Pario Venture's June 2022 Update - Startup and scale-up noise

Pario Venture's June 2022 Update - Startup and scale-up noise

"When there is disruption there is always opportunity "

You cannot help but be aware the financial markets have had some tough times in 2022. Without a doubt, we are now into a phase of challenges for startups and scale-ups out there.

It's been an interesting June 2022 at Pario Ventures. I thought I would share what we have been seeing happening and listening to. We are shortly announcing our fund for supporting good companies during the next period of time as well as a new program providing none financial support.

An interesting stat we saw in regards to TVPI in Q1 this year. TVPI by the way stands for Total Value to Paid In. Google it and understand it. It's a pretty relevant indicator at present. Anyway TVPI in Q1 this year is -3.5% from last year's peak and only beaten by the dot-com crash at -15.7% and the Global financial crisis at -7.8%. All the signals point to that -7.8% fast approaching. Also, the markets are a lot more volatile than they were in the first quarter of this year.

Downturn over by Autumn or is it until 2023 - Some very smart people I know out there say the worst will be over by October this year. Others are expecting a long downturn into 2023. My advice to founders has been to prepare for the longer term and you can always be happy if it's shorter. Not sure we ever really know with this stuff ahead of time.

Cash in Bank - Until that investor has put cash into your company bank account then it's not a done deal. Last week alone I spoke to at least 10 founders who at the last minute had investors pull out of equity investment. If investors have committed then get the funds in, don’t wait to have the perfect alignment.?ABC Always Be Closing as they say.

M&A Cash - We have seen a few examples this month where companies in various stages of an M&A transaction, have seen bank funds/loans aside to trigger the deal have been either rejected even though pre-agreed or terms significantly changed for the worse.?

Hiring - We are seeing a lot of companies UK and US companies cut hiring and those with heavier quarterly losses vs revenue, removing people across the board. However, as in previous times, this means opportunity, the floor falling out so to speak we are already seeing people available on the market and packages lower.?There is a chance also, as with before downturns that people are afraid to move from current jobs.

Founders seeking advice - Always a nightmare for founders. Personally, I use to read the numbers for myself and pretty much did not seek advice from anyone. Other founders speak to the whole world and wonder why they are confused. Honestly, take a look at the markets, look at trends, and the previous history. For example, there is real data out there. Some of it looks overwhelming at first but invest the time in yourself and the business to understand it. Don't expect others to do it for you.

Down rounds are starting - I am not convinced this will become a major thing, however, I am seeing companies probably overvalued last round and not delivering plans quick enough to revenue-raising money at 20-30% lower than they were in 20/21.

Deal Terms/Term Sheets - To combat the down round situation we are seeing terms sheets tightening up for investors to stop any issue of down rounds.?Deals that are focused on investor protection. Could we be about to see the x3 share preference clauses we once saw back over 13 years ago?

Share swap (M&A) - Activity more so in the US, but we are seeing a lot of founders using their company shares to acquire other businesses that are having challenges.

Remote working - Forget what you read in the press. We are seeing a lot of Founders take the attitude that a) office space is not cheap right now(this may change) and b) in challenging times, you want happy staff, so remote working could save some money but also make their company more interesting to work for.

Functionality moving in-house - Spoken to a lot of companies this month that are moving from using externals to internal to at the very least bring some costs down. Expect to see in certain areas this continue. What it may create, a bit like hiring, is some suppliers bring pricing down.

Previous milestones changing - Not surprisingly, the majority of investors are looking for companies to be cash positive sooner rather than later. We have seen a mixed bag of feeling on this from founders. Some say it adds extra stress to their world(hang on for an even bigger ride yet), having to change milestones pre-agreed. Others who expected it or are just happy to weather the storm.??

Less than 12 months runway - Not surprisingly, I would say out of the companies we have spoken to this month, 30-40% have less than 12 months' runway and some are concerned even with cuts they cannot weather the storm. The US actually worse than the UK for this.?

Advisors to companies - I was surprised at the extent of this already. A number of founders we have spoken to say that either their advisors have pretty much stopped working for them or gone AWOL. And these were paid and with skin in the game. Some of the advisor's details we were privy to I would question if they should have been advising companies in the first place, but anyway, that's for a different day. As I said to one founder who was stressing out about this, she thought 4 were going and 1 was left. When asked who was the best one anyway, clearly said the 1 staying. You only want the ones around that can deal with uncertain times ahead.

Will be interesting to see how July pans out. We are heading into the holiday season and I suspect it could be quiet on the deal front of things, certainly in the UK. I also wonder if, by the end of the summer, the government makes some moves on the EIS sunset that's fast approaching for 2025? Will they allow a larger amount of SEIS??

David Murray-Hundley "The Grumpy Entrepreneur" is Co-Founder and CEO of Pario Ventures. Having gone bust after the dot-com boom and created a company in the GFC, David has seen his fair share of carnage. Pario Ventures is based in London, New York, and Brussels. Pario holds investments in over 80 companies across Mobility, Oil and Gas, Fintech, SpaceTech and others.