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Equity rallies, bank runs, a credit crunch and a VC slowdown - making sense of Q1 2023

Welcome to the Q1 2023 edition of my European SaaS Musings!

I’ll now publish this quarterly, and cover some of the game-changing need-to-know’s

in the European SaaS world.

You can expect opinionated commentary & data on the public markets,

macroeconomics, and the most interesting, notable & exciting VC rounds in European SaaS, and finally some of the top things we’ve been reading.

To be the first to know when the Q2 musings has dropped, subscribe to Oxx communications (the subscription form can be found in the footer at the bottom of the page).

1) What’s going on in the public markets?

2023 started very strongly for public SaaS valuations, the basket of SaaS stocks included within the BVP Nasdaq Emerging Cloud Index (EMCLOUD) bounced up 15% in January alone, representing a jubilant start to the New Year. This continued with a buoyant first week of February, where the index climbed another 10% to net a total 25% increase in the first 5 weeks of the year.

The index proceeded to slowly shed most of these gains, dropping back to a range of +5-10% since the start of the year, before a late surge at the end of March, finally landing between +15-20% during the quarter.

Zooming out to look at the last 12 month time period, we can see that whilst the net Q1 performance has looked directionally positive, the total gains only push the index close to the average position last achieved in Q3 2022, whilst it remains about 30% down vs the levels achieved 12 months ago, at the end of Q1 2022.

Overall valuation multiples measured by enterprise value to annual recurring revenue (EV / ARR) for public SaaS companies increased during the quarter, now standing at a 7.1x median multiple, ~10% up since the end of 2022.

With positive movements in the public markets as technology stocks have seen one of the more sustained rallies in recent history (despite the material shocks in the quarter, see Section 2 below) – inevitably comes discussion over when the tech IPO market is going to open.

Most of the commentary appears to be debating whether there will be a material unlock in H2 2023, or whether it will begin in 2024. Analysis below from Morgan Stanley hits the middle of this range – extrapolating from previous “IPO Winter’s” to suggest that the IPO window might re-open from Q4 2023 onwards. TechCrunch recently suggested that people might watch out for some of the large HR-Tech unicorns – eg Rippling, Gusto, Deel or Velocity Global, who could be some contenders for early listing once the winter thaws.

In advance of the thawing of IPO’s, there has been continued take-private activity, and commentary over the “Great Consolidation” starting to take place within venture-backed tech. We hear that M&A bankers have had a busy quarter, with lots of (unannounced) activity ongoing amongst mid to large scale technology businesses, across a number of different verticals.

Businesses facing a challenging late stage private market financing environment and slowing growth are looking to corner their market positions and improve their financial profile by merging with or acquiring competitors – and we see this as something to watch out for over the remainder of 2023.

2) Return of the (credit) crunch?

Q1 was memorable for many in the tech industry due to the sudden and shocking events related to Silicon Valley Bank (SVB).

SVB – a long-standing institution supporting early stage tech companies (and funds) across multiple financing activities, got into difficulties which resulted in the UK and US entities being taken over, by HSBC and First Citizens, respectively. This was by far the biggest bank failure since the Global Financial Crisis – the business had >$200bn in assets, and a market cap of $16bn.

Lots has been written about the causes of this, which primarily resulted from a classic bank run, catalysed by panic over unrealised losses in a long-duration portfolio as interest rates rose. The below chart from the FT stood out in particular to me.

Like many in the VC and technology industry – I was pleased to see a swift resolution and wish HSBC and First Citizens the best integrating SVB’s great team & capabilities into their platforms. Oxx was a key part of a strong VC-industry response, drafting joint statements with other funds, actively liaising with portfolio companies, and lobbying government bodies. My colleague Richard shared some of his thoughts on the topic and what it might mean in the future in this piece for Forbes.

The fallout from this was rapid and profound. Per the Economist – “after the collapse of SVB, capital markets essentially froze”. In the week immediately after the collapse, from March 11-19th, American corporations issued no investment grade bonds, having issued a daily average of $5bn in Jan and Feb…

And things then got worse. About a week later, Credit Suisse was suddenly in trouble, which resulted in a takeover by long-term rival UBS after being thrown a £44bn lifeline by the Swiss central bank. This led to further concerns about whether Deutsche would be next in the chain, which fortunately proved to be unfounded.

An interesting initial consequence of the bank failures relates to the slow progress on the unwind of quantitative easing, which central banks had been painstakingly trying to reverse.

Goldman writes that “2/3 of the quantitative tightening that was painfully achieved over the last year has been given back on the back of the Fed balance sheet expansion in response to the US regional bank issues”. To give context to these numbers – the Fed took 12 months to shrink its balance sheet by ~$600bn, and $300-400bn of this was re-invested in a matter of days.

In addition to this headache for central banks, it’s potentially driving a different headache for commercial banks and other lenders, specifically related to restrictions in future credit availability.

JPMorgan strategists wrote that “the uncertainty generated by deposit movements could cause banks to become more cautious on lending.” This could have widespread impacts across the economy, as smaller banks, disproportionately affected by the flight of deposits, contribute a material proportion of overall lending – per Goldman, banks with <$250bn in assets account for 45% of all consumer lending, whilst 43% of the $5tn of commercial loans sit with the mid-sized banks. And of course – housing remains precarious as mortgage rates hover near multi decade highs…

Inflation remains stubborn in many places which is maintaining the short term upward pressure on interest rates. This is going better in the US – the Fed’s recent rate rise shifted language from “ongoing hikes” to “additional policy firming may be appropriate”. And Eurozone inflation rates appear to be falling. But the UK has now broken out, taking the unfortunate accolade of the most persistently high inflation across key global regions.

Inflation doesn’t appear to be exacerbated by the labour market (certainly with a technology lens) – as there continue to be material start-up layoffs. Carta reports that there’s still a very significant number of firms that are making 25 or more employees redundant per month. This is well above the longer term average, and has been sustained at a high level across most of Q4 2022 and Q1 2023.

And finally, the predictive recession indicators make for bleak reading. The US 10y/3m yield curve is now exhibiting the deepest inversion in history. As shown in the below chart - this has a pretty much perfect track record of predicting when recessions (in grey) will occur. So it continues to be possible we remain at risk of a deteriorating period of stagflation in the global economy.

3) Q1 took a clear dip in European early stage investing

So – whilst the public SaaS markets had a good quarter, the macro was super shaky, and the earlier stage markets have also taken a bit of a hit.

We generally review about 100 scale-up stage B2B SaaS rounds happening each quarter on average across Europe and Israel ($5-30m equity rounds in B2B SaaS businesses that are named Series A – C rounds).

Q1 of 2023 was – as you might expect – softer, with a total of just 77 transactions (all the way back to 2019 levels, and 1/3 down YoY). March was about 50% higher than both January and February, which could be an early indicator of a re-acceleration, but equally could just be the timing of the round announcements.

There’s also typically a further 50 B2B SaaS rounds per quarter that happen, with the same fundraising parameters, but are not named “milestone” A-C rounds. This can include typical smaller “Growth Equity” transactions, but also is the most typical labelling for internal follow on, or “bridge” style financing rounds.

Below we show a chart of the rolling average deal count per transaction type. We can see a few interesting patterns:

1. Series A rounds, very resilient across 2021 and H1 2022, dipped slightly in H2

2022 and materially in Q1 of 2023.

2. There was similar strong growth in the “Other” bucket of non-milestone

rounds, which captures the very significant volume of insider rounds during

2021 and 2022.

a. This continued for half a year longer than the Series A’s – reflecting

persistent requirements for insider rounds, and these have seen a

flatter decline so far in Q1 of 2023.

3. Continued softness in the numbers of (mid-sized) Series B’s and (small)

Series C’s.

A consequence of the tougher fundraising environment, and the increased proportion of non-milestone “bridge” rounds during 2022, is that round velocity has reduced. The excellent treasure trove of data that Carta distributes contains the below, highlighting the slowdown in total rounds in Q1 of 2023, which matches the analysis we’ve shared above.

Looking forward – it’s looking increasingly certain that there are going to be a lot of companies raising, it’s just a question of when.

This is a pretty inevitable conclusion of: 1) Series A volumes have been very high across all of 2021 and 2022, 2) a huge proportion of businesses raised internal extension equity rounds (or convertible notes, or venture debt) to extend runway, and 3) there are materially fewer new rounds that happened in Q1 of 2023.

IVP recently made a comment on this, stating: “4/5 early stage companies have fewer than 12 months of runway left… expecting a material uptick in raises in H2 2023 and 2024 as cash burns and runways collide”.

Given this, businesses are continuing to pursue the elusive ‘profitable growth’ – as markets continue to reward companies with moderate growth and low burn multiples / running at breakeven, vs high growth at all costs.

Tom Tunguz shared some interesting data on the topic. Companies with high burn multiples (4 or 5x) are looking to materially reduce this. Much of this is likely from dramatic restructuring – but some may be assuming a big revenue acceleration.

Also – companies who are operating efficiently, with burn multiples of 1x, are actually looking to increase the burn multiple. This on balance probably reflects these efficient companies increasing investment to consolidate their market position, build their product and boost long term prospects (though not necessarily short term revenue growth).

This results in an interesting picture, where in his sample, there’s actually no correlation between burn multiple and expected 2023 ARR growth.

This is a bit of a puzzle. If this reflects realistic expectations (rather than unreliable and autocorrelated forecasting), then it will split companies into the clear “have’s” and “have-not’s” with respect to revenue growth.

If generally, across companies, the burn multiple is invariant with ARR growth, things are probably going to be fine for future fundraising if you hit your growth projections. But – if you don’t hit the revenue growth, the worst thing to do is maintain your high burn multiple.

And lastly – lots of businesses who are relying on ramping sales & marketing investment to control burn multiples are seeing their sales cycles extending and new ARR taking longer to appear. Tom Tunguz also shared data on this topic, and he notes this has been particularly prevalent in the enterprise – with an average 36% increase in the enterprise sales cycle, compared to the average across all start-ups landing at 24%.

Against this backdrop, it’s particularly important to reflect on the businesses that have had strong raises during the quarter.

Below are my top dozen or so European SaaS Deals announced in Q1. This (obviously) includes a personal favourite, Cybersmart, an SMB-focussed cybersecurity / insurance business, where Oxx led a $15m Series A round in the quarter! We're thrilled to have backed Jamie & the rest of their team and can't wait to see them progress in the coming years.

More generally – security is a very clear theme in many of the investments, as well as some next-gen commerce tools (eg Hygraph and Vue Storefront); and a cluster of businesses operating in the fintech / regtech space.

Congratulations to the companies raising - some great businesses & rounds here! If there are any other companies & rounds you think I should have included, LMK.

4) Great things I read this quarter

There was an unfathomable amount of (human and AI-generated) content on ChatGPT and Generative AI more broadly. Unsurprisingly, the tech industry is very excited, accompanied by some bullish early research insights:

“Our findings reveal that around 80% of the U.S. workforce could have at least 10% of their work tasks affected by the introduction of LLMs, while approximately 19% of workers may see at least 50% of their tasks impacted” – plucked from ‘An Early Look at the Labor Market Impact Potential of Large Language Models’, published on the 17th March.

But some other commentators, notably including Paul Krugman in the New York Times, treat the developments with a little more caution:

That’s not to say that AI won’t have huge economic impacts. But history suggests that they won’t come quickly. ChatGPT and whatever follows are probably an economic story for the 2030s, not for the next few years”.

Outside of the AI-sphere, lots of market review pieces appearing in the quarter as the data for 2022 is finalised, including some interesting forward looking predictions for 2023.

5) Thanks for reading!

I hope you enjoyed reading this Q1 update. If you have any feedback, please do

reach out (; all comments or recommendations are welcome.

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