👋🏾 Hi friends!

I hope you had a relaxing break over the (long) weekend and a Happy Easter to those that were celebrating 🐣.

I managed to spend a few days spending time with loved ones and dipping into writing here and there.

I’m excited to have another article being published (soon I hope!) on the Evening Standard, if you haven’t read my last two, check them out here.

One of the things I find incredibly frustrating is that writing is a creative process – even when you are writing non fiction – and it is hard to schedule in times for creativity. So I am having to find ways to create environments in which I can be creative, especially when it comes to writing the book.

If you’ve got a hack, I’d love to hear from you!

I’m well underway writing about all the things I’ve learned from the last couple of decades as founder, CFO and CEO, so sign up for early access to Off Balance – The Book and feel free to share with anyone else you think might enjoy it 😄.

Now let’s get down to business…

In this weeks Off Balance, I’ll be chatting about:

🎙️ Charles Sidman – Managing Partner of ECS Capital Partners on Nothing Ventured
📈 Carta’s European Data Insights unpacked

Would you spill your most intimate thoughts to a robot bartender? Has AI become a cult or a religion?

These were just a couple of the issues touched upon in this episode of Nothing Ventured where I sat down with Charles Sidman – Founder and Managing Partner of ECS Capital Partners, LLC.

Charles has an incredible background from building computers in his youth to 20 years as Professor of Molecular Genetics, Biochemistry, and Microbiology and a decade as Professor of Management at the University of Cincinnati before moving first into angel investing and now raising a fund.

In this episode, we talked about:

➡️ Moving from academia into venture to be able to influence the world better.

➡️ Getting to an exit within 6 weeks.

➡️ Diversity in and the interaction of the system is what matters.

➡️ Complexity science and the intersection with personalised medicine

➡️ Angel activity can be incredibly rewarding, just not necessarily financially.

Check out the episode on YouTube, Spotify, Apple or wherever you get your podcasts and don’t forget to rate, subscribe and like 💪🏾

Check it out and let me know what you think!

Also, if you have any feedback, or if there’s something you’re desperate to see me include, just reply to this mail or ping me online – I’m very open to conversations.

If you like what I’m putting out, do give me a follow on LinkedIn, Twitter and Instagram.

(If you are trying to connect with me on LinkedIn, maybe read this post I wrote and make sure to start your request with “Off Balance” and, more importantly, tell me why you’d like to connect 💪🏾)

Don’t forget to like, rate and subscribe to Nothing Ventured on Apple, Spotify or YouTube, it really helps more people see what we’re doing – you can find links to these (and more including my Office Hours) right here!

Now let’s get into it.

Off Balance

It’s quite easy to find trend data on startups in the US, but slightly harder to find the same quality of information on what’s going on in the ecosystem this side of the Atlantic.

Thankfully, the team at Carta have released their European Data Insights report which gives a snap shot of the European startups within their data set of 41,000 total companies tracked as of 31st December 2023.

So let’s take a look at what the report tells us and maybe, some of the reasons why.

State of European Private Markets

The first thing to note is that this report is quite a bit smaller than their more all encompassing State of Private Markets report which is able to highlight trends from a larger and more robust data set.

As such, there are fewer insights given that there are, presumably, fewer European companies on platform being tracked.

This is not particularly surprising.

Carta’s main product (cap table management) was almost entirely geared towards US incorporated companies and it wasn’t until August 2022 that they acquired Capdesk, the UK and European equity management platform.

The reality is that equity management in Europe is – as with many products over here – understandably fragmented. In the UK you have alternative products such as Vestd, whilst in Europe you might use Ledgy.

This is unsurprising as, certainly in the UK, one of the principle reasons to use a cap table management system such as Carta or Vestd is to manage employee option schemes, track vesting, issue documents and ultimately file with HMRC. Unlike the US which has a common modality for issuing options regardless of which state the company is incorporated in, in Europe differing legal implications means most solutions will solve for one country in the first instance and then potentially expand out into other regions – it is a great example highlighting the problem of scaling in Europe where localisation requires ongoing development of essentially new systems to handle this diversity even if the core cap table management product should remain static irrespective of region.

The other reason is also simply that there are fewer startups over here than there are in the US and hence a smaller pool of companies from which data can be extracted and, let’s face it, for most companies, until things get pretty complex, it’s unlikely that they will move from the default solution for so many problems – Excel.

But all of this is to set the scene as far as the availability and volume of data is concerned. What of the actual insights?

Pre-Seed Ascending

Tracking 1,070 rounds between the first quarter of 2020 and the last quarter of 2023, Carta’s data suggests that both the average and median round size at pre-seed has grown 40% year on year.

Carta’s suggestion as to why this has happened is that the total number of rounds has contracted meaning there is more capital chasing fewer deals leading to larger amounts of capital deployed – £1.165m on average with a median round size of £880k.

Pre-seed, in the UK at least if not across Europe, is an interesting beast. Given the preferential tax treatment angel investors receive via the SEIS and EIS schemes, we typically see fewer VC led rounds at pre-seed as compared maybe to the US (though this may also be a quality driven issue). If there are fewer rounds to participate in but investors want to ensure they receive their tax breaks, it follows that they may invest more in each round they participate in.

It has always seemed to me, that the tax efficient investing, whilst a great way of promoting early stage investing has two unintended consequences:

It has the effect of inflating valuations at very early stages as investors are more comfortable paying a higher price if they are driven by the tax benefit.

Similarly, it is likely that there are more businesses raising a pre-seed that probably should not because, again, investors may be being driven by the tax benefit over and above the feasibilty of the venture.

Whatever the actual reason(s), the fact that there is more capital available to these startups during the earliest rounds is no bad thing, it means (hopefully) that runways will extend and the ability to get to PMF is strengthened.

Seed Descending

Conversely, Carta reports that there were 26% fewer seed deals in 2023 compared to 2022 and that median round size had dropped by 14% YoY to £1.868m though it is still up 56% since 2020.

Following on from my comments above, this makes some sense. If one assumes that in the UK and Europe VCs are typically first coming to the table at seed rather than pre-seed, then this is the first time these startups are taking on institutional investors.

And institutional investors should be more diligent in their approach than angels (2021 and 2022 notwithstanding!).

As VCs have started becoming far more selective around the metrics and traction of the companies they deploy into as well as an emergent narrative around backing businesses that demonstrate scale coupled with capital efficiency, it is unsurprising that they are investing less than a year ago in any one deal.

Let us also not forget that the last couple of years have also been traumatic for founders and many are pushing back on raising too much capital (which in turn inflates valuation) and taking too much dilution at the earlier stages.

A healthy approach to cash and runway management means that founders are likely to take on less capital whilst continuing to hit their milestones.

Series A Feeling Pain

The median Series A is down 21% year on year though is up 27% from 2020. Again this is unsurprising in the context of the wider pull back in venture capital.

There has been an uptick of 13% in terms of the volume of rounds since 2020 but this is probably a lot lower than one would expect given that in 2020 many, if not most, investors were sitting on their hands waiting to see how the pandemic would play out.

Again, the drop from the heights over the last few years is a natural outcome of investors demanding much higher thresholds to qualify to raise a Series A coupled with the aforementioned push for capital efficiency. Founders are again finding themselves in a position where either pro-actively or by default having to do more with less (or at least less than would have been the case in 2021 and 2022 when both average and median round sizes peaked.

Series B Flat(ish)

At Series B, the data tells a mixed story. The median round size is up 6%, however there has been a huge 40% drop in deal volume in 2023.

It is simply getting harder to raise a Series B if the business is not performing as it should. As one of my guests once said, if Series A is all about product market fit, Series B is all about Go To Market fit and if a venture has not solved that playbook, is not showing significant growth, they are going to find it harder to raise their B round.

This is also a factor of the number of funds deploying at Series B and beyond here in Europe which is well documented. As this article from Forbes states:

Carta’s data further supports this view around the difficulty at Series B showing that the median number of days to raise a Series B is 760 days (from having raised their Series A) whilst the time between a Seed and A round is only 1.5 years.

Overall, the data paints a picture of a contraction in the number of rounds though generally a positive story in the amount of capital being raised in any individual round on average. What startups and founders must internalise is that the bar to raise from venture capital funds today, and most likely well into the future, has been lifted.

What this is likely to mean is that the businesses that do manage to raise a round have gone through a more robust selection process than we were seeing in 2021 and 2022 and, one would hope, are therefore much more likely to have promising and concentrated outcomes than over the last few years.

Check out the original report here.

As always, my office hours are open, if you’d like to chat about this or anything else, just grab some time 😊.

I hope you found Off Balance #31 useful. As always, I’d love to get your feedback and understand the sort of topics you would love to hear about.

Just hit reply to this mail or drop me a line at hello@emergeone.co.uk and let me know 😊

🚀And that’s a wrap for this edition of Off Balance – I’d appreciate your feedback so just reply to this email if you’ve got something you’d like to say.

📨 And if you think someone else might love this, please forward it on to them,

🎧 Finally, if you’re a fan of the Nothing Ventured podcast, please don’t forget to like, rate and subscribe wherever you get your pods – it really helps us spread the word.

That’s it from me so until next time…

Stay liquid 🙂

Aarish