Venture Capital: Momentum Out of Uncertainty
Nearly overnight, the COVID-19 pandemic threw economies around the world into turmoil. Over one year after the onset of that disruption, an unexpectedly rapid recovery has taken place, as well as resilient private market activity.
Venture capital investors leaned into the new reality and despite the challenges posed by the pandemic, the pace of investment barely skipped a beat. 2020 recorded the highest total investment in the US and 2021 is on pace to set a new high-water mark.
Liquidity has also been given a shot in the arm, with the emergence of additional – albeit unproven – routes to the public markets via special purpose acquisition companies (SPACs) and direct listings.
- Venture capital investment and fundraising both reached record highs in 2020, as investors embraced virtual processes.
- Venture funds, corporations and non-traditional VC investors have record high levels of capital at their disposal, which should bolster activity moving forward.
- According to Pitchbook’s VC Dealmaking Indicator, the VC investing environment in the US is as friendly as it has ever been across all stages of development (Seed, Early and Late).
- VC dealmaking has exploded over the past few quarters, as public market performance has been impressive since the pandemic-induced low of March 2020.
- Exit activity was strong in 2020 and H1 2021, with public listings in the US accounting for 86.6% of exit value.
Rapid Growth in Europe
In the first six months of 2021, portfolio companies based in Europe raised nearly $50 billion; this surpasses the $38 billion raised in all of 2020. Of the $50 billion raised, 71.4% was split across five countries: UK, Italy, Germany, France, and Sweden. While these major markets are not new players in VC, smaller emerging markets like Romania, Croatia, and Greece have also benefitted from this capital investment growth. Europe is increasingly attracting investor capital as several technology firms continue to emerge in the region.
Upwardly Mobile – US VC valuations reach unprecedented levels
Increased economic confidence and a positive outlook for the second half of 2021, coupled with a surplus of cash from record levels of dry powder and an influx of nontraditional and crossover investors, have boosted VC valuations to new heights.
- Early-stage pre-money valuations reached record levels in Q2, with a median and average of $50 million and $105.4 million, respectively. These values represent significant growth over 2020 numbers, which were already all-time highs despite the uncertainty and logistical difficulties caused by the COVID-19 pandemic.
- A combination of widespread vaccination roll outs, local reopening programmes and rebounding business travel in Q2 has restored economic confidence for many investors as they look to capture future growth in early-stage companies.
- Through Q2 2021, angel and seed valuations have continued their respective recent trends; seed-stage valuations have not seen a YoY decline since 2009.
- With two quarters left in the year, 2021 could be the first year that the average late-stage VC pre-money valuation exceeds $1 billion. For Q2, the median and average valuations hit $160 million and $882.4 million, respectively, representing a sharp increase from values recorded in previous years. The value growth is partly driven by investor willingness to make increasingly large investments in pre-IPO companies.
- The IPO market maintained its hot streak in Q2 2021 on the back of economic recovery, which has pushed 2021 on pace to set a record for the most VC-backed IPOs since 2000. The number of IPOs is encouraging for the broader liquidity of the VC ecosystem.
- Through H1 2021, we have seen record highs for strategic acquisitions with valuation uplifts increasing to 2.2 times the last funding round – the highest level since 2006.
- The elevated valuations for both IPOs and acquisitions strongly illustrate the persistent demand from investors in VC seen throughout H1 2021. This is expected to continue this year given the sustained low-interest environment.
The technologies attracting investment from the top funds in 2021
The Pitchbook Emerging Indicator Tech report provides a unique perspective on the products and technologies that are driving early stage growth opportunities. It tracks 211 early and seed stage deals that involved the top 15 VC funds.
These VCs invested $5 billion across 211 deals in Q2 2021, the second highest amount on record after the $6 billion invested in Q1.
The top five areas of technology investment in Q2 were:
- Fintech $920 million
- Enterprise SaaS $508 nillion
- Health and Wellness Tech $498 million
- DeFi $434 million
- e-commerce $400 million
- Across all technology segments, $592 million was invested in early stage companies that appear to be using artificial intelligence and machine learning (AI & ML).
- DeFi – Decentralised Finance – an umbrella term for financial applications in crypto or blockchain – showed persistence in deal activity despite falling crypto prices in Q2.
- Q2 saw minimal investment by the top VC funds in mobility tech and climate tech start-ups, despite these industries generally attracting significant investor interest.
- Companies that blend SaaS features with custom personalised services continue to attract interest from VCs.
- The lines between social and e-commerce continue to blur as more online content creators and influencers use social tools to engage with potential customers within their followers. This is evidenced by the growing popularity of “link-in-bio” which enables influencers to link directly to product feeds from within social platforms.
- The permanence of remote work and digital collaboration continues to drive opportunities for early-stage companies. While improving chat and meeting technology remains a focus area, several start-ups are also focusing on improving the way organisations create and build community and culture via digital channels.
Interest in fast growing private companies has rarely been higher due to the combination of VC funds sitting on a mountain of investable capital, corporations seeking inorganic growth from new tech start-ups, an influx of nontraditional and crossover investors as well as deal hungry SPACs facing the prospect of returning capital to investors unless they can find appropriate acquisitions. In 2021, VC supply is outstripping demand.
CSS portfolio companies, many with disruptive digital technologies, are looking to take advantage of these favourable market conditions through planned IPOs or putting themselves firmly in the shop window seeking to attract growth hungry suitors. To find out more click HERE.
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.
27 August 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.
Pitchbook Q2 2021 Emerging Tech Indicator
Pitchbook Q2 2021 US Valuations Report
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