The chaos of 2020 affected everyone but not in the same way. That holds true for venture capital. At Elaia, we had to adapt the way we supported our portfolio companies and questioned our investment theses. Despite that, it was still one of our very best years ever, especially in terms of investment activity & liquidity: while achieving our investment plan of the year, we managed to return more money to our LPs than we invested in startups. We are very proud of such a performance in this context!
Venture capital historically has a few winners and many losers. Spectacular IRRs and returns are made by the fortunate few. We started a while ago a process of transparency with respects to our performance. We’re publishing our 2020 report card in the interest of this transparency goal, but also to share some of the insights and lessons we gained from a remarkable year. We’ll do this in 2 chapters:
Chapter 1: 2020 year in review
- Reviewing portfolio business performance.
- Breaking down our new deals.
- Evaluating the portfolio.
- Analyzing our exits.
Chapter 2: The sunny road ahead
- Growing room.
- Depolarizing world?
- Digital acceleration.
- Tech as investment’s gold standard.
- Bonus: PE vs VC!
I — 2020 key elements for Elaia
To understand how we’re grading ourselves, let’s break down the 4 key elements in our analysis: portfolio strength, new deals, valuations, and exits.
1. The business models and plans of our portfolio companies proved to be resilient.
As the scope of the crisis became clear, Elaia began working even more closely with the entrepreneurs and managers of our portfolio startups. We adapted that work where needed, including cash deployment, and perspective on liquidity. During business plan reviews, we offered help to those who needed an extra boost to weather the crisis.
With the exception of a few sector-dependent startups, our portfolio demonstrated its durability. For example, the more mature part of our portfolio (companies we backed before 2016), were also potentially the most exposed to Covid’s economic fallout because they have higher fixed costs and more employees which leaves less room to maneuver. Yet their aggregate revenue grew 19% from 2019 to 2020. Without being overly optimistic about the pandemic, we expect revenues for this same group to grow 40% in 2021. Looking at the SaaS companies which are a vast majority of this portfolio, ARR grew 38% last year and is expected to grow at over 50% this year. This business performance clearly outperforms the general economy on the same period.
This performance in 2020 has reaffirmed our core investment thesis in backing tech-intensive B2B companies because they are less volatile than consumer-facing startups.
2. A good year hunting new deals with some later stage investments
By the numbers, Elaia had a strong year:
3. Solid YoY performance for investors despite Covid effects
As the scope of the pandemic became clear in March 2020, we decided to be extra cautious and make large financial provisions on the most exposed of our startups valuations. With so little visibility, we thought it prudent to account for potentially future large drops in their valuation so that our reporting to investors reflected the risk we saw. Remember that Nasdaq and other key exchanges were down 30 to 40%! Indeed, many of our LPs told us that we were one of the most cautious investors in terms of marking these provisions.
While none of that risk has materialized in terms of seriously damaging the prospects of our portfolio companies, Elaia chose to keep most of these provisions in place through the end of 2020. We did so knowing that such a move was bound to weigh on our performance results.
Despite the effects of that cautious valuation practice, the valuation of our portfolio on isoperimeter (not taking into account new and follow-on investments) eventually increased by 60% in our books in 2020. This increased value is not just on paper. Half of that gain has been monetized and distributed to our investors.
As a result, we returned more cash to our LPs than we invested in 2020, which is particularly gratifying because the size of our funds has tripled over the last 5 years, implying a stronger investment than divestment pace by nature.
4. About those exits…
We’ve seen three exits in the second half of 2020, and we could even have accounted a fourth one negotiated late 2020 but announced in the first week of 2021, and materialized a few weeks after. These included:
- OpenIO => Acquired by OVHCloud, leading European cloud provider. Proof that we can do tech exits, including ones between European actors, that create value by building the tech stack.
- Mirakl => Raised $300 million, the biggest fundraising in French VC history, and at a nosebleed valuation of $1.5 billion. It’s more evidence that French companies can create new categories and scale globally. We had the opportunity to sell a small chunk of our holdings as part of the round while keeping a strong position in the shareholding structure and retaining our board seat. While the number of shares sold was small, the impact on the funds IRR and multiple was outsized. Mirakl’s Series D meant Elaia reduced the time to cash neutrality on the related fund by finishing to return the full capital in only 8 years, after a few earlier exits such as teads.tv.
- EasyRECrue => Acquired by iCIMS, a talent cloud company. This was a classic strategic exit to another private-equity-funded tech acquisition platform; its main purpose was to allow iCIMS to expand internationally. This exit returned a strong multiple and high-end IRR to our fund, in line with our level of return for performing companies
- Volterra => Acquired by F5, leader in application security and delivery. Okay, this one gets a little squishy because it was effectively done in 2020 but closed and announced in early 2021. Still, it’s proof of how mergers between 2 startups can pay off. Elaia had led the Series A investment in Acorus Networks, which was merged with the U.S.-based Volterra in 2019. When it comes to the cloud game, Silicon Valley plays in another league. So typically, Elaia wouldn’t have the opportunity to invest in a startup like Volterra. But the Acorus deal made us a Volterra shareholder. The result was spectacular and a quick return that would probably not have been nearly as impressive if Acorus had remained independent. And it’s a good sign that U.S. companies are coming to France in search of technology, which means exciting M&A deals. IRR was remarkable (close to 3 digits!) on this one.
Note that since the Volterra acquisition, we already had another liquidity event with a biotech IPO (read more about it here) and there are already other liquidity events in discussion that could come to fruition in 2021, but of course those remain hush hush. Still, this is part of a broader set of trends we think are poised to shake up Europe’s exit scene.
II — Lessons learned: Understanding why the climate for European exits is improving
1. Room to grow
The past decade has seen a Renaissance for European Tech. But for all the progress, it’s still having a smaller economic impact on its home turf than it should. To wit: European startups raised 13% of all venture capital even though Europe represents about 25% of the world’s GDP source, according to Atomico. So Europe has come a long way, but it still punches below its weight. In France alone, tech investment has grown 30% annually for six years, but remains 26 times smaller than the levels seen in the U.S. If we consider that the U.S. is only 5 times bigger than France, it means there’s still a phenomenal potential for growth in France. That might have once been the source of grumbling. Now it’s seen as a golden opportunity to close that gap. In fact, we’re seeing European companies raise money and scale at faster rates than ever. While it will take some time for this dynamic to play out, the momentum is here.
2. Shifting center of gravity
Silicon Valley is still Silicon Valley. But it’s easier than ever to build and scale outside this epicenter as the tech world becomes more depolarized. That’s part of longer development trends enabled by the cloud and the availability of capital. But telecommuting and remote work have gutted the myth that being in the same location and the same office are necessities for companies to be innovative and productive. As place becomes less important for success, it’s easier for companies to spread out. With teams distributed, that also means deal flow for Elaia is more international than ever.
3. Digitalization & tech drive our world view
And it has become more robust than ever. It becomes an even bigger priority at moments of crisis! Among the things we see accelerating digitalization (we even wrote a paper about it):
- The only businesses consistently able to remain open during the pandemic were digitized and online. The lesson is clear: Any company that has not invested heavily in digital transformation must do so immediately and those who are already online will thrive. And the crisis has exacerbated the difference between the already online businesses and the others. That will provide a massive market opportunity.
- The Covid economy has demonstrated that any company can be impacted overnight for an indefinite period of time. Forget winners take all. Now, it’s survivor takes all. And for those that do survive, they will be ready for that moment when the economy takes off again post-Covid. That’s a good reminder that more than ever, this moment requires managers who know how to adapt and a team that is agile to navigate such stormy moments.
- 2020 has also emphasized the importance of health and sustainability. Post-crisis, only limited/selected sectors will offer strong growth and profit opportunities. We forecast that even after the crisis ends, these subjects will remain paramount. People understand the fragile nature of life and the planet. Startups that impact these areas will be in demand. With Elaia’s history of investments in deep tech and health, we are in a strong position to lead in these areas.
- Governments are printing more and more money. The massive debt spending is widely supported by citizens and businesses. Tucked into these relief funds are often money for investing in digital transformation. We don’t have a crystal ball to see how governments will manage this debt. But startups that enable digitization will be able to target these large budgets.
4. Tech is the sweetheart of the investment rodeo
With borrowing rates close to 0%, there has never been so much liquidity trying to fight for so few places to invest it. One of the most attractive investment opportunities is equity, both public and private.
And within that equity arena, one thing we can say with confidence is that tech is the new gold standard. The returns being experienced by the tech sector in both private and public markets continue to demonstrate tech’s strength and attractiveness.
That is also being driven by the strong exit market. In many of these cases, acquirers are willing to pay high multiples for a target company because such a deal drives up the acquirer’s value as well.
But there’s a new twist here: PE, Private Equity. In recent months, private equity firms, which fueled half of our recent exits, are increasingly sniffing around our portfolio! This is a potentially exciting new source of liquidity, but one that also comes with some new dilemmas.
Regarding our good friends in Private Equity…
With the technology sector delivering strong value, and the classical economy stalling, the math is quite clear. Meanwhile, private equity has been raising record sums, amassing mountains of dry powder, and looking for some place to invest it. So these investors have turned their gaze toward venture capital to cherry-pick our most promising startups.
This represents a tempting liquidity market, but there are some inherent tensions between the goals of VCs and PE. We believe Elaia is in a good position to help align the interests of all parties, including entrepreneurs, to make such deals more successful. This is a critical emerging topic for Europe and we’ll talk more about it in the coming weeks.
What is next
If 2020 taught us anything, it’s that predicting the future is a tricky exercise. But there are few trends that we feel strongly are worth watching.
That list starts with PE. It will take time for the old economy to recover. With tech valuations so strong, private equity will be increasingly drawn to this sector.
And while we don’t envision any region matching Silicon Valley’s ecosystem, that depolarization will continue and lead to more valuable companies being created outside of the U.S. Throw the uncertainty created by Brexit into the mix, and we believe that France and Germany are in strong positions to benefit from this shift.
Deep tech is going to represent a more important slice of the new wave of successful startups. Sure, there’s always room for a fun newcomer like Clubhouse in the consumer space. But in general, much of the easy, obvious problems have been addressed and so less likely to generate high-value winners. In contrast, we see deep tech as more attractive because the way to create value will be to tackle more difficult, technical challenges.
And while we take pride in our performance last year, we’re not getting cocky. The pandemic is not over and there will be difficult times ahead. Eventually, those government subsidies will end when the health crisis recedes and that’s bound to cause some turbulence as everyone recalibrates.
In addition, we think that many startups have delayed their next fundraising rounds, mainly thanks to government backed loans and subsidies. That will shrink the number of deals early 2021 and make the competition more fierce, with a balancing counter effect at the end of the year.
Finally, there were a lot of venture funds that started in France since the end of last crisis in 2011. With the 10-year fund cycle coming to an end for many of them, there may be a reshuffling of teams in the VC landscape soon. Some will prove that they could deliver strong cash-on-cash returns over this fastuous period. Other just won’t.
How will Elaia navigate this? The same way we always have:
By keeping a disciplined focus on our investment thesis, by using our deep expertise to find and back the very best entrepreneurs who are ready to make a global impact, by developing the Venture Care for our portfolio companies, and by having a model and data-approach to our portfolio management. And for sure, we will keep you posted on the outcome.