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Molten Ventures
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== European tech coming of age and here to stay == The European technology sector has lagged the US and China for the past decade. Relative to both markets, Europe has few tech champions and a paucity of technology exposure on the public markets. However, Europe is finally starting to accelerate and catch-up, with a mature technology ecosystem delivering ever more successful businesses. Entrepreneurs are then reinvesting capital from successful exits to support the next generation of founders. In this context, 2021 was a record year for VC investment globally, Dealroom estimates that over US$675bn was raised globally by start-ups (Exhibit 10), double the all-time high recorded in 2020. Europe led this surge in growth, growing faster than both the US and China, with 133% growth y-o-y, with total funds raised in 2021 of US$114bn. The success and maturity of the European ecosystem can also be measured in terms of the number of ‘unicorns’ in Europe, private companies with a valuation above US$1bn. As can be seen in Exhibit 11, there was a surge in European unicorn numbers in 2021, increasing by 98 (over 40% growth year-on-year) to approximately 320 companies. Of the 98 new unicorns, 75 were VC-backed. Although the majority of unicorns are clustered in the UK, Germany, France and Scandinavia, unicorns are also becoming more dispersed, with the long tail to be found across 28 European countries, including Italy, Malta, Slovenia, Estonia and Cyprus. The mobility of talent and the increasing ability for companies to be based anywhere in the region are significant factors behind the success of the European ecosystem. The UK has led this success, with almost US$23bn raised in 2021 according to Beauhurst, a UK private funding data provider (Exhibit 12). These data include more than 2,600 announced deals, with an average deal size of £8.5m, up from £5.0m in 2020. Exhibit 13 highlights the growth of UK megadeals (£50m+ rounds), which leapt from 44 in 2020 to 112 in 2021 (with even more marked growth for £100m+ rounds), contributing to the significant y-o-y increase in average funding round size. We would argue that factors highlighted above all play to Molten’s strengths and underpin the rationale for management to raise its targeted Series B+ co-investment fund. These factors are: * increasing success and maturity of the European start-up ecosystem; * dispersed footprint of companies across Europe; and * continuing increase in the size of funding rounds and the greater number of megadeals. '''Listed VC offers liquid investment in European tech''' Molten Ventures, together with its listed VC and private equity peers, provides an attractive way to access private European technology companies and participate in the value they create through a diversified holding company, offering attractive liquidity to investors. Direct European public market technology exposure remains limited, as software-as-a-service (SaaS) business models and digitalisation mean start-ups are far more capital efficient than they have been in the past. When coupled with better access to private capital in Europe, companies have not needed to list to access the capital required to drive growth. This means that companies can stay private for longer, avoiding the cost, governance issues and short-termism that can be found on the public markets. This has allowed private company investors (and entrepreneurs) to retain far more of the value created by Europe’s successful start-ups. Molten’s holdings Cazoo, UiPath and Trustpilot were part of a wave of late-stage venture backed companies to IPO in 2021, although notably Trustpilot was the only one of the three to IPO in Europe (London). '''Technology sector soared in 2021, 2022 off to a bumpy start''' Since March 2020, technology indices have soared, with the COVID-19 pandemic accelerating the digital transition as consumers and companies were forced to embrace new, online ways of working. This trend is particularly well captured by the performance of the BVP Nasdaq Emerging Cloud Index, a US index (given the wide range of quoted SaaS stocks in the US and the paucity in the UK and Europe) of pure SaaS businesses, which reflects the types of company that Molten invests in (Exhibit 14). Having risen to 2.5x its 2020 starting point (and more than 3x the low point in March 2020), the cloud index rose fairly steadily to the end of 2021 (ignoring some valuation-driven jitters in Q221). Then from mid-November 2021, the index turned, losing a third of its value over the next three months, to a point where the performance of the cloud index is now broadly in line with the Nasdaq index since the start of 2020, although still up by c 61% from the beginning of 2020. '''VC returns provide portfolio diversification''' Molten Ventures and its quoted VC and private equity peers, provide technology exposure that is otherwise largely inaccessible to the public market investor. Valuations of private technology companies have a relatively low correlation to listed equity markets, supporting fund diversification and reducing the overall level of portfolio volatility. However, Molten Ventures, the investment vehicle itself, is publicly traded and, as has been seen at the start of 2022, is subject to wider public market technology valuation trends, suffering as investor appetite has moved to ‘risk-off’. A joint report by Oliver Wyman and the British Business Bank (The Future of Defined Contribution Pensions, Enabling Access to Venture Capital and Growth Equity, September 2019) found that venture capital is likely to improve diversification in a multi-asset portfolio because, as an asset class, venture capital is relatively uncorrelated with listed markets. Although VC investments are exposed to broadly similar economic conditions to publicly listed equities, they are likely to be less affected by short-term swings in investor sentiment that lead to volatility in public markets. This partly reflects the time difference between asset valuations and reporting, as well as the illiquid nature of the underlying investments themselves. The study found a positive 0.1x correlation between average global VC returns and MSCI World Index returns (1970-2016). However, independent estimates vary, with for example, Aberdeen Standard Investments (now abrdn) identifying a positive correlation of 0.42x between Global VC returns and US equities between 1990 and 2018. The Economist (How unlisted startups’ valuations will adjust to falling share prices) highlighted another pillar of support for private company technology valuations, arguing that competition for leading assets, coupled with entrepreneurs using the valuations of other funding round as reference points, will help to support valuations. Even after the repricing of listed tech stocks, valuations are unlikely to fall immediately so long as new funds are being raised with continuing cash inflows into the sector.
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