What tech investors are thinking right now

Roland Emmans

Many tech companies are asking us about the state of the equity finance markets and the current environment for fundraising. There are perceptions that all the markets are closed right now. While the world has changed from 18 months ago, that’s not my sense. What’s your perspective?

Amelia Armour

PitchBook data shows that €12bn was invested in VC-backed companies in Europe in the first quarter of 2023. On an annualised basis, that means that investment will be back to 2020 levels.

However, there is a lot of capital within the VC funds and there is an underlying optimism. The market may be slow at the moment but there are many companies waiting to float on the public markets.

Alex Snodgrass

There has definitely been a cooling in the market but there's still a lot of money out there to be deployed; some funds are sitting on their hands. I’m optimistic about the direction of the market.

Roland Emmans

Valuations have clearly shifted from where they were in 2021 but I see entrepreneurs and investors responding by focusing much more on what the business does and how it will achieve its growth trajectory, rather than being infatuated by valuations. What is your perspective on changing valuations?

Amelia Armour

Compared to two years ago, there has been a readjustment which has been particularly big in later-stage companies. PitchBook data shows that there has been a 10x increase in the median valuations of these companies between 2018 to 2022. At the seed and Series-A stages you don’t get much movement in the valuations.

Entrepreneurs and founders need to be realistic about valuations. If you have not hit your milestones and revenue targets, you have to be honest. If the price offered by a new investor is lower than the price of your last round, just take it on the chin.

Alex Snodgrass

In 2021, valuations were very high - arguably too high. The readjustment has been healthy to some degree, although some people may be anchored to previous valuations.

Fundamentally, we are backing businesses by making minority investments that will support delivery of future value. As long as you can buy into the future - about where the business is going - founders and entrepreneurs should buy into this short-term valuation adjustment as they build towards their ultimate goal.

Roland Emmans

How are tech businesses responding in this changed environment?

Amelia Armour

Businesses are focusing on their operational metrics, not just high growth. They are conserving their cash to extend their runway, so that they can deliver top line growth with the longer-term aim of getting to profitability. That has been a real shift.

Some of the companies in our portfolio are focused on raising enough capital to see them through the next few years. They are not optimising for valuation. Early-stage deep tech companies, who invest heavily into R&D and do not have early revenues, need to ensure that they have strong balance sheets. Software companies, especially at Series-A or Series-B, can adjust their cash-burn to find an earlier route to profitability.

Alex Snodgrass

The main priority has been revenue growth but now, based on a tempering of demand from clients, there is more of a focus on cost-cutting and getting into the best possible shape to ride out this tougher phase.

Roland Emmans

With investors being more selective and an uncertain geopolitical and economic environment, what would be your advice to an entrepreneur looking to raise external capital for the first time?

Alex Snodgrass

Focus on operational efficiency and make sure you are in the right place before taking on funding. Understand your cash runway and that you can see your way to profitability.

Reference and do a thorough due diligence on your potential investors. You need to have the right supportive partner on board who can you help see you through the challenges ahead. There has been disruption with some funders not being able to follow through on their commitments.

Amelia Armour

Good companies will always be able to raise money. Be clear about you will achieve with that first round of funding. What milestones will you reach so that you can unlock the next round of capital?

Make sure you raise enough capital. I think that in the UK we don't fund our seed rounds in deep tech companies significantly enough. That makes it more difficult to reach their next inflection points.

Explain your route from great technology to having an amazing product that customers like. Try to get some early commercial traction to show that somebody will pay for it. In the UK, people under-value their technology and products. They don’t charge enough! So charge more and get more commercial validations that will help you unlock the next round of funding. If you have met your first set of milestones, you will be able to achieve that.

Roland Emmans

We find that many tech businesses cannot easily explain what they do, how they do it and who their actual buyers will be. What’s your view?

Alex Snodgrass

It is really important that companies can articulate how their business will make money and how it can successfully scale. We do see businesses falling into the trap of charging less than their product is worth in order to gain commercial traction – and then struggling to get out of that trap.

Roland Emmans

Gartner has updated its projections for global tech sector growth, forecasting a 5.5% increase in worldwide IT spend. I am a bit surprised. I'm seeing big drives on AI, on cyber and on business efficiency. There are niche areas that are growing strongly. In which areas are you seeing growth?

Alex Snodgrass

I share your surprise. The last 12 months have been pretty hard. While many businesses are still growing, it’s been at a slower rate and they are focused on taking costs out.

Amelia Armour

We made our first investment in an AI company in 2014 and AI is a big investment thesis for us. The release of large language models is very exciting – as the more data you put into them, the better they get.

While we have seen some of our companies adopting generative AI for their own products, we have yet to see large-scale adoption by enterprises incorporating them into their own businesses. But when they do, that could be exciting for enterprise efficiency.

The large language models have problems of bias in the data and of ‘hallucination’ in their results – where they make up facts which are plausible but wrong. Explainable AI - where truth checking products might run alongside the large language models - is an extremely interesting area.

The discussion around regulation as AI develops is also very interesting. Already we are seeing companies being sued because they have used other companies’ data to train their models on. It is great that the UK is trying to lead on this issue; we need consumers and users to trust the system. The discussion needs to be open and diverse.

Roland Emmans

In terms of sustainability, what do investors expect? What progress do you expect to see from your investee companies?

Alex Snodgrass

ESG permeates almost everything we do. We will look at the ESG rating of a business before we invest. But this is a journey - we're not expecting every business that we back to be perfect from an ESG perspective, particularly at an early stage when resources are scarce. It is more that they acknowledge where they want to get to in terms of ESG and how we can help them do that.

Not every growing business needs to hire someone who is dedicated to ESG initiatives. From our perspective, resources can be deployed on a fractional basis; we help our investee companies to find people who can help to shape their ESG agenda and to ensure they have made real progress by the time they exit our portfolio. ESG is a broad ambit, so it's about finding each business access the right help that they need.

We try to get our 300 portfolio companies to talk to each other and ESG plays an important part in these conversations. Recently, we pulled them together to talk about issues such as diversity, sustainability, and how to encourage more female entrepreneurs. By sharing best practice, we hope to make a real difference for our portfolio companies.

Amelia Armour

We encourage our companies to invest heavily in recruitment, mentoring, to build a diverse workforce across gender and race so that you have greater range of thought around the table. In 2020, McKinsey produced a report that showed diverse teams leads to a greater financial outcome. Among our investee companies, diversity tracking metrics are reported at board level - just the act of asking for that data and having it reported can drive change.

At Amadeus, we have a 50/50 gender split at senior level but the VC world as a whole needs to do more to increase the number of female investment partners.

Alex Snodgrass

That is a very valid point. As investors, we should be judged by the same measures that we apply to a portfolio company.

Roland Emmans

What about carbon emissions and net zero? We are beginning to see firms being shortlisted for public sector contracts based on their ESG standings. Customers further up the supply chain are looking to measure their Scope 3 emissions and so are asking questions of their suppliers.

Amelia Armour

We are all on this journey - and it will be a long one - and we need to be open about that. What we ask our companies to report on will reflect the stage of their development; and what they report on will change over time. We should not be asking for data just for the sake of it; it is how we use that data that matters.

Alex Snodgrass

We take a scorecard approach to get an impact rating on the ESG dynamics of our portfolio companies and it's a pretty thorough process. But there is no point in just collecting that data - it is about how we use that data to help make each business a better business.

Roland Emmans

What is so interesting is that you are in very different parts of the market but your approach is consistent – make sure that what gets tracked is appropriate, gets done and brings benefits to people. Thank you for being part of this conversation.

Roland Emmans

You are going to be marooned on a desert island. What is the one piece of technology you would take with you?

Amelia Armour

A 3D printer. I could print a boat, for one thing. And can I have a pot of Nutella as well?

Alex Snodgrass

An iPod, if I still had one, or an iPhone – anything on which I could play my music.