Venture Capital/Analysis/ Is European tech having a dotcom moment? Seasoned investors think European tech is in for a longer period of pain than it’s experienced in the past By Amy O'Brien 22 November 2022 Sam Bankman-Fried, the CEO of collapsed crypto exchange FTX Sam Bankman-Fried, the CEO of collapsed crypto exchange FTX \Venture Capital Hoxton Ventures to add a new partner in April By Amy Lewin 17 February 2023 Venture Capital/Analysis/ Is European tech having a dotcom moment? Seasoned investors think European tech is in for a longer period of pain than it’s experienced in the past By Amy O'Brien 22 November 2022 The last few weeks in tech have been… eventful. To recap: one of the world’s biggest crypto exchanges, FTX, collapsed; big tech giants Meta and Amazon laid off 20k tech workers between them; in Europe, fintechs Wayflyer and Juni laid off 40% and 30% of their staff, respectively; and events startup Hopin made its third round of layoffs this year. It’s part of a months-long trend of tech startups being battered by the economic downturn. But many of the startups born during European tech’s coming-of-age — the likes of Checkout.com (2012), Deliveroo (2013) and Revolut (2015) — haven’t been around long enough to have witnessed anything like this before, whether that’s the dotcom crash in 2000 or the financial crash of 2008. When the dotcom bubble burst in 2000, it was predominantly Silicon Valley companies that were harmed. Now, with more late-stage and publicly listed companies, Europe’s tech scene is more exposed. So, are we running headfirst into a similar scenario, and might this time round be worse? To find out, Sifted scraped the continent for investors who were on the scene in 2000 to see if they’re getting déjà vu. Could this time round be worse? Doug Leone, the billionaire general partner of US VC giant Sequoia — which was an exuberant backer of FTX — forecast a bleak period ahead at tech conference Slush last week. “The situation today is more difficult and more challenging than either 2008 — which was really a protected financial services crisis — or 2000, which was a protected technology crisis,” he told Sequoia’s Luciana Lixandru on stage. “We should be prepared for a longer period of challenges than we’ve faced in the past” “Here, we have a global crisis,” he said, citing rising interest rates, consumers running out of money globally, the energy crisis and geopolitical challenges. “My forecast is that we’re not going to get away with this very quickly. How long? Who really knows but it’s not going to be a 2024 recovery.” Leone said we can look at historical downturns to get an idea of how long this one might last, recalling the “16 year malaise” in the 1970s, and the fact that a number of public companies didn’t recover for 10 years after the 2000 bust. “So we should be prepared for a longer period of challenges than we’ve faced in the past,” he said. Common denominators The market conditions of the last couple of years are also giving industry veterans déjà vu about former crises. “There are some headline commonalities,” Manuel Silva Martinez, general partner at Mouro Capital, tells Sifted. “A fast ramp-up in liquidity in the market; a fast concentration in interest in technology across private and public markets; and a listings ecosystem (call it IPOs, call it SPACs) arguably a little bit too lax at discerning what is suitable for a public listing.” Beyond these market indicators, Sequoia’s Leone was a bit more blunt in his diagnosis of the tech industry’s issues and suggested that founders had enjoyed too much easy money. “In the last two to three years, whatever you did was rewarded by some investor because of the plethora of capital,” Leone said. “You could make a shit decision or a good decision and you got money, which is a lousy way for you to learn your craft. All that has gone, and the healthy balance between founder and business partner is now in place.” Tech’s staying power isn’t in doubt But while the industry is being cut down to size, investors also point out that people have developed a dependency on tech in the last 22 years that can’t be wiped out as easily as a startup’s valuation. “The difference between 2022 and 2000 is that tech is now ubiquitous to all industries and subject to the macroeconomic cycle,” Anne Glover, CEO at Amadeus Capital Partners, tells Sifted. “The layoffs and downgrades are due in large part to worldwide forces which are depressing most economies. But these foundational technology stocks will recover when economies recover and stability returns.” That’s because there are so many tech companies this time around that are actually solving real problems in society, according to Robin Klein, partner at LocalGlobe. “The difference between 2022 and 2000 is that tech is now ubiquitous to all industries” Contrary to what Sequoia’s Leone says, Klein believes that the current environment “hardly compares at all” with the dotcom bubble — other than the “irrational exuberance of investors” that he tells Sifted is displayed in most extended bull markets. “In the year 2000 there were only 360m people online, but today, 64% of the world’s 8bn people are online,” Klein says. “Company operators, their investors, and public markets operators have matured tremendously between these two historical moments,” adds Martinez. Crypto’s crisis of confidence Although investors say that this time around the pain is spread much more widely across business sectors than the tech-specific crash of 2000, they all agree the FTX saga brings up bad memories. “We’re not experiencing a genuine crisis for technology companies today, but there are echoes of the dotcom crash in the crypto collapse over recent weeks,” says Sharon Vosmek, CEO of female-focused investment firm Astia. She points out that both showed a fundamental failure of corporate governance. “This leads to disaster for those involved,” she says. “FTX had no board, no voting rights and no financial reporting, yet investors were pumping huge sums of money into the business. This was also happening 20 years ago — and I have little sympathy for a business that does not take governance seriously.” Investors say this won’t necessarily lead to crypto’s complete demise, but that it’s going to take a while to rebuild trust in the industry. “Crypto markets and assets are not yet widely owned, nor central to economies,” says Glover. “This will cause casualties, but they won’t be widespread, and will just generate appropriate caution about the adoption of cryptocurrencies and stablecoins.” What’s next? Despite all the doom and gloom, investors believe the best companies to come out of this crisis will be those that leave their egos at the door — and perhaps swallow a down round on the way. “In boom times you exit and sell, and in times like this you buy, invest and create great habits,” said Sequoia’s Leone, who advised founders not to get caught up in the valuation mania but to think about their company’s long-term plan. “If you’ve got to raise $50m and you were at a valuation of $500m last round, but this time it’s $350m, take the money. Explain to your employees what the plan is,” he said. “There are too many companies trying to protect some artificial last round price for all the wrong reasons.” Europe is often criticised for its conservative attitude towards failure in business. But investors say that overcoming this stigma could be what separates the companies that survive from those that don’t. “There are too many companies trying to protect some artificial price for all the wrong reasons” “We’re seeing that in places like the US or Israel, the tech market is much more dynamic and people are correcting their valuations at a much faster pace,” says Martinez. “But Europe has an issue with failure and correction. The sooner we overcome that the better.” The sad reality is that tapping investors for cash is easier said than done right now. Only some companies will succeed, and we will see consolidation in the market. But Leone’s parting advice to European startups that think they’ll survive? “Do not waste the recession.” Amy O’Brien is Sifted fintech’s reporter. She tweets from @Amy_EOBrien and writes our fintech newsletter — you can sign up here. 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