Top investors Duco Sickinghe and Jürgen Ingels
Technology federation Agoria recently came up with fantastic news at first sight: Belgian growth companies raised no less than 1.37 billion euros in venture capital in 2022 – even more than the 1.33 billion euros from record year 2021. Yet the same Agoria warned in one breath for a hurray mood , because 2023 would be very difficult for companies. Time for some clarification in a story that seems to blow hot and cold at the same time: because should we be optimistic or not? We asked top investors Duco Sickinghe and Jürgen Ingels. “There will always be money for good files.”
Power in the entrepreneur
Duco Sickinghe, founder and managing partner of investment company Fortino Capital, starts by explaining that Belgian record amount. “First of all, this is because considerably higher valuations per transaction were recorded,” he says. “Fortino recorded a total of 75 transactions in 2020, which together accounted for half a billion euros. In 2021 there were ‘only’ 56 transactions, while the total amount doubled. And last year, 69 transactions together resulted in a valuation of 1.5 billion euros. The largest share came from Series D rounds, with the 200 million euros from the Ghent food tech company Deliverect as the outlier.”
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“Actually, 2022 was a year of extremes”, adds tech entrepreneur and venture capitalist Jürgen Ingels. “In the first half of the year, valuations were at one all-time high – sometimes up to ten or even fifteen times the turnover – because there was so much money in the market. At times it was even a bit ripped off the pot.”
“Moreover, the power lay with the entrepreneur: there were few really good files, so anyone who was able to present a good story could ask for very high valuations. You can also see it this way: the very smart tech companies saw that difficult period coming and therefore raised a lot of money last year against it crazy ratings. Today those same companies are cash rich and they can easily make acquisitions, for example.”
Actually, 2022 was a year of extremes, where power lay with the entrepreneur. There were few really good files, so anyone who was able to present a good story could ask for very high valuations
Looking cat out of the tree
So that was the first half of 2022. In the third and especially fourth quarter, however, we saw a serious cooling of the private market as a result of the war in Ukraine. That correction was already underway in public markets like Nasdaq, which fell 60 percent or more as a result of that war.
It is quite possible that in 2023 the private market will also suffer these blows and that it will become much more difficult for companies to raise money
“It could well be that in 2023 the private market will also suffer these blows and that it will become much more difficult for companies to raise money,” notes Sickinghe. “That is why they will probably wait until the second half of the year to go to the private market, while investors will also wait and see what happens to the economy. According to that scenario, people will therefore mainly watch the cat out of the tree. If, on the other hand, the recession is not too bad and gas prices remain calm, we may get a completely different story and everyone will be collecting money again by, say, May.”
“So I don’t see 2023 necessarily negative – the financial markets have become more cautious due to the circumstances – but not necessarily positive either: I’m wary of optimism because we are simply unable to know what will happen to the world. ”
Future cash flows
“Or with the interest rates”, adds Ingels. “They are now very high as a result of inflation, but we will also soon be heading for a recession, which will cause those interest rates to drop quickly. As a result, this will be compensated in the valuations. Interest rates determine the value of a company’s future cash flows: the higher the interest rate, the less the cash flows are worth, and the more – mainly – tech companies will decline in value because their value is just in those future cash flows. More than at other companies.”
A slightly lower valuation may just be more pleasant and healthier for the entrepreneur. You don’t always want to aim too high
“The valuations will be for the sake of it downside risk (the risk that the actual return will be lower than the expected return; editor) may also be a lot lower, but that is not necessarily bad news,” says Sickinghe. “Certainly not if you look at it from the entrepreneur’s point of view: a high valuation also means high expectations to effectively realize growth, with all the associated stress. A slightly lower valuation may just be more pleasant and healthier for the entrepreneur. You shouldn’t always want to aim too high.”
“Because those valuations are now falling to a realistic level, now is actually the time to invest in tech companies”, continues Jürgen Ingels. “That sounds a bit counterintuitive – many people have lost money on the stock markets – but history shows that during or just after a crisis is always the best time to put money in funds. For that reason, we started raising Smartfin Capital III this week, worth EUR 250 million. Just to say that we really think this is a good time to invest.”
History shows that during or just after a crisis is always the best time to place money in funds
Winner takes all
Both investors agree on one thing: also in 2023 to stay there are opportunities, because there is still a lot of money available in the private market for investments. “I think early capital – for seed and Series A rounds – won’t be a problem anyway, but there will also be plenty of venture capital,” says Sickinghe. “In that respect, I see the current one winner takes alltrend in the investment market will certainly continue.”
“What do I mean by that? If you succeed as a scale-up in growing more than 100 percent annually and you have a good story, you will also be able to raise money relatively easily this year. If you’re below that and growing at a respectable 50 or 60 percent – which is the case for about 80 percent of companies – then it’s going to be a lot more difficult. Not impossible. It will only take a lot longer because the conditions have become stricter: investors are rather conservative in this volatile situation and are mainly looking at that downside risk. So as a company you will have to fight harder to show that you can grow“, said Sickinghe.
Entrepreneurship as a calling
“There will always be money for good files”, notes Ingels. “Tech companies in particular need capital very badly, because they have negative cash flows as a result of their focus on and dependence on technology. Cash burns play a role in the valuation, resulting in the risk that tech companies cannot find money because they are not immediately profitable, or that they only manage to raise capital on conditions that are very poor for them. In 2023, a number of young tech companies will therefore go bankrupt or die drastically cost cutting must dowith all its consequences for the quality of their product or – even worse – their team. Want in the end the quality of a file always comes down to the strength of your people”, says Ingels.
“In that respect, it is good that the wannabe’s and the nice to haves which have disappeared from the market. The period it fashionable was to own a business and be an entrepreneur – and preferably one as young as possible – is behind us. Fortunately, because entrepreneurship must be a calling if you strive for sustainable success. It is a combination of courage, knowledge, luck, perseverance and other factors that you don’t often find together in one person. Moreover, if you have already experienced an entrepreneurial adventure and therefore the experience factor also plays to your advantage, then you will yet have a greater chance of success. That second generation Entrepreneurs and teams will also have a better chance of winning funding to make.”
The second generation entrepreneurs and teams will also have a better chance of obtaining funding because of that dash
Chips and quantum technology
Finally, it is striking that growth companies within FinTech, ManuTech and FoodTech in particular did well in 2022. Are there other tech sectors for this year that, according to Duco Sickinghe, will stand out? “Artificial intelligence is ubiquitous today, but I think software companies will increasingly build it into their packages as standard so that I don’t see it as an independent tech movement. I think – in Europe – more of chips and quantum technology, but also of AgriTech and MedTech.”
The focus of Jürgen Ingels as an investor, on the other hand, is mainly on cyber security. “More and more data is being consumed and more and more applications are running online,” he says. “So everything related to data security of the infrastructure, data management and compliance will only become more important. Although the metaverse and artificial intelligence are interesting developments, I think they are still too early for industrial applications.”
