With markets in deep red and recession clouds on the horizon, which are becoming increasingly ominous, many believe that the private equity and venture capital markets will also inevitably suffer from investors’ diminished appetite for risk. In Italy, however, this is not quite the case. Why? Gabriele Arcuri, Partner at DLA Piper, explained it to We Wealth.
How has venture capital reacted to the volatility in the public markets?
We do not have, at least in Italy, such a sensitive litmus test to say whether the uncertainty in the markets has shaken the venture capital market. In our country, the exit from ipo is usually peculiar to private equity, unlike in the U.S. market, where the risk appetite is higher and more than one unicorn has become one due to venture capital funding rounds. When we get the first reports on the first half of 2022 in September, we could compare them with those of the first half of 2021, a year for the market of double-digit growth. Already replicating those results would be a success.
How have the strategies of venture capital funds changed?
There has been an increase in investment over the past year and a clear delineation of the most attractive investment areas. Some sectors, children of the pandemic experience, have had a boost more than others, such as fintech, food tech, and parasanitary. Another particularly active sector is cybersecurity.
On the investor side, has there been less appetite for risk?
The volatility of the stock markets has indeed called investors to caution, but there is still a great appetite in the market to invest because you know that if an investment is made well, there will be a significant return. In any case, I believe that three-year investments, which we used to see up to ten years ago, are no longer thinkable, except in some sectors. The same business plans that are put in place to underpin these investments are unlikely to stop at such a short-term horizon. Then there is the quality of investors to consider. Indeed, the policies undertaken by Western countries in recent months have influenced the gaze of targets toward certain types of investors. Certainly, there are currently rules restricting the movement of capital to and from certain countries. Russian funds, for example, have branched out to many investors, and having to deprive themselves of some capital significantly affects the market.
How much might a global economic slowdown impact startups?
I don’t think venture capital funds will stop investing. Compared to the U.S. market, the Italian market is a less sensitive market and also, in a sense, healthier, in that we cannot afford the pathological degeneration of investment. In the United States, culture considers bankruptcy to be a pathological but proper phase in the company’s life. In Italy, failure remains one of the burdens entrepreneurs cannot erase from their records. In Italy, there is a careful analysis of the possibilities of investing in specific targets, unlike abroad. In addition, the funds currently have the money and have to spend it. Therefore, if it is a recession, I expect fewer transactions but an even more careful evaluation by investors.
Is it possible to close or narrow the gap with foreign markets?
The range is so vast that it is unthinkable to close the existing gap, especially with reference to the U.S. market. Instead, it is possible to reduce it by working from a cultural perspective, for instance, with education, to enable those who have an idea to shape it. On this, prominent universities are doing a great deal to create dedicated laboratories. University spin-offs are one of venture capital funds’ first investment areas. In addition, we need to work on entrepreneurial culture. The Italian entrepreneur is still much more inclined to ordinary financing than equity or quasi-equity funding from venture capital investors. In this context, realities such as cdp venture can be a fundamental driver to reducing the gap with countries historically more active in venture capital, such as Germany, France, and Spain.
