Dear Members,

As the summer comes to an end - 2021 feels further and further away from us.

Between October 2021 and June 2022, most of the listed tech companies lost between 30% to 90% of their value. Netflix lost -74%, Paypal -72%, AirBnB -52%, Upstart -90%, Zoom (US) -59% etc.

These drops have a huge effect on private valuation and how VC and investor apprehend the market compared to 2021.

1 - Are we getting back to reality?

What if the dropdown of the market was actually a market correction?

The huge amount of liquidity that the centrals banks put on the market led venture valuations to rise and shine (among other thing).

2021 was a crazy year for the (primary) venture capital market, we saw incredible things like SaaS companies valued at 100x the ARR, or a fintech unicorn that only made €2m revenues per year (you know who I am referring to).

It seemed so easy to raise funds, anyone with a strong team and a good idea was able to raise from a couple of millions to hundreds.

Any investors back then was able to tell you that those valuations were crazy, except the ones that invested 4 years back ;)

2 - 2021 Impact on the Venture Secondary Market

The secondary market was even more shady and unintelligible, given the fact that investors were investing in the same companies we saw on the primary market, but without any data regarding the “said” company.

This can be explained very easily: the private market was ultra volatile back then ; many startups often doubled or tripled their valuation in less than a year.

VCs saw their NAV rising to the stars, we also experienced some excellent IPOs which make us believe that the vast majority of tech companies could have the same story as Airbnb.

Plus, all the specialised press started talking about employee and business angel that became multi millionaires thanks to their “ESOP” shares.

Every investors went crazy and wanted a piece of the cake. But like every betting and volatile market, reality hits harder than you think.

3 - Decision of Centrals Banks

Fed and BCE decided to fight against inflation rather than recession, meaning they will use the only leverage they have on the economy: Interest Rates.

Central Banks decided to reduce their balance sheet, which will ultimately lead to a drop of liquidity amount on the market and a rise of debt cost.

There are many ways to understand how those rates will affect the market, that being said, it will for sure impact the valuation of the listed and private companies.

As these decisions will have a mid to long term effect, we have to prepare ourselves to face more difficult times regarding financing and valuation - Which is a very good news.

4 - What will happen in the next 12 months?

Everybody is sitting and waiting but at some point, someone will do something.

The public market are the first one to be impacted. For now everything is fine on the blue stock, but due to Central Banks decisions, we will see a decrease between October and November this year.

It is wise for investors to be greedy when others are fearful and fearful when others are greedy

You may say "Boomer" when seeing Warren Buffet, nevertheless, he is still one of the best investor in the world (Cathy Wood where are you?), and his words would make all the more sense in this fearful momentum of the market.

On the Public market, we are experiencing extreme bearish bets in public stocks with record short positions.

And on the Private Equity market, we will experience a dramatic fall of volume and transactions, due to the rise of debt cost, and a drop of LBOs numbers.

=> These Extreme bearish bets in stocks could actually fuel a huge market rebound either on the Public and on the PE market.

Most of the market operators are betting at the same time on a downside of the market. A Black Swan always happen, when investors do not expect it.

If everyone thinks there is a black swan ahead of us, then it means it is just not a black swan ;) but just clouds in the sky.

At NSL, we know that when there is a large consensus, thinking the same thing at the same time is often wrong.

Furthermore, in a context of high inflation and higher fixed costs, would you rather prefer to stay in cash and be certain to lose, or benefit from market windows to catch trains that are still at the station and maybe trains that you missed last year?

Those right in time investments could offer you a mid / long term protection to inflation as well as capital gains.

We need to keep in mind that real interest rates are still negative or very low, and will remain as such with recession risk ahead, hence why being invested in real economy (PE companies) rather than cash makes sense.

We just need to focus on most of the class companies, delivering growth with profitability ahead.

Review your investment thesis and focus on Valuation.

This market window will offer some investors the opportunity - via secondary opportunities that we offer at NotSoLiquid - to invest in top category-leader companies, which were inaccessible when it was bull market and FOMO moment and big US PE funds took all of the stocks available during past rounds of financing.

Now it is your turn.