The power is no longer in the hands of the sellers. In an uncertain market, the power is now with the investors. In financing rounds, investment funds impose their terms. This is particularly true for the financing of start-ups, technology companies, and high-growth companies. Experts from AURIS Finance, a consultancy firm specialising in mergers and acquisitions, give their analysis of the situation.
There has been a paradigm shift in the funding market. Whereas a few months ago, investors were struggling to find companies to invest in, it is now start-ups and growth companies that are finding it difficult to obtain funding. While 2021 was marked by significant fundraising for French tech, companies seeking funding are now facing a lack of interest from investors. According to Crunchbase’s global figures, $81.1 billion was raised by growth companies in the third quarter of 2022, compared to $171 billion a year earlier, a 53% drop. The macroeconomic context is the reason for this decline. The risk of inflation and the end of a period of sustained low interest rates are weighing on investors’ liquidity. As a result, many investors are taking a wait-and-see approach. Others are becoming more cautious and are adding clauses to their contracts to protect themselves in the event of a market downturn.
Power is in the hands of investors
Certain clauses that have been absent from financing agreements for many years are now making a comeback. This is the case of the liquidation preference clause, also known as the “liquid pref”. In the event of a resale, this clause allows investors to receive a preferential return on their initial investment with a pre-defined initial investment multiplier. In the current context, this multiple is skyrocketing. Experts also note the return of the “ratchet” clause (an anti-dilution provision), by which an investor’s stake in a company is protected from dilution by the issuance of additional shares in subsequent financing rounds.
Hedging against potential market reversals
Finally, 2022 saw the arrival in French contracts of Material Adverse Change clauses (MAC) from English-speaking countries. These “significant adverse effect” clauses allow the buyer to withdraw from the negotiation in the event of an event exogenous to both parties but having a direct impact on the value of the target company. This provides additional protection in case of an extraordinary event, such as a geopolitical conflict or a health crisis. At the same time, tensions around company valuations are increasing. Technology companies are the first to be affected. According to the “State of European Tech 2022” report, almost 400 billion in public and private valuations have evaporated into thin air in 2022. The total value of this ecosystem is now estimated at $2.7 trillion, compared to $3.1 trillion at the end of 2021. One of the most emblematic cases is undoubtedly that of Swedish fractional payments giant Klarna, which lost 85% of its value in one year.
Get the support you need
In this context, negotiations between investors and companies seeking funding may become more tense in the coming months. Sector specialists at AURIS Finance are able to assist you throughout your entire financing process, including with the drafting of financing clauses.
