"N26 is overvalued for me".

Valuations that are too high, poor sentiment on the stock markets, IPOs that have flopped: according to Fabian J. Fischer, the rosy times for startups are over for now. In an interview, the VC investor explains why continuation funds could now be a solution.

Fabian J. Fischer is a little stressed. He has 30 minutes until the cab arrives. In addition to his time as an investor through Picea Capital, a venture capital firm he co-founded himself, he is also CEO of the digital consultancy Etribes. But once it comes to realistic and unrealistic valuations of startups, burst or postponed IPOs and the current market mood, Fischer has plenty to talk about. Because at least the next three years will be tough for the startup world, he says.

Mr. Fischer, you see a mismatch between startup valuations that are too high and the chances of a good IPO. What do you mean by that?

We've now had a long period on the stock market in which tech stocks have only ever gone up. For investors, the potential of the companies was sometimes more important than hard key figures. This phase is now finally over. In the current tense phase on the markets, investors are more cautious on the stock exchanges. The expectations that many VCs have of startups can therefore not be met at present.

Can you give an example?

As of now, N26 is overvalued for me. In October 2021, things still looked different. After a financing round, it was even said that N26 was worth more than Commerzbank. This valuation may have been correct at the time due to the interplay of supply and demand. But with the best will in the world, I can no longer imagine it being so.

Why do you think such valuations are not tenable at the moment?

We are currently seeing liquidity being pulled out of the market. This is happening a bit more slowly in the VC sector, where people always think in terms of financing rounds. But on the stock market, it's happening very quickly. Both shareholders of start-ups and potential new investors are currently holding back. Investors who currently hold shares in very highly valued companies are trying to sell them on, and this is currently only possible at a considerable loss. To compensate for the current gloomy mood on the stock market, more and more VCs are now launching a continuation fund.

What is this all about?

Continuation funds come from the private equity sector. If an asset has to be sold because the private equity firm has to pay its investors, but it assumes that its stake in a company will be even more valuable in the foreseeable future, it puts the asset into a continuation fund. In a sense, the continuation fund takes over the investments in the companies from the old fund. Shareholders or new investors can then participate. This gives investors another chance to profit from the growth of a company.

A lot of stupid money will disappear from the market

Fabian J. Fischer, CEO of Etribes

That sounds a lot like an impending Ponzi scheme.

It depends on how transparent this whole process is. If there is always a new vehicle built to hold shares and pay out investors without the chance of a good exit, then it could be called a Ponzi scheme. I think continuation funds are good if the value of the company is assessed realistically and professional investors can decide again whether they want to invest or not. For private investors, of course, this is nothing.

Isn't there a danger that continuation funds will become nothing more than a ramp for start-ups?

Continuation funds must clearly be made for winners. After all, start-ups are being re-evaluated. Young companies that have a high burn rate, low growth prospects and no realistic scenario for an IPO will have a hard time getting into a continuation fund. Such funds should be used for selection purposes and not to carry out life-extending measures on start-ups.

You indicated earlier that N26 was unlikely to get as high a valuation on the stock market at the moment as many VCs had estimated last year. Would the startup end up in a continuation fund?

I think with N26, everyone has to be prepared that there will be valuation corrections. With these corrections, it can definitely end up in a continuation fund. If I were a fund investor right now, I would only participate in it if there is a fair valuation round.

How do you think the financial opportunities for startups will evolve given the current situation?

We'll be able to see a whole series of continuation funds so that VCs and startups alike can ride out this phase. This will probably continue for at least three years now. Founders are well advised to keep as much liquidity together as possible and cut costs. They can't currently hope for big funding rounds or IPOs. A lot of stupid money will disappear from the market, as hard key figures become more important again. This also has something good: The selection that takes place as a result will lead to more quality.

Personal details: Fabian J. Fischer is a Hamburg-based entrepreneur and investor. As CEO of the digital consultancy Etribes, he is responsible for the strategic development of the company, which supports medium-sized companies and DAX-listed corporations in meeting the challenges of digitization. Fischer is also co-founder of Picea Capital, a venture capital firm that invests in early-stage technology companies through an evergreen VC fund.