, you gotta stop clicking on that 'bait. But now that you're here, I thought I'd share three slides from the macro update to our LPs yesterday.
I. The first one shows a now pretty well-established trend. Total deal value in European venture is at all time highs, but number of deals is at five year lows. And you can feel it in the market out there, can't you? Time to borrow some Patagonia from your favourite VC to make it through the Polar vortex. Personal prediction: this is going to get worse before it gets better.
The reason? Many of our early ecosystems, like Berlin, are still figuring out that venture works much better as a consensus-building, cooperative approach if total capital available for follow-ons is the constraint. The savvier investors are starting to wait, round sizes are going up, it's harder to raise smaller and earlier.
Note: Sunstone is doing a push to do more seed rounds (€250K-€1M), so once again we're trying to get ahead of the trend. We want to be early, we have conviction and we will lead every round we choose to do.
II. New funds raised is way, way down (though capital raised is holding pretty strong). We're at a third of the 2008 number of new funds raised, more than 50% down over the last five years. Sounds like smart LPs are doing the same thing smart VCs are doing - crowding into the quality funds. Venture in Europe is still a small, small industry, and it's fairly clear based on track who is doing a good job.
III. Exits remain... well the slide says "relatively strong", which is historically true. But "a mixed bag" would capture it just as well in my view. Look at that tiny IPO number - we're mirroring the US here without any regulatory reason why (at least nothing substantially different vs pre financial crisis). Also note the $500M+ exit for 2017... under ten companies were sold for $500M+ in EV in Europe in 2017. This is still a very, very small and specialized market.
That last number is particularly worrying to me because it's the "available" enterprise value at exit that can sustain European venture funds.
Imagine you have a $500 million fund and you want to do a 3x gross return on it. That means returning $1.5 billion. Assume you own around 15% of your average portfolio company. That means your portfolio companies must generate total enterprise value of $10 billion. Now look at the number of $500M+ exits again (admittedly, these are only the exits where the value was disclosed, but at that level they tend to be disclosed).
Over the last four years, Europe had ~40 exits over $500M. Let's assume the average is around $750 million (which will be generous), that's total enterprise value created of around $30 billion. So as a $500 million fund in Europe, you need to have 33% market share of those exits to be able to do a 3x gross return. Those are very hard odds to make a living by.
Which is another reason why Sunstone likes its "right-sized" early stage fund size of around $140M. It's a way to consistently generate good returns for our investors and be able to become return backers to our entrepreneurs.