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 counts at least 14 startups worth at least one billion dollars, or more than one per month. Since then, the phenomenon that we thought was well launched has come to a shocking halt.
“There have been good operations since January, but general caution and a wait-and-see attitude are in orderexplained Franck Sebag, partner at EY. Some startups preparing to raise 100, 150, 200 million euros or more to get unicorn status prefer to postpone their operation, or raise less“, indicated to La Tribune Franck Sebag, partner at EY.
Back to Earth
With a delay of several months, French Tech is really starting to experience the failure that has plagued American tech since the beginning of the year. After a decade of euphoria, especially in the last two years when digital emerged as the big winner of the pandemic, the sector is experiencing a harsh return to Earth.
Investors are now doubting the sector’s ability to sustain its excessive 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 increase in rates of the central bank, rapid inflation, shortage of semiconductors, huge geopolitical tensions over the war in Ukraine, zero-Covid policy in China, etc. are greatly affecting the global stock markets. And in particular the American Nasdaq, which is chained eight weeks of decline and has lost more than 30% of its value since the beginning of the year.
“There is a real reversal in the market, said Arthur Porré, founding partner at Avolta Partners. Investors are in the process of correcting the excesses of recent years, especially during the Covid era where technology has become a refuge due to especially low rates and the rise of the pandemic for these companies. Today, the macroeconomic environment has changed. And the higher the rates rise, the lower is attractive for investors to bet on risky assets such as technology“, explained Arthur Porré, founding partner at Avolta Partners.
Cascading effect: the building collapses from above
If American tech stocks started to feel the wind turning at the end of last year, French Tech has recently cooled off. So, 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 total for 2020! “The first quarter was historic in absolute terms, but in detail there were weak signs of slowing down, such as the concentration of most of the mega-fundraising in January, which meant that many of them were signed at the end of last year.“, added Arthur Porré.
Since then, the slowdown has been restrained, 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 ‘EY’s estimates, about 760 million euro 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 will be a few more difficult months because the technology is overheated. We are witnessing the movement of investors landing again, in a certain number of parameters of rationality. Valuations are going down so traders have to manage their money in a way that is better as investors will look more closely at the stability of the business model”, studies Paul-François Fournier, executive director of Bpifrance.
The tri-color ecosystem is already noticing the -relative-disengagement of American funds that were hit hard by the Nasdaq crash in the United States. Starting with Coatue Management, Tiger Global Management and Softbank, all of which 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 amounts raised in 2021 in France, has indicated that it wants to cut by at least half, or even 75%, its investments in startups. Mechanically, the new reluctance of the biggest players in the market, also the winners of most of the big “deals”, affects the entire ecosystem.
“There is a cascading effect because the building collapses in on itself, explained Arthur Porré. Investors see that the macroeconomic situation is blocking the exit of startups, in particular IPOs. As a result, funders of large pre-IPO rounds become tense, lowering valuations and reducing their invested amounts. In this regard, hyper-growth financing also takes a hit, and so on until Series A. If they still have money, entrepreneurs who raised a year ago at very good valuations prefer to wait. Until the market correction is over, the weather is uncertain“.
A fall recovery?
For our experts, this global crisis in tech stocks is temporary. Everyone beware against facile comparisons to the dot-com bubble burst of the early 2000s.”The current correction is amazing but it is largely because the stock market has somewhat lost sight of the standard of rationality in recent years. When a startup is worth more than 20 times its annual recurring revenue, it is not sustainable in the long term.“, relativizes Arthur Porré.
Franck Sebag confirmed. “Today the fundamentals of technology are solid. Unlike in the early 2000s, digital is everywhere, it’s changing all sectors, everyone uses it, and we know that most business models work. Let’s not forget that the champions of the sector, Gafam, are among the companies with the largest profits in the world. This is not the collapse of the bubble but the return to Earth following excesses“, added Franck Sebag.
Our experts are therefore not worried that the phenomenon of “zombie unicorns”, that is, these overvalued unicorns with a shaky business model, and which are beginning to collapse in the Atlantic, will affect France. Of the 24 active French unicorns, only a few are actually considered at risk, notably Meero – whose unicorn status is also disputed – and BlaBlaCar, which suffered greatly from Covid-19 but nevertheless found refinancing. in April. The cryptocurrency and fintech sectors should also be watched as they are particularly vulnerable to the end of the euphoria in the markets.