Q2 2019 Quarterly VC Update: Suranga Chandratillake on the State of Venture Capital Investing

In conjunction with our Q2 Venture Financing Report, I sat down with Suranga Chandratillake from Balderton Capital to get his take on the state of venture capital investing.

A few highlights from Suranga Chandratillake

On technology companies driving valuations to historic highs: “Software is eating the world, and it has a voracious appetite. … Against a backdrop of sweeping technological change, the right companies have an opportunity to be truly gigantic.”

On European deal term trends: “This feels like a healthy place to be. Entrepreneurs are no slaves to investors, but, equally, investors are able to exercise appropriate fiduciary responsibility on behalf of their own backers.”

On how Brexit could affect the UK startup community: “My biggest long-term concern is that a hard Brexit and nationalistic rhetoric will fundamentally damage Britain’s hard-earned reputation as a welcoming, supportive home for ambitious folk from the world over.”

Based on Cooley data for the quarter, how does your experience in the market – especially in Europe – compare? Are you seeing the same rise in early-stage valuations? 

Yes, we broadly see a similar trend. I do think it’s always hard to judge too much from medians, though. The very best companies are somewhat disconnected from the pack, and we have absolutely seen some of those gain very high valuations.

As far as VC deal terms, is the pendulum in Europe favoring companies or investors?  

As an ex-CEO who now sits on the VC side of the table, I think the terms are fairly well-balanced in Europe these days – 1x liquidation and no participating preferences, no full ratchets, etc. This feels like a healthy place to be. The entrepreneurs don’t become slaves to investors, but, equally, investors are able to exercise appropriate fiduciary responsibility on behalf of their own backers.

Do you think this will continue through 2019?

I don’t think it will change dramatically in the near term.

Are there noticeable patterns that are different for early-stage deals compared to later-stage deals?

“Founder friendliness” is the flavor of the day for early-stage investments. I think investors recognize that the journey ahead of founders is a long one these days. The trend for companies to stay private for longer and aggressive terms limiting a founder’s flexibility early both chip away at long-term incentive and drive. Later-stage investors, I think, are still closer to a proxy for public investors and so are more likely to expect terms that protect their rights strongly.

Is there a trend to the geographic source of funds in the UK/Europe (more funds from the US, Asia or Middle East than in the past)? And, if so, is that having an impact on terms or valuations?

We are certainly seeing more investment from the rest of the world. This is primarily from the US and generally Series B, C and onward, but there are occasional Series As led by US firms too.

Valuations are near historic highs for almost all stages of deals – does Balderton fear overpaying for deals? How challenging is it to put money to work in this environment?

Valuations are at historic highs for Series As, but they are also at historic highs for exits, whether M&A or IPOs. Fundamentally, we are finally seeing a huge shift where information technology revolutionizes literally everything about the way we all live and work. Just as people overreacted to that in the short term in the late 1990s, I think most people are underreacting to it now. Software has truly started eating the world, and it has a voracious appetite. Against that context, we feel at ease with current valuations. The right companies in this context have the opportunity to be truly gigantic.

Are you bullish or bearish on the prospects for liquidity options through the balance of 2019 and 2020?

It is always difficult to judge the exit market. If I felt I could do that, I’d work for a hedge fund, not a venture capital firm. I firmly believe our job (and skill) is to find, invest in and work with extraordinary teams building category-changing companies. When you do that, whether or not they can go public in 2020 vs. 2025 does not really make a huge difference.

With a renewed Brexit push from new Prime Minister Boris Johnson, does the outcome of this process influence/concern investors in the UK and EU?

In some sense, as a pan-European investor, we are used to and at ease with the fact that given countries or ecosystems grow and shrink in scale and influence over time. Even if the UK did diminish dramatically as a startup location, places like Paris, Berlin, Stockholm or Amsterdam will probably benefit from that decline. However, with a UK-centric hat on, we see no decline in UK activity at this stage. I think my biggest long-term concern is that a hard Brexit and nationalistic rhetoric will fundamentally damage Britain’s hard-earned reputation as a welcoming, supportive home for ambitious folk from the world over. If we do that, we will have squandered something that very few have and that we will struggle to ever rebuild. Happily looking across the board at our UK-based companies’ ability to hire globally, this has not yet happened.

About Suranga Chandratillake

Suranga has been a general partner at Balderton Capital since 2014. He was previously an entrepreneur and engineer. Suranga founded blinkx, an intelligent search engine for video and audio content. He led the company for eight years as CEO through its journey of moving to San Francisco, building a profitable business and going public in London, where it achieved a peak market capitalization in excess of $1 billion.

Suranga has a MA in computer science from the University of Cambridge. He holds patents in the area of video discovery and online video advertising. He was elected a fellow of the Royal Academy of Engineering in 2012 and chosen as one of the World Economic Forum’s Young Global Leaders in 2009. In 2017, Suranga joined the UK Council for Science and Technology. Suranga was granted an OBE for services to technology and engineering in the 2018 UK New Year Honours.

About Balderton Capital 

Balderton Capital is based in London, with $2.6 billion in assets under management. Balderton invests in early-stage, European-founded technology companies with the potential to disrupt huge industries and the ambition to scale globally. The team has a track record of backing breakthrough companies, including Revolut, MySQL, Betfair, The Hut Group and Yoox Net-a-Porter.