Where it’s hard for VCs to invest right now

Good morning there,

In 2021, things were easy for VCs. Many of them were writing cheques left and right into a vast array of businesses, often at record speed. Following a (much-needed) reality check in the market during the last couple of years, things aren’t so easy.

And for those with capital to spend, I’m curious: where is it hard to invest right now? I recently asked Balderton Capital general partner Suranga Chandratillake which stages he’s finding it trickier to deploy capital. Read on for his take.

Elsewhere:

• Revolut cements $45bn valuation and the fintech's latest alumni-turned-founders
• VCs weigh in on fund sizing in 2024
• Selling to the controversial Neom project: 'The moral question is rather simple'

— Anne Sraders, senior reporter

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Where it’s hard to invest for VCs right now, according to Balderton's Suranga Chandratillake

I recently wrote about how VCs with money to spend are piling into only the best, highest-quality companies right now — awarding big sums and valuations to Helsing, Monzo and Mistral. But lately, I’ve also been wondering: where is it hard for VCs to deploy capital right now? (Readers, I’d love to get your take.) 

I posed the question to Suranga Chandratillake, general partner at Balderton Capital (which just raised $1.3bn in two new funds across early and growth stages) last week. For him, it’s Series A through C, “which actually hits both of our funds,” he says. “There’s a huge amount of focus on AI right now, and knowing what are the right tricks to invest in AI companies at those stages is really, really hard.”

Breaking it down, he believes it’s “relatively easy to do seed AI investments because those are really tech and people driven: so, is this an innovative, new idea or technology? Are the people, people who could pull it off? If yes, then invest.” Growth investments, he adds, are not quite as straightforward, but those companies do have pretty clear business models and their technology works. 

“In between, it's really hard,” Chandratillake says of those Series A to C rounds. “The valuations are high, some of the companies have fantastic traditional sales and revenue metrics, but you don't know necessarily how much of that is experimentation on the part of customers, how much of it is really real and going to retain and some of the companies don't have any metrics.”

It seems to tap into another big trend I’ve written about lately: worries about whether AI companies can actually deliver the growth and revenues investors have been expecting — and betting on. 

AI companies in those in-between stages, as Chandratillake says, may have hit some technical milestones, but might not be performing as a late-stage company would be expected to. “It’s a really hard period where you have general excitement over the sector, there's clearly interesting companies that are going to get built.  

“But knowing which ones they are, and being able to take the level of risk required to write a relatively large cheque — you know, $10m, $20m, maybe even $30m — that's a tough place to be right now.” 

I’m curious to hear from you, VCs: do you agree with Chandratillake? Where do you think it’s a challenge to invest your money right now? What stages or sectors are you finding it more difficult? Where are you seeing more or less competition for rounds right now? I’m all ears.

— Anne Sraders, senior reporter

🇸🇪 Swedish electric boat startup Candela has signed a deal to sell eight of its vessels — half of all its orders so far — to the Saudi Arabian government entity Neom, a futuristic megaproject that aims to build 10 new regions in a 26.5k km sq area in the Saudi Arabian desert. Neom has attracted other European startups such as German electric taxi startup Volocopter, Polish startup AI Clearing and London-based One Web.

• The Saudi project sparked human rights concerns earlier in the year over the treatment of locals. But the controversy hasn’t deterred Candela founder Gustav Hasselskog.
• “All countries in the world must contribute to making transport emission-free. It’s not a sustainable line for a company like Candela to make some kind of shortlist of countries that we can sell to,” he says. “All countries, including North Korea, need to switch to a fossil-free economy. So the moral question is rather simple.”

💰 UK fintech Revolut has upped its valuation to $45bn in an employee share sale weeks after securing a UK banking licence. 

• The London-based company said Friday that the secondaries are being purchased by investors including Coatue, D1 Capital Partners and Tiger Global. Revolut most recently raised outside capital in an $800m Series D round in 2021 at a $33bn valuation. 

💪 20 Revolut alumni have become entrepreneurs since last year.

👀 VCs weigh in on fund sizing in 2024.

📣 Readers, we want to hear from you. What’s the best thing on European tech you’ve read recently? Drop us a line.

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Helsinki-based Vapaus, an employee bike services platform, raised €10m in Series A funding. Shift4Good led the round and was joined by investors including Finnish Industry Investment, European Investment Bank and SuperHero Capital.

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