A few thoughts on the current market evolutions — Chapter 5
By Xavier Lazarus, with help from Marc Rougier, Saish Rane, Justine Guers, Delphine Villuendas & Louisa Mesnard
Facing this new market condition, I gathered thoughts and analysis from both discussions with key players on both sides of the Atlantic and based on my past experience in times of crisis. Having started when some of my colleagues were still in Kindergarten, 20 years ago and 3 crises ago, is one of the few privileges I have in the market!
In these five chapters — published weekly on our Medium account, you’ll find a compilation of data, insights and advice I’d like to share and discuss with you. This is by no means a sure-fire thesis nor an omniscient crystal ball, rather the strong desire to share data and provoke thoughts, so we can collectively weather the unfolding stormy conditions.
You can find the previous articles here: Chapter 1, Chapter 2, Chapter 3, Chapter 4
This is the last part. The prospective one and the most risky one. The one with a 100% probability of being wrong, at least for a huge part of it. But that is the fun part too: predicting the near future!
So, let’s go for it, and remember that I will invoke the 5th amendment to not incriminate myself if this chapter ends up as one my worst set of predictions.
Knowing now that I don’t own a crystal ball and assuming that there are no new black swans such as Covid in 2020 and Ukraine in 2022, my current belief is that the crisis should last at least until the end of 2023 and then the market could evolve towards recovery.
It’s a long enough period for strong companies to become stronger; the weakest will not be weaker, they’ll just be gone or be swallowed by the strong ones. That is why, I am surprisingly confident that a few large B2B tech European platforms will emerge after this crisis.
Financial markets will be depressed for a while; trends, whether up or down, will be due to volatility and short-term speculation, more than to real fundamental changes. VCs will follow the current depressed financial markets, eventually. There will still be funding deals at every stage of the VC lifecycle, but less than before, and investors will try to back only the very best ones. Their valuation will suffer much less than the average of the market.
The financial capacity to invest more in private or public markets will depend a lot on macroeconomics (interest rates & inflation) and PE/VC exposure and portfolio allocation constraints. This won’t get much better before the end of 2023 at the earliest.
Then maybe, after this 18 month period ends, times will change. Given the context, there are two main options:
- People will have adapted to the new business and financial rules — the market will stabilize and gradually come to terms with the new “degraded” reality
- We will enter a new phase of economic dynamism where the market will recover and conquer new heights — as we have experienced in the post 2008-crisis
Even though 2024 and part of 2025 could be still quite challenging, there will be sun after the storm. Assuming that we experience — as I believe — the tough version of the crisis for 18 months, spirits will be down, and many companies will be hurt, sometimes beyond an easy fix. But the macroeconomics would be improving.
This creates an 18 to 24 months time frame where both people are depressed, competition is weak yet markets are positively evolving. This is a perfect time for investing or launching a business. Only the best entrepreneurs would be left. Only committed investors would have the willingness to keep doing their job, which was and should mostly be painful and only incentivizing the long-term theses. These new investments in new companies will hence expand in low-competition yet developing markets.
This happened from mid-2011 to mid-2013. This was our best investing time ever, since most of the largest tech companies (think of our seed-funded unicorns: Mirakl and Shift Technology or the incredible initial growth phase of Criteo) that we have been proud to back, started or thrived then.
In the sectors that will be the next winners, I expect large new technological trends to emerge (more of the same doesn’t work after a long and deep winter). For example, two to three years post 2008 crisis, SaaS and Social Networks skyrocketed. My best guesses for the coming years are on strategic digital, deep tech and biotech transformations — such as Cloud Infrastructure, Cybersecurity, Climate change fighting technologies and Life Sciences.
Definitely, deep tech skills and deal flow access will be one of the strong competitive advantages for investors. I am not saying that the rest is not very interesting, but my guess is that in many areas, the current winners will take all (cue the ABBA song) during the crisis, and going after them with only a re-lifted yet same old idea will be an impossible play for Venture Capital.
Web3 is more puzzling. There was clearly a speculative craziness but the technological foundations are getting better and clearer, and the philosophy behind decentralization will be cleansed by the crisis to be back to its original purpose, a new internet vision and not a new tech plutocracy to replace the existing one. Maybe it will be time to invest there sometime soon.
On a different angle, nonprofit investing also will rise. Unfortunately it is not our model, but we need to integrate in our thinking the intentions behind this wave, the profound willingness of many entrepreneurs or investors to give back and try to really transfer part of the tech wealth and know-how for good, beyond a great tagline this time.
That is why at Elaia’s level we have both launched our own endowment fund and are deep diving into impact funds, the Elaia way: investing in tech & deep tech visionary entrepreneurs and helping them to disrupt markets to bring to our investors performance and return in line with our standards, but under a clear impact intention and scrutiny.
Our first fund following this principle, that we just launched, is around the microbiotech revolution (we should obviously fight microbes, but isn’t it even better to use them to transform the petrochemical industry?). It will be our own beta test at scale, to prove that the words deep tech, performance and impact can be efficiently merged.
As a conclusion, we have ahead of us about 3 years of a difficult market first, then followed by a probable morale fatigue, but also the confirmation of mighty players — those who have survived the dip — and the eventual emergence of new players — those who will ride the next wave of technology breakthroughs.
I am not concerned at all by the fundamentals, or what most of the European Tech ecosystem members do, including ourselves at Elaia: the digitalization of the world economy is not a short-lived fashion but a long-term mutation where entrepreneurs, researchers and VC will keep being predominant agents. I do believe that this crisis will come to an end in not that long a future, even if at some point, it may feel like the world could end before.
As I said, that’s the only privilege of having already lived through a couple of crises. Firefighting or whining should not consume all our energy and blur our minds, we will also witness, in these weird times ahead, the final emergence of European tech champions and the birth of the next wave of European tech innovation. If you remember what kind of incredible times came out after the 2000 and the 2008–2011 crisis, I strongly believe it would be a shame to miss the next fun period.
You can also find the 🇫🇷 version of this paper in Maddyness here.
