Start-ups binge on private money as markets around the world dry up

Venture capital deals are going strong in Europe as an abundance of cash, public market turmoil and slumping valuations motivate companies to stay private ever longer.

In the first half of the year, European venture capital transactions raised nearly $57 billion, down just 4 per cent from the same period last year, according to the data provided by analytics firm PitchBook.

The war in Ukraine and a deepening energy crisis, along with the threat of recessions as central banks hike rates to curb runaway inflation have put a damper on risk appetite, virtually shutting down initial public offerings globally. Private investors awash with cash have been keen to put their money to work, allowing companies to put off listing to a later point in their life cycles than ever before.

“There’s still a lot of money to be invested, although private market investors are also being more careful, cautious and responsible,” said Jason Hutchings, head of private financing markets for Europe, the Middle East and Africa at UBS Group. “They are being more thorough in their due diligence, but we are still seeing more companies turn to private capital markets than pursue IPOs.”

This is bad news for Europe’s flagging IPO market, with just $6.4 billion raised over the first six months of 2022, according to the data compiled by Bloomberg. That’s a whopping 88 per cent slump from the same period a year ago, the data shows.

To be sure, companies that have grown up in an era of cheap credit and easy financing are finding that the path to private funding is fraught with difficulties of its own. Stock market volatility has weighed on valuations, forcing some startups to swallow hefty markdowns recently.

In a dramatic reversal, buy-now-pay-later giant Klarna Bank in July saw its valuation slashed to $6.7 billion, down from the $45.6 billion it achieved in June 2021. This came after a massive slump in the stock prices for its publicly traded competitors such as New York-listed Affirm Holdings. Start-ups have stepped up efforts to adjust. Keen to keep costs low and delay fresh funding rounds, companies ranging from online brokerage Trade Republic Bank to delivery firm Gorillas have laid off hundreds of employees in recent months.

“The heady days of free money, when growing companies could get funded simply for the asking are over,” said Hutchings.