The landscape for venture investments has presented significant challenges since Q3 2021, marked by a contraction in available funding, rising interest rates, and destabilizing geopolitical events. The early-stage investment segment as a whole is being tested, which is evident not only in our share price, but also in the market valuations of our publicly listed peers.
However, it is crucial to acknowledge the cyclical nature inherent in markets, destined to rebound at some point. Despite our hopes for a market upswing post-summer 2023, this optimistic outlook has yet to materialize. Through our interactions with both investors and entrepreneurs, a prevailing sentiment suggests that the market might be approaching a stage of "final capitulation." This phase typically marks the culmination of despondency, establishing a foundational price level from which the likelihood of appreciation becomes more probable.
Nasdaq First North Index All Share saw a tripling in value from 2015 to 2020 and a doubling from 2020 to 2022, before retracting by approximately 65%. The current capitulatory phase is anticipated to severely test the resilience of early-stage ventures, potentially resulting in numerous exits. Consequently, once the inevitable upswing occurs, capital will be funneled into a fewer but more robust set of companies. This supply-demand imbalance could create a squeeze effect, catalyzing a price recovery for those who survived. In Katalysen Ventures’ IPO memorandum, we published a growth target that we think is appropriate for a venture developer, given the characteristics of the model and previous performance data: 35% annual growth in portfolio value. We still believe this target to be obtainable, over a full economic cycle.
So, how are our portfolio ventures doing in this harsh environment? We have always promoted a venture-centric approach (as opposed to an investor-centric one). In line with this ethos, we exercise caution when disclosing detailed information about our portfolio companies to avoid setting unrealistic expectations among investors interested in our portfolio companies.
Moving forward, we intend to strike a balanced approach, offering more insight into individual portfolio ventures, while maintaining a level of discretion that preserves the integrity and operational focus of the businesses we back. For now, we can summarize our expectatioons on the potential of the holistic portfolio as follows:
Expectation: Negative (0X-1X)
Ventures in segment: 8
Weight in portfolio: 15%
Expectation: Positive (1.5X-2X)
Ventures in segment: 10
Weight in portfolio: 35%
Expectation: Very positive (2X+)
Ventures in segment: 7
Weight in portfolio: 50%
In 2023, we have strengthened our positioning ahead of a market upturn: we have invested expertise and time to increase our stakes in the portfolio ventures that we believe hold the most potential over the next 30 months, and we have significantly reduced our operating expenses. We continue to evaluate possible further actions within both these themes (increasing important holdings through expertise, reducing costs), and decisions have been taken after the end of the Q3 period that will result in a further approximate 35% reduction in operating costs starting Q1 2024. We will keep you updated as these changes are implemented.
Despite our ability to conduct “pure” expertise investments into the portfolio, cash continues to be a scarce resource since not every challenge can be solved through hard work alone. Additionally, we need to maintain our own runway until market confidence returns and given the low price at which the share is traded, we believe smaller funding events (while not ideal) to be the better way forward for the company’s shareholders. The issuance of warrants after the Q3 period is an example of such a funding event.
Cash is a challenge that we can confidently handle, partly thanks to the excellent long-term support from our larger strategic shareholders. On behalf of Katalysen, I would also like to thank the many entrepreneurs in our portfolio, who are doing a great job, sweating as much as we are! We remain confident that this hard work will pay off and believe the present moment to be and excellent time to invest in well positioned early-stage venture developers and venture studios given the immense opportunities that await on the other side of the market cycle.
Peter Almberg CEO