For several years, there has been a deep, close relationship between the economic activity of digital companies and the amount of funding granted. The situation was magnified with the Covid crisis that generated a huge influx of public funds, amounting to 750 billion euros in Europe.
This almost unlimited financial gain has the opposite effect on companies, which are often overestimated, which can lead to the formation of a financial bubble. Corrections recorded in the United States since the beginning of 2022 may only be the beginning. To avoid being swept away by the bubble burst, companies and investors must bet on profitable long-term growth.
Unicorns, or Décacornes, these companies valued at more than 10 billion euros, disruptive projects, promising innovations, or even new profiles of entrepreneurs make you dream or leave you wondering … even if France does not have Décacorne – Doctolib and Back Market is the closest to this level, having been valued at more than 5 billion euros – 12 new unicorns for 2021 and 10 billion euros raised in 2021 demonstrate the supposed good health of French technology. And the government has just set a goal for France in June 2022 of 100 rhinos and 10 decakorns in 2030! Of course, we should be happy with this entrepreneurial dynamism, but beware of appearances that can be misleading.
Beware the standard fundraising mirage of technology and data. As is often the case, the first warning signs appeared in the United States. The average work of the stock market index on the basis of 500 major companies listed on the New York Stock Exchange or Nasdaq (S&P 500) at the beginning of January 2022 revealed a valuation of 40 times earnings … an excessive number, a situation with the risk of a bubble that investors can no longer afford Ignore it. The first correction in tech stocks in recent months is a warning, and many entrepreneurs are now trying to raise money or sell quickly under circumstances that remain exceptional and may not last. In a few months, it may be difficult to find financing.
This relates to private activities in a SaaS mode, all companies with a technology component (fintech, martech, insurtech, medTech, etc.) and digital activities and data activities in general. The sticking point will come when the investor wants to get out of the capital in the absence of a profitable investment. Selling at a higher price will be the only option, then the risk of bursting the bubble will be great …
Boomerang effect is not far away
Funds were raised for some companies whose realization is difficult to predict. These are not all bets that are statistically viable, and may conflict with reality. This would not be the first time in the history of technology. This was the case, for example, for the French company Sigfox, which was once the triumphant symbol of French technology, but was placed in receivership at the beginning of 2022. Almost 300 million euros have been raised since its inception in 2009, including That last record fundraising €150 million in 2016 wasn’t enough to handle a market that didn’t develop as quickly as expected, in this case the Internet of Things, and the reluctance of telecom operators.
Another point to keep in mind is that the financial security obtained thanks to these fundraisers leads to many employment needs. These jobs are then not funded with what they should be, in this case customers and adequate or properly projected turnover. This situation could lead to wage increases that could destabilize an entire sector.
Stratospheric valuations of certain companies also affect governance: they often put maximum pressure on management and employees to try to make unrealistic financial promises at any cost. And then it becomes difficult to stay consistent with the mission and values that companies and their investors sometimes put forward.
Use common sense And the Business Economic Reality
Standard fundraisers offer a view of capitalism that is not the one that 90% of entrepreneurs experience. For the vast majority, the equation is simple: I grow, I recruit, I invest because I have clients who order, pay the bills and order again if they’re satisfied.
The ratings and media insight given to Unicorns seem unreasonable in comparison to companies with a business model, consistent consistency and assured sustainability, which are more conservative. Moreover, many serious investment funds, planning for the long term, are struggling to find enough projects today to invest their solid liquid assets, as valuations are still excessive.
Let us remember the common sense note: the company continues as it develops on the basis of a solid industrial enterprise, positioning and related products or services, relying on the development of customer satisfaction. Many companies “simply” aspire to develop by investing in the long term, perhaps by merging other companies, while respecting the money invested and all stakeholders: employees, customers and shareholders. Companies whose metric does not represent how much money is raised as much as the growth – strong and profitable – that depends on their activity billing.
It is not a question of putting economic models back. They coexist and are examples of the dynamics of our economy. Let’s be ambitious, but let’s also stay clear. The meaning of history and the challenges of sustainability posed today to our societal models, lean toward the urgency of long-term planning and long-term targeting.
By Bertrand Laurios
CEO of Dékuple Group
Cans Leon 2022
All resources related to this article
Do you need additional information?
Mind study service upon request