October 24, 2023
How is the US investment environment faring?
Throughout 2023, the startup ecosystem has faced uncertainty, leading to a decline in investments, exits, and fundraising. Seed stage startup deals have stagnated, with investors showing caution and preferring capital-efficient milestones. This cautious approach is reflected in the near-decade low early-stage valuation step-up of 1.6x in Q22023 and the decade-high median age of companies at the seed round.
The US venture ecosystem is experiencing reduced participation from nontraditional investors due to rising interest rates, and the decline in deal value from $122.4 billion in the first half of 2022 adds to the challenging environment.
Persistent challenges, such as the lack of liquidity and high interest rates, are putting pressure on early-stage startups. Investor hesitance and concerns over potential down rounds have affected dealmaking, leading to low relative velocity of value creation and step-up in valuations. Late-stage startups also face financing and exit challenges, with insider-led deals reaching a decade high of 9.4% of total deals, indicating a capital shortage and investor reluctance to take on risks.
The resolution of the US debt-ceiling debate brings temporary relief to the economy, preventing major financial market chaos and government shutdown. Although the economic outlook predicts a slowdown, positive indicators in the labour market suggest the slowdown will not turn into a recession.
Concerns remain regarding the Federal Reserve’s tightening cycle and soft business investment. Foreign growth, energy supply issues in Europe, and uncertainties about China’s growth could impact the US economy.
Overall, the US economy is expected to face headwinds in 2023, but these challenges are not self- inflicted by the government. The baseline scenario predicts slow economic growth without a recession.
Participation of US VCs in Europe
The VC landscape in both North America and Europe, found themselves grappling with a notable downturn in dealmaking activity to start 2023, yet it is Europe that faired the worst of this decline. In comparing the level of deals for H1 2023 to that of H1 2022, Europe contracted by a significant level of 32%, whilst North America fell by relatively milder, yet still substantial amount of 29%.
This reduction of deals can be underscored by the reduced number of North American investors participating in European VC deals. The number of deals which the investors have partaken in is the lowest amount since 2020 – amounting to only 24%. This shift in investment behaviour can be attributed to an overarching sentiment amongst investors who wish to focus within their domestic markets due to the uncertainties stemming from various factors. It is predicted that until there is a greater sense of assurance in the European markets, that additional North American investors may refrain from making investments.
There was initial sense of optimism for an inflow of North American investor capital given the subdued valuations and prospects for portfolio diversification offered within Europe. However, the appreciation of the pound and euro against the dollar has softened the interest and likely offset the aforementioned benefits.
Family Office allocations to Direct Investments
How are Family Offices allocating their investments?
According to a global survey, four-fifths of family offices have reported engaging in direct investments. This trend remains consistent across family offices with assets under management (AUM) both below and above the $500 million mark. This finding suggests that family offices, regardless of their AUM, are actively seeking out opportunities for direct investment, indicating a growing preference for direct involvement in investment decisions rather than relying solely on external money managers or intermediaries. Family offices in North America (86%) and Europe, the Middle East and Africa (87%) were the likeliest to engage in direct investments, with Asia Pacific the outlier at 69%. A significant portion of family offices (49%) rely on other families and networking groups for deal flow, while 51% rely on their internal teams. However, there is a growing trend of family offices turning to external investment advisors (24%) and banks (21%) for investment opportunities.
What is the ticket size of Direct Investments made?
Although the number of Family Offices partaking in Direct Investments has remained relatively stable over the past year, the preferred ticket size has increased. An amount of 31% of Family Offices reported that their direct ticket sizes fell between $1 million - $2.5 million with an additional 23% reporting an amount between $2.5 million - $5 million. The consensus for this increase is that as Family Offices are gaining more confidence, having partaken in a greater number of deals, they are more confident in making larger ticket investments. However, it should be noted that Family Offices with below $500 million AUM still have a strong tendency to make investments of ticket size under $2.5 million – with 65% of Family Offices in this AUM bracket making investments equal or smaller to this size.
In what stage are Family Offices investing?
Family Offices’ preference towards the stage of investment has a clear bias towards the earlier forms of investment with 56% of Family Office’s indicating that they invest in either Series A or B startups, and additionally 55% investing in Series C or D. An interesting trend to note is the increased interest in secondary transactions which now 23% of Family Offices have indicated that they have made an investment in. Leveraged buyouts showed the category with the least interest (19%), whilst seed funding 25%) and Pre-IPO (32%) were also both lower on the radar of families in comparison to the Early Stage and Growth categories.
Which sectors are the investments being made?
The most popular sector which has been invested into is the Technology sector, in which 63% of Family Offices have invested into. This is followed by Real Estate and Healthcare which amount to 42% and 40% respectively. These preferences reflect those in the public sector where recent developments in artificial intelligence have led to rebound of interest into the technology sector. One aspect of the sector preference significant to note, is that Family Office preferences were largely the same regardless the size of the Family Office.
We were happy to present our findings based upon the following key studies:
