Uncertainty in global markets overwhelms startups, which experience a squeeze in valuations and exits. But Italians continue to show some optimism about the future
Lovato: “The sectors we consider of greatest interest are those that have not yet experienced significant digitization.”
68.1 percent of Italian startups estimate they will end the year with revenue growth of at least 5 percent. 39.1 percent project an increase of more than 25 percent, and 18 percent an increase of more than 50 percent
Investments in Italian startups have experienced steady growth in the first six months of the year compared to the last six months of 2021, for an amount close to one billion. Despite the macro context, an ecosystem continues to show some optimism about the future. Although it sometimes faces internal limitations in capital availability that make it challenging to generate significant growth and exit opportunities. Sara Lovato, investment manager at United Ventures (an independent Italian venture capital firm specializing in digital technologies with €360 million under management), takes a snapshot of its strengths and weaknesses. To identify the sectors to focus on, in the short and long term, when it comes to made in Italy.
What has been the impact of the current economic and geopolitical scenario on startups globally?
The last decade has seen a great exuberance of the markets-even downstream of the policies to respond to the pandemic crisis-and has been the protagonist of record valuations and collections for startups. Today, the scenario is highly different. Uncertainty in global markets and the repercussions of the current geopolitical and energy situation on the real economy are also directly impacting the startup sector, which has seen significant compression in valuations and exits. The ability to penetrate specific markets and raise considerable capital has become more complex in an environment where consumers and investors have become more cautious in their choices. At the same time, these dynamics must be considered in the context of venture capital, which has rather long payback periods and is decoupled from short- to medium-term market dynamics. In addition, this scenario structurally emphasizes entities with solid fundamentals at the expense of those that lack sustainable business models at their base. It is no coincidence that many of the most successful innovative companies were born precisely in bear market contexts. Just think of the well-known case of Airbnb, founded in 2008, which experienced exponential growth and still boasts a leading position in its industry.
Is now the time to invest in Italian startups?
According to a recent InnovUp report, 68.1 percent of entrepreneurs estimate that they will end the year with revenues growing by at least 5 percent. 39.1 percent project an increase of more than 25 percent, and 18 percent an increase of more than 50 percent.
As is well known, the Italian startup ecosystem got off to a late start compared to other European countries but is currently in a vital growth phase. The blossoming of a new business mentality that pivots on young talent, innovative business models, and the excellence of Italian technology is creating a startup landscape that is increasingly up to competing in the global context. The flywheel of public funds is driving an expanding private sector. Despite the macro environment, investments in Italian startups continued to grow in the first half of 2022 to an amount close to 1 billion. These are still relatively small numbers but large enough to generate success stories. Indeed, there is still much to be done – we are talking about building virtuous cycles that, by nature, have long maturation times – but there are great investment opportunities.
How does Italy differ from other European countries?
Italy is a country of entrepreneurs, very creative, and historically used to dialogue with foreign countries. Sensitivity to digitization processes has spread more than ten years behind the central European countries before we saw the emergence of venture capital and adopted favorable policies. The Italian entrepreneur is sometimes confronted with internal limitations in technological adoption and availability of money at each stage of their company’s development, making generating growth and meaningful exit opportunities more challenging. To address these needs, we recently launched a growth fund to support the scale-up phase, a market segment that is under-attended in Italy. In our experience, Italy is an attractive country to start a business. However, it remains crucial for an investor to identify entrepreneurs capable of opening up to Europe and the world to generate significant returns.
The current context leads us to think about the whole energy and supply chain sector and new applications in blockchain and quantum computing, health, and the environment.
Which sectors to focus on, looking at the short and long term?
Those that have yet to experience significant digitization could instead generate more sustainable, collaborative, and efficient processes, increasing industry productivity through agile and global software applications.
What is United Ventures’ strategy in Italy?
With its two early-stage funds (plus a third in the process of being raised) and one growth fund, United Ventures aims to invest in exceptional entrepreneurs who have the ambition to innovate – on a global scale – sectors that have not yet been digitized. United Ventures seeks to identify these trends early, anticipating them and supporting the growth path of the startups in its portfolio. We have developed a qualified network, as well as a human and technological capacity that gives us privileged access to the best opportunities in the Italian market. A concrete example of this strategy is Musixmatch, a company that entered our portfolio in 2014, at a time when the enormous change that would sweep digital music consumption and the consequent opportunity to develop new business models was understood in advance. United Ventures accompanied its growth path until it became the world’s largest music lyrics database (8 million, available in 80 languages), with a network of more than one million artists. Recently, the company was the subject of an extraordinary majority ownership transaction by Tpg, one of the largest private equity funds globally, with about $120 billion under management and investments in Spotify, Airbnb, and Uber.
