Funding the future of mobility & sustainability at the Valencia Digital Summit

A vision from the Valencia Digital Summit on financing the future of Mobility & Climate-tech

One of the biggest challenges facing society is the rapid growth of population, particularly within urban cities. Today, around 4.4bn people live in cities, representing circa 56% of the word's population. This trend is expected to continue, and as the world reaches 9.7bn people by 2050, the World Bank estimates that circa 70% of the world's population will live in urban areas. With cities accounting for 70% of the global greenhouses gas emissions (GHGs) and with transportation accounting for circa 14% of all emissions, there is an urgent requirement to modernise and decarbonise our mobility infrastructure to adapt to these existential pressures.

I recently participated in a panel discussion on the trends and drivers around this topic, alongside Alfonso Carranza from Elewit Red Electrica and Paloma Mas Pellicer from Plug and Play Tech Center, David Pistoni, CEO of Goldacre portfolio company Zeleros Hyperloop was the moderator. The panel also highlighted the key opportunities that the Valencian tech-ecosystem present and the current funding environment.

Here are some of our key takeaways, but you can see the full panel discussion here.

Key trends on Mobility & Climate-Tech and importance of hardware

Until recently, climate-tech solutions were considered “nice to have”. Lately, and mostly driven by regulators across the world and (therefore followed) by the large capital allocators, sustainability has become a major focus for governments, corporates, consumers, scientists, entrepreneurs and investors. The investment required to transition to net zero by 2050 is estimated to be $275 trillion [1]. This is approximately $9.2 trillion every year over the next three decades.

Due to the growth potential that this represents, the venture capital ("VC") industry is starting to invest a significant amount of capital in climate-tech solutions. In 2021, VCs invested circa $40bn in the vertical, compared to $12bn in 2017[2]. In fact, since 2017, climate-tech is the second fastest growing investment vertical in Europe, behind fin-tech[3]. In addition, climate-tech VC funds are attracting a vast amount of investment, with the last 6 months seeing a constant flow of new fund announcements, from $50-800m+. Significantly, most of these funds see hardware and materials as critical drivers for change in the industry.

Mobility is one of the most active verticals within climate-tech, receiving 40% of all capital invested in 2021 in the sector. The most popular mobility solutions include electric vehicle battery solutions, EV charging firms, ride-hailing platforms and platforms that connect drivers with the wider context in real-time in an effort to push autonomous driving forward.

We are also seeing other exciting innovations that capture CO2 emissions and convert it into low-carbon materials using science-based processes. Another exciting area is the application of circular economy technologies to transform waste into low-carbon bi-products. An example is Hyperion Robotics, a recent investment announced by Goldacre, which uses 3D printing technology and upscaling waste to build reinforced concrete structures that generate up to 90% less emissions than traditional processes.

Key opportunities that the Valencia tech-ecoystem present

Valencia represents one of the most vibrant start-up ecosystems in Spain, contributing strongly towards the 5x+ increase in combined value (measured in terms of valuations) that the start-up ecosystem in the country has experienced since 2015[4]. The region is the third largest receiver of venture capital in Spain, behind Barcelona and Madrid. It benefits from a highly technical workforce which is mainly trained at the University Polytechnic of Valencia. We have also seen how the success of tech companies such as flywire ($3.5bn IPO, representing the second largest exit in Spain) and Igenomix ($1.3bn acqusition) but also more industrial ones such as Mercadona and LogiFruit is having a positive second-order effect in the ecoystem. A good example is the platform that Juan Roig, founder of Mercadona, has created with Lanzadera, an incubator with 1,000+ start-up alumni, including Jeff and Zeleros. The region has attracted leading start-up accelerators and incubators to be based in Valencia, such as Plug & Play and Demium. As a result, Valencia today has the highest concentration of start-ups per capita in Spain, but also a tech community that is technical, commercial and ambitious.

As an emerging tech ecosystem, most of the region’s start-ups have received pre-seed and seed stage funding, with less than 9% all of start-ups receiving Series A+ funding. As start-ups in the region continue their growth journey and in particular as they approach Series A+ rounds, it is critical they implement an internationalisation strategy which involves, at core, incorporating the English language into the day-to-day operations of the business. Having the key internal documentation in English, but also being able to communicate fluently, will help when attracting and working with international investors. In addition, in order to scale fast and achieve $100m+ in revenues, which is a typical challenge demanded by VCs, start ups from Valencia will likely require to attract international talent with strong previous experience, particularly for areas related to sales, operations, finance and marketing. As start-ups expand to new areas to target clients abroad, it is essential to hire (ideally local) talent who speak the native language. We still see cases where this is not the case, and instead the executive directors hire individuals that are somehow close to them in terms of culture and experience, as its easier to reference them and feel comfortable around them.

Current fundraising environment and advice to start-ups

Until recently, the western world was enjoying a period of low inflation, low interest rates and moderate growth. This was directly as a result of the extremely loose monetary and fiscal policies initiated in the aftermath of the global financial crisis. These conditions fuelled a simultaneous asset bubble in almost every single asset class in the economy, ranging from government bonds, real estate, crypto, SPACs, VC-backed companies and public stocks (particularly tech).

Following the COVID-19 pandemic and the conflict in Ukraine, the tide is changing. We are experiencing a rapid acceleration of inflation which is being followed by hawkish central banks driving interest rates up at the expense of growth. With some western countries experiencing 10%+ annual inflation already, such as England and Germany, we are likely moving to a new environment with higher levels of inflation and interest rates than what we have seen recently. The recessionary effect this will have in the real economy over the next 12-24 months is the big unknown. It will depend, to a great extent, on how far central banks go. It is also impossible to forecast how the war in Ukraine will evolve and whether we will see any future epidemic surges in Covid-19 cases.

In this uncertainty, the public markets have been the first to react, with stock prices and valuations of tech companies falling rapidly. Over the past year we have seen the EV/TTM revenue multiple fall from 16.0x in Q3'21 to 6.3x in Q3'22[5]. Public tech investors are now prioritising margins above growth at all costs. With the characteristic time lag that exists between public and private markets, activity in the private investment sector is now following a similar pattern.

The global VC industry is experiencing a marked decline in valuations and volume of deals. This is the case across all stages, but its more severe towards later-stage deals. This trend has been more pronounced in Q3 2022, which to an extent could also be the result of a particularly slow summer in terms of activity. Deals are taking longer to close, as the due diligence process is becoming (once again) more thorough. In addition, VCs are asking for much longer runways (ideally 18-24 months). This is opening a difficult conversation between the investor and the start-ups and other existing shareholders, as the combination of lower valuation and higher runway implies a higher dilution. We are also seeing an increase in consolidation, where even early-stage companies with huge potential have been forced to sell in distress.

As a silver lining, there is a significant amount of dry powder waiting to be deployed, with VC funds raising $151bn year to-date, marking a record-setting year already. Corporate venture capital firms are still very active and sectors such as climate-tech and industrial tech are still holding up strongly.

However, in this market environment, it is important for tech start-ups to be pragmatic in how they approach fundraising, ensuring there is enough time for the process before the cash end date, and ideally considering raising capital even before it is actually required. The expectations around valuation and dilution need to be sensible, prioritising closing their round in a swift manner. Companies that manage their runway in the right way and focus on finding product market fit will emerge stronger than the competition once the markets become more stable.

[1] The net-zero transition: What it would cost, what it could bring – McKinsey. January 2022

[2] Global Climate Tech Venture Capital Report - Full Year 2021 – HolonIQ

[3] The rise of Europe Climate Tech – Talis Capital & Dealroom report. April 2022

[4] Spanish Tech Ecosystem – Dealroom. October 2021

[5] Q3 2022 SaaS Public Market Update – Software Equity Group