Rob Genieser and Patrick Sheehan, Managing Partners, ETF Partners
For the past couple of years, year-end roundups that have looked back have invariably commented on the bountiful successes during the “good times” and then provided exuberantly optimistic forecasts for the coming year.
This time, for many pundits that is far more difficult to do, as most investors found 2022 to be challenging, and they struggle to be positive on what lies ahead, particularly from a macroeconomic perspective.
The energy crisis, political turmoil, the war in Ukraine, the rising cost of financing and the gathering shadow of recessions made it difficult for many companies to show success in 2022, and many European technology companies faltered. Particularly hard-hit were those that required large infusions of capital, had large operating deficits, were nascent in their technology development or were far away from markets where customers did not want or could not afford their solutions.
The boom years are now very much in the past, and the days of huge valuations based on relatively little evidence are gone, at least for now.
However, we at ETF Partners did not see such a decline when it came to our individual portfolio companies. In fact, to the contrary, we saw a great deal of success, as these companies continue to show outstanding growth. Simply put, there is a great need for their sustainability oriented, digital solutions in today’s world and that makes us optimistic of what 2023 can bring.
In fact, we predict that the rapid pace of digitalisation will continue for many years to come, which will only accelerate in 2023 as businesses seek to unlock efficiencies and derive economic benefit. We’re also seeing an increased need for many sustainable solutions, as companies seek to advance the environmental agenda. While it is true that there will be more scrutiny around the affordability of some schemes, the urgency to change has not disappeared.
How do we know that we and our companies are on the right track?
First, more and more investors and entrepreneurs are excited about creating businesses in the sustainability space. If you consider our firm’s development over the last 15 years, 2022 marked industry-wide recognition for our approach. This year, we won venture capitalist of the year at the Real Deal ESG Awards 2022, were recognised at the Excellence in ESG awards from BVCA and were highly commended on the world stage at the ICAEW’s Finance of the Future awards.
We had to demonstrate our focus on ESG and impact financing in each of these awards. We did this by talking about our rigorous auditing of prospective portfolio businesses and our approach to only working with those committed to a positive ESG culture and the ability to deliver a large enough positive impact. Of course, it does not hurt that these investments are also performing well.
We think our performance at those awards speaks for itself. Still, any industry recognition is secondary to what really matters: that the companies backed delivered on their potential to help improve our world in 2022.
We expect that to continue to happen.
In fact, for many of our companies, if the global business environment continues to be weak, and if the consumer continues to find it hard going, a number of our businesses could actually benefit in such an economic landscape.
For instance, fuel prices remain high. At an individual level, this could lead people to use their cars less and turn to buses more. Bus operators need to handle this evolving demand and are increasingly turning to businesses like Zeelo, to optimize their fleet routing and serve new areas/customers. We are very proud to support Sam and Barney, the great entrepreneurs building such an exciting business.
The same high energy prices impact ship operators’ operating margins. Their focus on vessel fuel efficiency mean that they are increasingly turning to our portfolio company, DeepSea, which works to optimise ship routing through AI modelling. Roberto and Konstantinos are doing a fantastic job!
Similarly, take Phenix, a company developing cutting edge solutions to avoid food waste. According to the FAO, 1/3 of the world’s food is lost or wasted along the food chain, representing a total amount of 1.3 billion tons per year. To address this Phenix has developed digital solutions that have already saved more than 200 million meals from the bin. Jean and Baptiste are revolutionising the way we think about food waste and are uniquely changing our approach to solving this social, environmental, and economic disaster.
These are relatively small companies that combine everything a business needs to navigate the current turmoil: energetic and focused leadership teams, a sensible business model, and a product or offering that meets a real market need.
As such, they are the sort of business that is likely to grow at a time when many others will struggle, and they are the sort of quality company that any right-minded venture capitalist would want in their portfolio.
But it’s not just about what investors want; these businesses, most of whom are less than a decade old, haven’t been through a recession before, so they’re looking for experienced, knowledgeable backers that understand what’s required. And I think that’s what we’ll see in 2023 — a flight to quality for both VCs looking to boost their portfolios and companies weighing up whether to secure more funding.
Make no mistake; it is going to be a challenging year for many. No industry is ultimately shielded, but those most likely to succeed will avoid “flash in the pan” trends and seek to build sustainable long-term businesses. If you can meet a market need, delivered in a way that resonates with customers, you are best placed to come out of the economic malaise in a strong position as a business. We think the performance of our portfolio companies in 2022 demonstrates this and shows that 2023 could well be the year the next big companies start to really make progress.