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Visibility and being part of a larger scene where knowledge and experience are abundant and easily reachable seem to make investors more at ease when the time comes to put large sums of cash in a fresh project.

In the European tally, the unicorn count is led by the United Kingdom (14 companies), leaving behind Germany (7), Israel (8), and France (5) according to data compiled by Crunchbase News.

While the larger countries clearly take the lead, startups from smaller countries not known for their economic and financial firepower still manage to attract large volumes of capital that churn out unicorns.

That is the case of Portugal’s Outsystems and Estonia’s Bolt, which have reached recently the mythical valuation of $1 billion. Both companies were founded, and still keep headquarters, in their countries of origin and intend to keep being so.

Portugal And Estonia

Despite their differences, Portugal and Estonia tell a similar story of how startups founded in smaller markets have a higher incentive to focus on scalable businesses, even though they have a higher probability of having to deal with scarcity of talent and hesitant investors.

Estonia, a country of 1.3 million people, has made an effort to present itself as a nation spearheading technological innovation. It boasts stories of success such as communications software—whose popularity led eBay to pay $2.5 billion for it in 2005 and later prompted deep-pocketed to pay $8.5 billion in 2011—gaming software company, money transfer app, and ride-hailing app. Estonian president Kersti Kajulaid even—even though only Bolt kept its headquarters in the capital Tallinn.

Money has been flowing to the Baltic nation. According to Dealroom.co, Tallinn-based startups garnered €207 million in 2018, a very substantial rise from the €57.8 million collected from investors in the previous year. The capitals of neighboring Baltic countries Latvia and Lithuania lagged behind its closest competitor: Riga and Vilnius bagged just €10.7 million and €165 million, respectively.

From The Investor Perspective

For investors, hunting for good deals in alternative startup spheres tends to pay off since these markets are much less crowded.

“Everybody focuses on London, Israel, Paris, but they are kind of missing areas that should be attractive to investors, that investors should see carefully,” said Tomosaku Sohara, partner of, a VC firm backed by Japanese blue-chip investors such as carmaker Honda, tech company Panasonic and the Japanese Bank for International Cooperation (JBIC), property of the Japanese government.

While raising money for the fund, which started closing deals this year, Tomosaku initially found some resistance. His strategy of investing in companies from the Nordic capitals, removed from the main European hubs, turned up some noses from prospective backers.

“It took a lot of time to convince them,” he said. “What I have been highlighting is that capital inflow to those cities is growing. Nowadays investors want to enter other markets because they are less competitive, you don’t need to deploy so much money; it’s a different approach.”

“Our proposal to our investors is: ‘Do you want to catch fish in a big ocean or in a small lake with the right fishermen?’”

One of the bets made by NordicNinja was in ride-hailing company, known formerly as Taxify. Operating in 34 countries and valued at $1 billion after closing a Series C round, it has performed well while attracting capital to finance its ambitious expansion projects—but not without hurdles.

“Estonia is well-known among the circle of tech investors, but historically it has been easier to raise funds if you’re headquartered in London or in the U.S.,” Markus Villig, Bolt’s founder, told Crunchbase News.

He also stressed that scalability is key if one wants to escape from a tiny market.

“Unlike companies coming from large ecosystems with easier access to capital, we’ve had to focus our operations on efficiency and strive to be smart in how we grow the business instead,” he said.

Talent Concerns

Portugal, meanwhile, has a larger market to tap for qualified human talent as a country of 10 million. But the country’s economy, among the poorest in the European Union, suffers from the same problem as Estonia: It gives little room for tech companies to explore the domestic market.

However, two tech companies managed to land big checks from prestigious investors. , headquartered in the country’s capital, Lisbon, is Portugal’s latest unicorn after raising $360 million in a private equity round led by and in June 2018.

But the title of true pioneer belongs to luxury e-commerce platform, the first startup to reach a $1 billion valuation in Portugal, still keeping its status as the country’s flagship case of native entrepreneurial success — even though it lost more than 40 percent of its market value in early August mainly due to market concerns about diminishing margins.

“You expect to find those luxury companies in France and Italy, but what’s happening today with the pervasiveness of the Internet means that entrepreneurs can be based anywhere,” told Crunchbase News.

Court is founder of VC firm and former general manager of Advent Venture Partners, through which he invested $4.5 million in Farfetch back in 2010.

Court recalls meeting the company’s founder José Neves in the tiny city of Guimaraes, where the company was initially headquartered, to discuss financing matters. The scene was quite distant from the vibrancy of central Europe.

Fretting about pumping money into companies from upstart economies might be common, but the main concern is the lack of talent available to steer companies towards a successful exit, and ultimately to profitability, said Court.

Being stuck in small countries means that “you might not be able to hire the right talent. Or that, down the line, it could be harder to sell the company because the buyer doesn’t want to have the hassle of finding a big team in, say, Portugal and Estonia,” Court added.

The solution is to hedge that kind of risk, keeping teams in the company’s country of origin while establishing others in cities with an abundance of talent.

“We ended up running the business with most of the staff based in Portugal but with a significant office in London to access talent that was available there and not in Portugal,” he said.

With that said, no startup environment is an island, and smaller ones can’t avoid the all-encompassing power of Europe’s entrepreneurial strongholds.

Article written for Crunchbase News by Pedro Garcia, a journalist based in Lisbon, Portugal, covering mainly business and economic themes.��Follow him on .

Photo of Tallinn, Estonia by via Unsplash.

Farfetch’s impending IPO could fetch a high price if the gets the valuation it wants. According to , the quickly growing and unprofitable company for a valuation in the $5 billion to $6 billion range.

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Is the firm worth such a figure? To answer the question, let’s take a look at its last few private valuations and compare its projected worth against its financial performance.

Prior Valuations

Farfetch raised a in May of 2016. The round raised the valuation of the British company to around $1.5 billion after the new equity was counted.

The company was, therefore, a unicorn before it raised its�� from Chinese Internet giant in June, 2017. Regrettably, the valuation at which JD invested the capital isn’t known.

However, there were signs that the company’s worth jumped during the capital event: Around the time of the JD round,��there ��that Farfetch could aim for an IPO valuation of around $5 billion.

So the firm’s valuation likely went from around $1.5 billion in 2016 to something at least $400 million higher in 2017. It is likely now shooting for a multiple of its Series F valuation as it goes public.

Valuing Growth

When Crunchbase News covered Farfetch’s IPO filing we followed a mostly performance angle, leaving valuation talk aside. After all, the company will set an IPO price range and we’ll be able to run the numbers from there.

However, with the possible goal posts set at $5 billion and $6 billion we can do a little work.

Let’s do some basic stuff first. Farfetch full-year 2017 results and half-year 2018 results, but we can get trailing twelve-month figures by summing its last four quarters together.

Here are the resulting sums:

• Farfetch revenue, trailing twelve months: $480.9 million.
• Farfetch run rate (most recent quarter times four): $579.2 million.
• Farfetch gross profit, trailing twelve months: $247.3 million.
• Farfetch gross margin, trailing twelve months: 51.4 percent.
• Farfetch loss after tax, trailing twelve months: $151.4 million.
• Farfetch net margin, trailing twelve months: -31.4 percent.

With those, we can do some work. Bear in mind that the firm’s operating and investing cash burn rates are increasing as the firm’s after-tax losses rise and its EBITDA becomes even more negative.

At a $5 billion valuation, Farfetch is shooting for a trailing revenue multiple of 10.4. That falls to 8.6 when we use a run-rate figure for the company. At a $6 billion valuation, the two figures rise to 12.5 and 10.4, respectively.

Those are, in effect, SaaS multiples. But Farfetch is an ecommerce company that also has a physical-retail component. That places it pretty damn far from software profits and recurring revenue.

There is a good reason why Farfetch may hope for such a rich revenue multiple and a good reason why not. 1 The anticipated multiples may make some sense given that Farfetch is growing faster than most SaaS companies. The company grew 55 percent from H1 2017 to H1 2018—far greater than the��median for cloud and SaaS companies.

On the other hand, with gross margins of around 50 percent, Farfetch generates far less profit per dollar of revenue than most software companies, meaning that its revenue is, dollar-for-dollar, worse. That the company is also quite unprofitable on an after-tax basis isn’t encouraging either; the firm has reached scale but is moving further from the black, a bad sign.

Farfetch is, therefore, asking for a SaaS multiple with worse margins and ballooning losses, a tough sell when its revenue growth is decelerating��(the company grew a faster 59.4 percent from 2016 to 2017 compared to its most-recent 55 percent pace, and an even faster 70.1 percent from 2015 to 2016).

Adding to above, on comparable businesses, coming to the following conclusion:

If Farfetch really is able to crack online luxury retail without becoming a big spender itself, then it deserves a premium. But given that it is hard to see how its investment needs will wind up being as slim as the cigarette pants on its site, its prospective valuation might prove to be quite farfetched.

We can safely wrap by saying that a $5 or $6 billion valuation for the company is expensive, given what we can figure out from this distance.

But it’s 2018 and growth is worth more than it normally is. I suspect that the pricing of Farfetch’s IPO will be illustrative as to the current appetite of the public markets for high-growth, high-risk tech shares.

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