The Numis Growth Capital Survey (1Q20): Contagion

The Numis Growth Capital Survey (1Q20): Contagion

To provide clarity amidst volatility, over a 72 hour period we surveyed 18 of the world’s leading growth investors — including Andreessen Horowitz, DST Global, General Catalyst, Greylock, IVP, Kinnevik, Naspers, Sequoia and Valar Ventures.

In our highlights deck we share their beliefs and expectations regarding COVID-19, the economy, investment appetite, priorities, valuations, strategy — and what they believe is misunderstood by founders. Highlights below - see the highlights deck for more, including our recommendations for founders.
 
Highlights:
• Investors expect COVID-19’s impact to be significant and sustained.
• Investors are pessimistic regarding the macroeconomic environment for the coming year. One in three expect a prolonged global recession; many believe the issue is finely balanced.
• Subject to valuation, appetite to invest is holding firm. New investments face greater headwinds than follow-ons. Investors are willing to look past weaker short-term performance for companies with structural growth opportunities.
• Software-as-a-service (SaaS), fintech and ‘deep tech’ prospects are favoured; investors are wary of propositions exposed to discretionary consumer spending.
• ‘Disruptors’ are not immune to valuation pressure. Public market software multiples have compressed 25%. Most scale-up investors anticipate reducing the valuations they offer — one in three, significantly. But investors entertain flexibility for the best-performing companies.
• Investors believe companies should re-prioritise profitability over growth — but six in ten see opportunities for profitable companies to invest for marketshare.
• According to investors, macroeconomic risk and the context for current valuations are most misunderstood by founders. Among investors, challenges posed by the changing dynamics of the business cycle are misunderstood, according to investor peers. 

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David Kelnar

March 12, 2020
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Transcript

  1. GROWTH CAPITAL SURVEY (1Q20): CONTAGION Over the last 72 hours

    we surveyed 18 of the world’s leading growth investors including Andreessen Horowitz, Greylock and Sequoia. Our survey reveals economic pessimism, sustained investment appetite, diverging valuation dynamics and new strategic success factors for scale-ups. March 12th, 2020
  2. THE NUMIS GROWTH CAPITAL SURVEY (1Q20): CONTAGION Highlights: – Investors

    expect COVID-19’s impact to be significant and sustained. – Investors are pessimistic regarding the macroeconomic environment for the coming year. One in three already expect a prolonged global recession; many believe the issue is finely balanced. – Subject to valuation, appetite to invest is holding firm. New investments face greater headwinds than follow-ons. Investors are willing to look past weaker short-term performance for companies with structural growth opportunities. – Software-as-a-service (SaaS), fintech and ‘deep tech’ prospects are favoured. Investors are wary of propositions exposed to discretionary consumer spending including travel and hospitality. – ‘Disruptors’ are not immune to valuation pressure. Most scale-up investors anticipate reducing the valuations they offer — one in three, significantly. But investors entertain flexibility for the best-performing companies. – Investors believe companies should re-prioritise profitability over growth — but six in ten see opportunities for profitable companies to invest for marketshare. – Macroeconomic risk and the context for current valuations are most misunderstood by founders, according to investors. Challenges posed by the changing dynamics of the business cycle are misunderstood by investors, according to their peers. To provide clarity amidst volatility, over the last 72 hours we surveyed 18 of the world’s leading growth investors – including Andreessen Horowitz, DST Global, General Catalyst, Greylock, IVP, Kinnevik, Naspers, Sequoia and Valar Ventures. Our survey reveals economic pessimism, sustained investment appetite, diverging valuation dynamics and new strategic success factors. Read the blog. 1. Read the Numis Growth Capital Survey (1Q20): Contagion
  3. THE NUMIS GROWTH CAPITAL SURVEY (1Q20): CONTAGION Founder Recommendations: 1.

    Disruption from COVID-19 will likely increase and persist. Model stronger-than-anticipated economic headwinds as disruption devolves into weaker demand. Revisit expectations regarding pipeline engagement and sales cycles. 2. Be decisive in implementing necessary remediations and/or seeking capital. Don’t be at the back of a queue that becomes a stampede. 3. Expect barriers to capital from existing investors to be lower, in the short term, than from new counterparties. If seeking capital from new investors expect fewer in-person meetings, slower decision-making and longer deal cycles. 4. Emphasise structural growth opportunities to mitigate concerns regarding weaker short-term performance. 5. Investors’ risk appetites, priorities and valuation sensitivities vary widely. Seek targeted connections and guidance regarding individual partners’ preferences. 6. Extraordinary companies can sustain premium pricing. But in the absence of best-in-class growth, reconsider valuation expectations. 7. If profitable, evaluate opportunities to invest for marketshare. Read the Numis Growth Capital Survey (1Q20): Contagion 2.
  4. “The impact of COVID-19 is overblown.” % respondents Strongly disagree

    Strongly agree % respondents Brief Lasting “The duration of COVID-19’s impact on the global economy will be…” INVESTORS EXPECT COVID-19’S IMPACT TO BE SIGNIFICANT AND SUSTAINED – Investors strongly disagree that the impact of COVID-19 is overblown. – On balance investors expect COVID-19’s impact on the global economy to be lasting. As ‘lockdowns’ expand, just three in 10 expect the virus’ impact to be short-lived. Sources: Numis Growth Capital Solutions Read the Numis Growth Capital Survey (1Q20): Contagion 3.
  5. Pessimistic Optimistic “I feel…about the macroeconomic environment over the next

    12 months.” %
 respondents Strongly disagree Strongly agree “We are at the beginning of a prolonged global recession.” % respondents ONE IN THREE INVESTORS ANTICIPATE A PROLONGED GLOBAL RECESSION – Almost all investors feel pessimistic about the macroeconomic environment for the next 12 months. – One in three already expect a prolonged global recession, as disruption devolves into reduced supply-side and demand- side activity. Many believe the issue is balanced. Just one in five somewhat or strongly disagree that a prolonged recession is probable. Sources: Numis Growth Capital Solutions Read the Numis Growth Capital Survey (1Q20): Contagion 4.
  6. Decreased Increased “Subject to valuation, my desire to make investments

    is…” % respondents Strongly disagree Strongly agree “I am willing to look through weaker short-term performance for companies with structural growth opportunities.” % respondents APPETITE TO INVEST IS HOLDING FIRM – Subject to valuation, growth investors’ appetite to invest remains solid. – Many investors are willing to look past short-term underperformance for companies with structural growth opportunities. Sources: Numis Growth Capital Solutions Read the Numis Growth Capital Survey (1Q20): Contagion 5.
  7. – Investors are most interested in opportunities in: – Opportunities

    least favoured are those tied to discretionary consumer spending, including: – New investments face greater headwinds than follow-ons. Founders seeking new investments should anticipate: – For follow-on investments, investors anticipate: NEW INVESTMENTS FACE GREATER HEADWINDS THAN FOLLOW-ONS “slower decisions” “longer diligence and deal cycles” “valuation sensitivity” “less impact” “We will support our portfolio through the crisis.” SaaS ‘DeepTech’ FinTech Travel Hospitality Retail Sources: Numis Growth Capital Solutions Read the Numis Growth Capital Survey (1Q20): Contagion 6.
  8. 5-year median 3-year median 10x 9x 8x 7x 6x 5x

    4x 3x EV/NTM Sales Mar 15 Sep 15 Mar 16 Sep 16 Mar 17 Sep 17 Mar 18 Sep 18 Mar 19 Sep 19 Mar 20 ‘DISRUPTORS’ ARE NOT IMMUNE FROM VALUATION PRESSURE – High-growth public software companies, which inform earlier-stage valuations, have not been immune to broader market declines. – We created a basket of 75 ‘Disruptors’ — next- generation, typically software-as-a-service US public software companies. – Despite large market opportunities and rapid growth, Disruptors have suffered rapid multiple compression of 25%+. – Disruptors’ valuations have declined from 9x forward annual revenue to under 7x and broken below their three year average. Valuations for public market ‘disruptors' have compressed 25%+ Source: Numis Growth Capital Solutions Read the Numis Growth Capital Survey (1Q20): Contagion 7.
  9. “Compared with the last six months, valuations I offer in

    the next six months will be…” % respondents Significantly reduced Significantly increased “The best companies will escape valuation pressure.” % respondents Strongly disagree Strongly agree MOST FOUNDERS’ VALUATION EXPECTATIONS WILL BE CHALLENGED Sources: Numis Growth Capital Solutions – Given public market declines and lower expectations for growth, most investors anticipate reducing the valuations they offer — one in three, significantly. – But investors entertain flexibility for the best-performing companies. Six in ten investors somewhat or strongly agree that the best companies will escape valuation pressure. Read the Numis Growth Capital Survey (1Q20): Contagion 8.
  10. “Generally, companies should re-prioritise profitability over growth.” % respondents Strongly

    disagree Strongly agree “Profitable scale-ups should invest to take share, not cut back spend.” % respondents Strongly disagree Strongly agree INVESTOR MINDSET IS SHIFTING TO REPRIORITISE PROFITABILITY THE PENDULUM IS SWINGING TO PROFITABILITY - BUT SOME CAN INVEST FOR SHARE Sources: Numis Growth Capital Solutions – Investors are shifting from rewarding growth to seeking profitability. – Six in ten investors somewhat or strongly believe that scale-ups should re-prioritise profitability over growth, given current market conditions. – For profitable companies, while views differ a majority of investors believe there is scope to invest to take marketshare. Read the Numis Growth Capital Survey (1Q20): Contagion 9.
  11. INVESTOR MINDSET IS SHIFTING TO REPRIORITISE PROFITABILITY INVESTORS BELIEVE FOUNDERS

    MISUNDERSTAND MACRO RISK AND VALUATION CONTEXT Sources: Numis Growth Capital Solutions – We asked investors what they believe is currently most misunderstood by founders. Responses focused on: “The size of the economic pullback in the short term” “[Understanding that] this uncertainty will last” ECONOMIC RISK: CONTEXT FOR VALUATIONS: “How interconnected they really are to the global economy” “Earlier valuations were not normal — this correction is relative to all-time highs.” "The belief that valuations only go up…” – We also asked investors what is most misunderstood by other investors: “Balancing the confusing picture of companies missing short term growth goals with the general insight that great companies are created in all stages of the cycle” “Recognising that the best businesses could come out stronger” DYNAMICS OF THE BUSINESS CYCLE “The difficulty of changing mindset and culture from growth to profitability” Read the Numis Growth Capital Survey (1Q20): Contagion 10.
  12. Disclaimer: Numis Growth Capital Solutions is provided by Numis Securities

    Limited (“Numis”). Numis is authorised and regulated by the Financial Conduct Authority (Firm Reference Number 144822). Numis has not independently verified the information contained herein, nor does Numis make any representation or warranty, either express or implied, as to the accuracy, completeness or reliability of the information contained in this document. The information in this document should not be regarded by the recipient as a substitute for the exercise of its own judgment. The receipt of this document by any recipient is not to be taken as constituting the giving of investment advice by Numis to that recipient, nor to constitute such person as a client of Numis. To the fullest extent permitted by law Numis does not owe any duty to the recipient whether in contract, in tort (including negligence), under statute or otherwise with respect to or in connection with the recipient’s use of this document. Numis specifically prohibits the redistribution of this material and accepts no liability whatsoever for the actions of third parties in this respect. This report has been prepared and approved by Numis Securities Limited ("Numis"), a securities dealer in the United Kingdom. Numis is not a registered brokerdealer in the United States. The author is not registered/qualified as a research analyst with FINRA. Numis Growth Capital Solutions We enable the world’s most ambitious companies to achieve their ambitions. Our team delivers strategic advice, trusted relationships with leading investors and best-in-class transaction execution. Get in touch at numis.com to see how we can accelerate your journey.