CEO of the Luxembourg Private Equity & Venture Capital Association (LPEA) Stéphane Pesch talks about how the current economic climate is impacting VCs.
How important is Luxembourg for the Venture Capital (VC) industry?
Many VCs joined Luxembourg in order to domicile and launch their investment funds here. That has always been one of our advantages, and will continue to be the case because we have a toolbox designed to be as competitive as possible. The first element accelerating the whole thing was the 2013 introduction into Luxembourg law of the Special Limited Partnership in parallel to the Alternative Investment Fund Managers Directive, allowing players from the US, UK and other regions to replicate their favorite structures. Secondly, since 2016, technology has seen a fantastic period of acceleration. The only potential “positive” thing that covid-19 did was to further accelerate the whole digitisation movement and to allow new ways of working and collaborating.
This second element has pushed the markets further and also the appetite for investors to invest into VC. And if you are a European or international VC, usually you come to Luxembourg, because there you will find everything you need with the right structures, service providers, allowing you to fundraise, to deploy capital and invest in your segments.
What does LPEA want to see change in Luxembourg?
We need to facilitate the contact between VCs, startup founders, other investors interested in VC (e.g. family offices) and business angels. An event focused on technology and innovation could help. I think that nobody can change inflation and the current economic and geopolitical situation, but at least we can potentially look at some of the challenges the technology and VC industries are facing right now and try to mitigate against them. Therefore, a big annual event with all the stakeholders could certainly represent a nice and smart solution.
How is the current economic climate impacting VCs and subsequently startups?
For the moment, we will see fewer deals and the deals that do go through will be more closely scrutinised (qualitative and resilient assets). Some of the valuations might also go down, if they haven’t already. If we now take the VC angle, valuations for the next acquisitions (startups) will be consequently adapted while some of the existing portfolio companies (already acquired) will need more time, nurturing and value creation.
Sometimes, in very dire times, it might also happen that the rise of new “unicorns” is either halted or slowed down. Adverse economic conditions mean that they don’t get the chances they would in a normal economic cycle. But this will depend on many criteria and also on the startup founders and team (cf. Google after the internet bubble).
To what extent are current affairs causing a shift in the types of segments VCs are interested in?
During our Insights Conference, held on 13 October, for the first time we had GPs and VCs explaining and presenting their latest products. We saw a high interest in innovative greentech, energytech companies. That is very interesting and shows that the focus of some VCs changes over time. They examine the current problems and are able to shift with agility their investments into new industries, including green, clean energy, sustainable finance and, since data will be a key ingredient of their future successes, the VCs know exactly how to handle that part and efficiently implement it.
This article was first published in the VC Guide 2022