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Pandemic hampers young entrepreneurs’ chance to pitch

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When Felix Böck manned a booth at one of his first green tech exhibitions, he feared it would be a waste of time. Nearby displays showcased carbon sequestration or AI-powered climate solutions, while his company ChopValue — which makes furniture, shelving and cheese boards from recycled chopsticks — was promoting sustainable decor.

Yet being present at the event bore fruit. One attendee was fascinated by Mr Böck’s display on a desk made from chopsticks and eventually became an early lead investor in ChopValue.

“I never once passed up any opportunity to go to networking events, trade shows and conferences. That’s how I met most of our future investors,” says Mr Böck, founder and chief executive of the company. He worries that the pandemic has scuppered those opportunities for the next generation of entrepreneurs.

According to data provider PitchBook, first financings for US start-ups as a proportion of total deal activity fell to a 10-year low in the third quarter of 2020. Compared with the same period in 2019, debut fundraising almost halved from $3.9bn to $2.1bn.

ChopValue makes furniture, shelving and cheese boards from recycled chopsticks

On the whole, however, early-stage venture funding rose 12 per cent between the second and third quarters of this year, driven primarily by additional funds from current investors.

At Vancouver-based ChopValue, Mr Böck has locked in bridge funding from the original nine backers that invested in 2017. That most recent round will bring total fundraising from $2.65m to more than $5m by the end of this year.

But while first-time founders face headwinds, the global fundraising markets remain flush with $2.5tn in idle cash. This has coincided with the proliferation of scout programmes by at least 100 venture capital firms (VCs) to dish out small cheques ($25,000 — $50,000) to early-stage companies.

Consequently, the main challenge for new start-ups is how to connect with investors in an era of social distancing, rather than the availability of funds. In March, as lockdowns were introduced across the US, investors refocused their efforts on setting up shop remotely and ensuring their portfolio companies were well-capitalised.

Whereas a 12-18 month supply of cash after an investment would normally suffice, the pandemic means that companies should aim for 18-24 months, says Jarrid Tingle at Harlem Capital, a VC group that backs diverse founders.

“We’ve definitely been focused more on founders who have a nose for the money,” says Mr Tingle. “It’s not only about having a big vision . . . companies need to demonstrate they can grow in a capital efficient fashion.”

Many VCs have completed a deal remotely as a direct response to Covid-19 restrictions © Girts Ragelis/Shutterstock

The pandemic has meant venture firms have learnt to “invest remotely” using videoconferencing, which has enabled investors to take on more meetings and reinvigorated the market, particularly for SaaS (software-as-a-service) companies.

A study by Omers Ventures, the venture investment arm of Canada’s largest pension fund, found that 40 per cent of VCs have completed a deal via videoconferencing during the pandemic.

“I’ve been very impressed with how quickly investors have adjusted,” says Michael Seibel, chief executive at start-up accelerator programme Y Combinator, who recalls the tough time founders had fundraising after the 2007-08 financial crisis. “Unlike then, investors have kept their cheque books open.”

Using virtual platforms has also sidestepped the barrier of geography, allowing founders to court investors in Silicon Valley or London without the need to take a flight.

Michael Seibel © Gary Sexton

In theory, this shift could be “of benefit to diverse entrepreneurs”, says Oussama Ammar, co-founder of The Family, a start-up accelerator based in Paris. Videoconferencing gives everyone more of an equal chance by limiting the social aspect of the founder-investor relationship, which is conditioned by class and race, he argues.

Yet videoconferencing is not without pitfalls, with the medium requiring a different set of skills than pitching in person, says Mr Seibel. For instance, founders are better able to command an investor’s undivided attention and read social cues when they are in the same room. Mr Tingle says people are less engaged by slide decks over video calls, and he urges founders to strike a conversational tone with investors.

In Europe, the move to online meetings has led to more favourable deals for entrepreneurs. Founders have long criticised the continent’s fundraising environment, which is dominated by conservative investors from finance backgrounds.

“[That environment] is fuelled by investors putting in very little money to start off with, but getting ridiculous degrees of control over the company through liquidation preferences,” says Tycho Onnasch, chief operating officer at Deedmob, a Dutch online volunteering platform that has raised €620,000 since it was founded in 2017.

By moving online, founders can pitch more widely and compare the term sheets offered by investors across Europe, says Mr Ammar. Previously, entrepreneurs were more inclined to take bad terms simply because they were offered first, but now competition among investors has given some start-ups the power to negotiate.

“It’s a bit like in a relationship,” says Mr Ammar. “If you’ve not found the partner of your dreams, then maybe it’s better to wait because if you jump too soon, you will not be ready for when the right one comes along.”



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High-priced tech stocks sink further into bear market territory

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Some of the hottest technology stocks and funds of recent months have fallen into bear market territory and investors are betting on more turmoil to come, as rising bond yields undermine the case for holding high-priced shares.

A Friday afternoon stock market rally notably failed to include shares in Tesla and exchange traded funds run by Cathie Wood, the fund manager who has become one of the electric carmaker’s most vocal backers.

Shares in Tesla fell 3.6 per cent on Friday to close below $600 for the first time in more than three months, although it had been down as much as 13 per cent at one point. The stock is down 32 per cent from its January peak, erasing $263bn in market value.

Wood’s $21.5bn flagship Ark Innovation ETF — 10 per cent of which is invested in Tesla shares — also closed lower on Friday. It is now down 25 per cent and in a bear market, defined as a decline of more than one-fifth from peak.

Clean energy funds run by Invesco, which were last year’s best-performing funds, are also in bear market territory, along with some of the highest-flying stocks in the technology and biotech sectors.

“Bubble stocks and many aggressively priced US biotechnology stocks have been the hardest hit segments of the equity market,” said Peter Garnry, head of equity strategy at Saxo Bank.

The tech-heavy Nasdaq Composite index fell into correction territory — defined as a decline of more than 10 per cent from peak — earlier this week but rebounded 1.6 per cent on Friday as bond yields stabilised.

The yield on 10-year US Treasuries yield briefly rose above 1.6 per cent early in the day after a robust employment report for February buoyed confidence in a US economic recovery. Yields were less than 1 per cent at the start of the year.

Rising long-term bond yields reduce the relative value of companies’ future cash flows, hitting fast-growing companies particularly hard.

These type of companies figure prominently in thematic investing funds run by Wood at Ark Investments. The performance of Ark’s exchange traded funds has abruptly reversed after they recorded huge inflows and strong gains for much of the past 12 months.

“The speculative tech trade is in various stages of rolling over right now,” said Nicholas Colas, co-founder of DataTrek, a research group.

Bar chart of  showing Hot stocks and funds enter bear market territory

RBC derivatives strategist Amy Wu Silverman said investors were still putting on hedges in case of further declines in high-flying securities, including options that would pay off if Tesla and the Ark Innovation fund drop in value.

The number of put options on the Ark fund hit an all-time high on Thursday, according to Bloomberg data. By contrast, demand for put options on ETFs such as State Street’s SPDR S&P 500 fund — which reflects the broader stock market — have fallen as stocks have dropped.

Demand for options normally slides as a stock or ETF slumps in value, given there was “less to hedge, since you got your down move”, Silverman said. The elevated put option activity on speculative tech stocks and funds was “suggesting investors believe there is more to go”, she said.

Even after the declines, stocks in the Ark Innovation ETF remain highly valued, with a median price-to-sales ratio of 22 versus 2.5 for the broader stock market according to Morningstar, the data provider.

Two of the fund’s other big holdings, the streaming company Roku and the payments group Square, were also lower on Friday, extending recent declines.

Ark’s other leading ETFs have also retreated sharply as air has come out of Tesla and other hot stocks. Tesla is the largest holding in Ark’s $3.3bn Autonomous Tech and Robotics fund and its $7.2bn Next Generation Internet ETF.

Wood has also taken concentrated holdings in small, innovative companies. Ark holds stakes of more than 10 per cent in 26 small companies across its five actively managed ETFs, according to Morningstar.

“These large stakes raise concerns around capacity and liquidity management,” said Ben Johnson, director of passive funds research at Morningstar. “The more of a company the firm owns, the more difficult it will be to add to or reduce its position without pushing prices against fund shareholders.”

Ark did not respond to a request for comment. The Ark Innovation ETF is still sitting on a performance gain of 120 per cent for the past year. It bought more shares in Tesla when the carmaker’s shares began falling last month.



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Powell inflation remarks send Asian stocks lower

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Asian stocks were mostly lower after a rout in US Treasuries spread to the region after comments from Jay Powell that failed to stem inflation concerns in the US.

Hong Kong’s Hang Seng dropped 0.3 per cent following the remarks by the chairman of the US Federal Reserve while Japan’s Topix rose 0.1 per cent and the S&P/ASX 200 fell 0.8 per cent in Australia.

China’s CSI 300 index of Shanghai- and Shenzhen-listed stocks dropped as much as 2 per cent before pulling back to be down 0.5 per cent by the end of the morning session, after Beijing set a target of “above 6 per cent” for economic growth in 2021.

Premier Li Keqiang hailed China’s recovery from an “extraordinary” year and said the government wanted to create at least 11m urban jobs at a meeting of the National People’s Congress, the annual meeting of the country’s rubber-stamp parliament.

“A target of over 6 per cent will enable all of us to devote full energy to promoting reform, innovation and high-quality development,” Li said, adding that Beijing would “sustain healthy economic growth” as it kicked off the new five-year plan.

Analysts were less sanguine on China’s economic outlook, however, pointing to the markedly lower growth target relative to recent years.

“There is, in fact, not much surprise from the government work report except for the super-low GDP target,” said Iris Pang, chief economist for Greater China at ING, who estimated growth would be 7 per cent this year. “This makes me feel uneasy as I don’t know what exactly the government wants to tell us about the recovery path it expects.”

The mixed performance from Asia-Pacific stocks came after Powell failed to alleviate fears that the US central bank was reacting too slowly to rising inflation expectations and longer-term Treasury yields, which rise as bond prices fall.

Powell on Thursday said he expected the Fed would be “patient” in withdrawing support for the US economic recovery as unemployment remained well above targeted levels. But he added that it would take greater disorder in markets and tighter financial conditions generally to prompt further intervention by the central bank.

“As it relates to the bond market, I’d be concerned by disorderly conditions in markets or by a persistent tightening in financial conditions broadly that threatens the achievement of our goals,” Powell said.

Yields on 10-year US Treasuries jumped 0.07 percentage points to 1.55 per cent following Powell’s remarks. In Asian trading on Friday, they climbed another 0.02 percentage points to 1.57 per cent. The yield on the 10-year Australian treasury rose 0.07 percentage points to 1.83 per cent

“Based on our growth forecast, longer-term rates will likely rise for the next few quarters — but more slowly,” said Eric Winograd, a senior economist at AllianceBernstein. “And we think the Fed is prepared to push in the other direction if rates rise too far, too fast.”

The S&P 500, which closed Thursday’s session down 1.3 per cent, was tipped by futures markets to fall another 0.1 per cent when trading begins on Wall Street. The FTSE 100 was set to fall 0.8 per cent.



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Financial bubbles also lead to golden ages of productive growth

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Sir Alastair Morton had a volcanic temper. I know this because a story I wrote in the early 1990s questioning whether Eurotunnel’s shares were worth anything triggered an eruption from the company’s then boss. Calls were made, voices raised, resignations demanded. 

Thankfully, I kept my job. Eurotunnel’s equity was also soon crushed under a mountain of debt. Nevertheless, the company was refinanced and the project completed. I raised a glass to Morton’s ferocious determination on a Eurostar train to Paris a decade later.

With hindsight, Eurotunnel was a classic example of a productive bubble in miniature. Amid great euphoria about the wonders of sub-Channel travel, capital was sucked into financing a great enterprise of unknown worth.

Sadly, Eurotunnel’s earliest backers were not among its financial beneficiaries. But the infrastructure was built and, pandemics aside, it provides a wonderful service and makes a return. It was a lesson on how markets habitually guess the right direction of travel, even if they misjudge the speed and scale of value creation.

That is worth thinking about as we worry whether our overinflated markets are about to burst. Will something productive emerge from this bubble? Or will it just be a question of apportioning losses? “All productive bubbles generate a lot of waste. The question is what they leave behind,” says Bill Janeway, the veteran investor.

Fuelled by cheap money and fevered imaginations, funds have been pouring into exotic investments typical of a late-stage bull market. Many commentators have drawn comparisons between the tech bubble of 2000 and the environmental, social and governance frenzy of today. Some $347bn flowed into ESG investment funds last year and a record $490bn of ESG bonds were issued. 

Last month, Nicolai Tangen, the head of Norway’s $1.3tn sovereign wealth fund, said that investors had been right to back tech companies in the late 1990s — even if valuations went too high — just as they were right to back ESG stocks today. “What is happening in the green shift is extremely important and real,” Tangen said. “But to what extent stock prices reflect it correctly is another question.”

If the past is any guide to the future, we can hope that this proves to be a productive bubble, whatever short-term financial carnage may ensue.

In her book Technological Revolutions and Financial Capital, the economist Carlota Perez argues that financial excesses and productivity explosions are “interrelated and interdependent”. In fact, past market bubbles were often the mechanisms by which unproven technologies were funded and diffused — even if “brilliant successes and innovations” shared the stage with “great manias and outrageous swindles”.

In Perez’s reckoning, this cycle has occurred five times in the past 250 years: during the Industrial Revolution beginning in the 1770s, the steam and railway revolution in the 1820s, the electricity revolution in the 1870s, the oil, car and mass production revolution in the 1900s and the information technology revolution in the 1970s. 

Each of these revolutions was accompanied by bursts of wild financial speculation and followed by a golden age of productivity increases: the Victorian boom in Britain, the Roaring Twenties in the US, les trente glorieuses in postwar France, for example.

When I spoke with Perez, she guessed we were about halfway through our latest technological revolution, moving from a phase of narrow installation of new technologies such as artificial intelligence, electric vehicles, 3D printing and vertical farms to one of mass deployment.

Whether we will subsequently enter a golden age of productivity, however, will depend on creating new institutions to manage this technological transformation and green transition, and pursuing the right economic policies.

To achieve “smart, green, fair and global” economic growth, Perez argues the top priority should be to transform our taxation system, cutting the burden on labour and long-term investment returns, and further shifting it on to materials, transport and dirty energy.

“We need economic growth but we need to change the nature of economic growth,” she says. “We have to radically change relative cost structures to make it more expensive to do the wrong thing and cheaper to do the right thing.”

Albeit with excessive enthusiasm, financial markets have bet on a greener future and begun funding the technologies needed to bring it to life. But, just as in previous technological revolutions, politicians must now play their part in shaping a productive result.

john.thornhill@ft.com



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