Venture capital focuses on funding small, early-stage and innovative firms that are deemed to have high growth potential. It is often considered a catalyst for job creation and economic growth. Investment focus in 2021 will be on new highly innovative start-ups and companies that have benefited from the disruption caused by the pandemic with follow-on investment aimed to turbo-charge that growth through to exit. The combination of the high investment appetite for VC and the increased exit opportunities is likely to shorten the typical VC window from start-up to sale.
While macro-economic uncertainty remains high, the outlook for the VC industry seems clearer than many other areas. Firstly, the two main sectors for VC investment – tech and healthcare- have grown more important during the pandemic. Secondly, the large VC funds have raised significant amounts of capital during 2020 adding to ample dry powder available to invest in companies going forward.
Non-traditional investors that have invested strongly in VC over the last few years, such as corporate investors, hedge funds, mutual funds and alternative asset funds, are proving to be a staying force in the sector and institutional investors have retained their appetite for all things VC.
2021 could bring the opportunity for innovation as investors, companies and regulators seemingly embrace the cause of increasing access to capital for start-ups.
Biotech and Pharma VC deal activity will remain high
The healthcare sector thrived in 2020 as focus on vaccine development and treatment for COVID-19 boosted the biotech and pharma industry. This was evidenced in terms of VC investment, technological breakthroughs and exits. In the US, IPOs ballooned to records levels nearly doubling the previous yearly record of $5.1 billion in 2018.
In M&A 2020 was a standout year with prominent deals such as AbbVie’s acquisition of Allergen for $63.0 billion, Gilead Sciences acquiring Immunomedics for $21.0 billion and Bristol-Myers Squibb’s buy out of MyoKardia for $13.1 billion. Such activity clearly demonstrates high confidence in the sector. A resolution to the pandemic may lead to a pullback in capital as institutional investors diversify into sectors likely to benefit from widespread vaccine distribution. However, the continued fundraising by specialist investors in biotech and pharma should ensure that 2021 VC deal activity will remain robust.
Here in the UK, the 2020’s have been coined the Decade of Health and the abundance of unmet medical needs ensures VC capital is likely to be allocated regardless of major shifts in macro-economic factors.
The pandemic will undoubtedly leave lasting scars on many industries. However, biotech and pharma could be one of the first sectors to bounce back; with remote working almost impossible for scientist and technicians, this has allowed companies to maintain peak productivity and means they are set to resume business as usual operations sooner than other industries. This will drive medical breakthroughs and novel scientific findings which will in turn serve as impetus for further VC investment.
More blockbuster listings in 2021
For the last decade or so, the perceived wisdom was that fast-growing tech companies were better off staying private. In 2020 the public markets in the US recovered quickly from the initial drop from the pandemic and continued to value revenue growth extremely highly given the low returns in many other asset classes. These revenue multiples are approaching levels that surpass or at least are competitive with the multiples typical in the private market. For this reason, PE and VC investors are leaning strongly towards the public options of traditional IPOs, SPACs and direct listings.
Success breeds success
The success of tech mega-IPOs in 2020 was one of the factors that drove late-stage VC investment to a new high, continuing a decade-long increase in activity. The total amount of capital available to late-stage companies has consistently increased the deal sizes and valuations, driving total capital investment to a new high of $92.1 billion in the US. 2021 is expected to see even more capital to flow into late-stage VC funds as investors look to re-invest IPO returns.
Silver Lake is starting 2021 in record-breaking fashion and has raised $20 billion for its sixth flagship fund, the largest-ever tech-focused vehicle from a PE firm, surpassing a $17.8 billion effort from Thoma Bravo that closed last year. Silver Lake’s previous fund closed on $15 billion in 2017, while Vista Equity Partners, another of the industry’s most prominent tech investors, raised a $16 billion vehicle in 2019.
During the early days of the pandemic, Silver Lake made a series of minority investments in teetering tech companies that are already beginning to pay off. Last March, the California based firm invested $1 billion in Twitter, and in April it teamed up with Sixth Street Partners to make a $1 billion investment in Airbnb at an $18 billion valuation. The firm also joined Apollo Global Management to make a $1.2 billion investment in Expedia in April.
European VC investment in 2021 to continue to hit record levels
The record amount of venture capital investment in Europe in 2020 suggests that the appetite for the region’s start-ups remains strong despite the global pandemic. Including investment in Israel, VCs invested over $46 billion in the continent, beating the 2019 record of $41.8 billion.
Investment runways for European VC-backed companies have evolved significantly during the last decade as capital deposited into first-time rounds has remained consistent, whilst capital for follow-on rounds has soared. Start-ups are fully maximising on the abundance of VC financing and valuation growth across the different stages in their life cycle before an exit. This is allowing companies to stay private for longer and there are currently more than 50 VC backed European companies valued at $1 billion or more. There is now a wider array of sources and greater amounts of capital flowing into European VC, with particular focus on the early and late stages. Median VC deal sizes and valuations have also grown handsomely during COVID-19.
As European VC continues to grow, expect another 25 tech companies to raise money at a $1bn+ valuation for the first time in 2021 as momentum continues to build. Europe is following a similar growth chart in unicorns as seen in the US, with seed-funded companies in Europe have around a 1 in 100 chance of scaling to a $1bn+ valuation.
Brexit will not stifle VC deal value in the UK
The UK remained the biggest draw for VC investment in Europe in 2020, with British companies raising over $13.7 billion. Five new UK unicorns were created, more than any other European country. Expect VC deal value to remain strong in 2021 as well established highly valued start-ups underpin investment in the region. Since the referendum in 2016 Brexit uncertainty has not dampened VC deal value. Consecutive annual records were achieved between 2017 and 2019 and 2020 beat them all despite COVID. Expect more of the same in 2021.
The UK has been a natural stepping stone for US-based companies to invest or expand operations in Europe. These existing relationships are expected to survive Brexit assuming there are no major regulatory changes such as passporting rights and there is not a major devaluation of the pound.
Non-traditional VC investment is here to stay
Corporate investors many of whom might have received VC investment themselves, hedge funds, mutual funds and alternative asset managers have become significant investors in VC. Often derided in the past as tourists in the VC market, they now lead or solely finance a greater number of VC deals than ever before. As private growth tech companies have seen exponential growth and remained private longer, non- traditional investors realised they were losing out on valuable upside by waiting until companies completed an IPO. As such investment in VC has become ingrained within non-traditional investor strategies.
VC investment has become a major financial instrument in Europe as global interest has been stoked and non-traditional investment has been drawn in from multiple sources – such as sovereign wealth funds, PE firms and family offices. It has become trendy and lucrative for non-traditional investors to invest heavily in new-age start-ups with the potential to fuel future growth in emerging industries. Tech-enabled start-ups have demonstrated remarkable pandemic resilience as online reliance propagated in 2020, further enticing capital from non-traditional investors.
Since 2001, CSS Partners has raised over £175m for ambitious growth companies. Over this time we feel we have developed a good understanding of what investors want.
CSSP backed companies will often offer EIS Shares so investors can use the significant tax breaks of the UK Enterprise Investment Scheme to help mitigate the risk of venture capital and maximise returns.
Investments offered by CSS Partners are not appropriate to all investors. Our free client service aims to be of benefit to high net worth and sophisticated investors looking to achieve higher returns.
20 January 2021
The information in this website is provided by CSS Partners LLP. This website has been approved for the purposes of section 21 of the Financial Services and Markets Act by Charles Street Securities Europe LLP (CSSE), which is authorised and regulated by the Financial Conduct Authority. CSS Partners is an appointed representative of CSSE.
Any views or opinions expressed in this blog are those of the author alone, except where specifically stated that they are the views of CSS Partners LLP.
VC Defies Expectations despite Pandemic Pitchbook News 21.12.2020
Year Ahead 2021: Explore our Outlook UBS 12.2020
Brexit Agreement May Mean for PE deals Pitchbook News 05.01.2020
2021 US Private Equity Outlook Pitchbook News 15.12.2020
2020 Annual US PE Breakdown Grant Thornton 12.01.2021