ACTIVIST VC BLOG

The Hottest VC Trends of 2022: Our Predictions

April 7, 2022

In our previous blog post, we looked at global Venture Capital investment and exit trends in 2021. Now it’s time to make some predictions for 2022 and beyond.

This time around, our crystal ball is clouded by fast-rising inflation, tightening fiscal policy of the central banks, and the hard-to-predict military aggression of Russia:

The scope and duration of the war in Ukraine are an enigma. The war has already created some startling bottlenecks in materials availability and supply chains.
At the same time, the increasingly brutal behavior of Russia and the resulting sanctions and boycotts are guiding VC investments to react quickly to the changing operating environment: the demand for energy sources replacing Russian oil and natural gas and services protecting against cyberattacks is growing fast – but more about this later.

However, at the end of the day, the development of the Nasdaq index (~general interest in tech companies) determines the degree of the VC buzz, be it about VC fundraising, the number of VC investments, or exits.

A bit off-topic but descriptive of the current sentiment is how different generations use and trust a particular new technology, cryptocurrency in this instance:

About 23% of Gen Z owned cryptocurrencies
Millennials, about 38%
Gen X, 28%
And baby boomers, about 6%

And the ownership is not casual, as 28% of millennials expect crypto to help fund their retirement!

The Yahoo Finance video below about a recent Investopedia survey gives further insight on investor concerns and trends (including the one on crypto):

Inflation and Fed rate hikes top investor concerns
Source: Investopedia & Yahoo! Finance

Inspecting Our Previous Predictions

Let’s start with a little bit of introspection and an assessment of our predictions for 2021 from our last year’s edition of this blog (published March 2021):

1. SPACs

“We expect to see more SPAC flops as greed takes over – the SPAC fever will settle down accordingly after a while”

This turned out to be quite accurate, more SPAC analysis later in this post

2. VC Activity

“If the tech stock market remains strong, we believe plenty of private capital will flow into VC and PE funds in the coming years.”

Given the conditional nature of our prediction, the odds of us being right were good. And right we were: as the Nasdaq climbed to record highs, VC activity went through the roof

3. Digital Disruption

“…we think Digital Disruption and AI are central to the development of the entire tech sector and we continue to emphasize both the fast development and importance we see in this field.

Make no mistake about it, the rate of digitalization before Covid-19 was already fast. But the pandemic has accelerated the rate of change and further broadened its impact…”

This trend is getting stronger by the week and we believe the development will continue. Digitalization is a huge wave of change and development that will dominate the economic development of the 2020s.

4. AI

“We believe in the accelerating emergence of solutions that are smarter and that utilize artificial intelligence, machine learning, blockchain technologies, etc. to leverage even more data. But we think there are some twists in the tale:

There will be disappointments on the way, though – e.g., self-driving vehicles are not likely to develop as fast as the most ardent optimists have predicted. (And even if the technology performed flawlessly even in difficult conditions, rigid regulations and attitudes can still pose challenges.)”

Very much true. Different types of AI and automation are spreading ever wider and are pushing their boundaries. If you want to dig deeper into analyzing this huge wave, jump to the Live data section of the OECD AI Observatory, a great source of AI-related data points: AI news, AI research, AI investments, AI jobs, AI SW, etc.
But I am not holding my breath to use my Tesla’s self-driving features both legally and safely here in Finland, especially in wintertime…

So – in general, we had a well-functioning crystal ball last year…

SPACs and IPOs

The total number of SPAC IPOs reached record highs in 2021, increasing to 613 from 248 in 2020.

As we predicted a year ago, the pace of SPACs in the US has started to lag:

There were only 55 new SPACs in Q1 2022, and the current monthly trend is indicating less than 200 SPACS in total for the year 2022: a 2/3 drop in the volume compared to 2021. But still high above the figures seen before 2020.
There are currently 610 US SPACs seeking merger targets
The valuations of SPAC companies are coming clearly down – the IPOX SPAC Index has lost 22% over the past three quarters

Only one SPAC was liquidated in 2021 (i.e., closed down after not finding a merger target within the promised timeframe). We expect that there will be a flood of SPAC liquidations in 2022 and 2023.

In addition, more SEC regulation is coming, triggered at least in part by the research of Michael Klausner and his team which showed the generally poor performance and unfair mechanics of SPACs.

However, this SPAC money (or the lack thereof) does not have a strong direct impact on the VC Exit market as VC-funded companies are more likely to take the traditional IPO route than the faster but more expensive SPAC path. Creating a SPAC is not that expensive per se, but the SPAC teams take typically a hefty price for running the show.

The SPAC boom is fading fast: 55 new SPACs in Q1 2022 and the current monthly trend is indicating less than 200 total SPACS for the year 2022.
Source https://spacinsider.com/stats/

SPACs have constituted more than half of the US IPO market so the decrease in SPACs has also resulted in a decrease in the number of IPOs. At the same time, the 12-year rally of the Nasdaq (with 1200+ % gains) hit a wall at the end of 2021 and the more than 20% drop in the index early in 2022 resulted in a number of canceled IPOs.

The slow-down in US SPACs resulted in an overall cooling of the IPO market
Source: https://stockanalysis.com/ipos/statistics/

The downward IPO trend can also be seen globally: January and February of 2022 have been lackluster compared to the 2021 levels.

The beginning of the year 2022 has been slow for IPOs also globally
Source: https://focus.world-exchanges.org/articles/number-ipos

VC activity volumes in 2022

If the tech stock market remains strong, we believe plenty of private capital will continue to flow into VC and PE funds in the coming years. Even if the share prices of tech companies were to tank, there is so much dry powder in VC funds, that there will be plenty of VC investments in 2022 albeit not on 2021 levels.

In the US, early-stage VC investments have been somewhat on a back-burner. I assume (and hope) that the US VC firms will shift their focus from the megadeals to feeding earlier stage companies – to create investments that can be harvested in the next five to ten years.
In Europe, the biggest gaps are in the EUR 5M to 20M ticket range: the typically much smaller European VC funds (median fund size has been around 50M whereas in the US it is well over 100M) cannot reach this ticket size while these tickets are typically too small for the large international funds.

VC Imbalance in Europe: active early-stage but a very passive mid-stage
Source: CB Insight Report Q4 2021

You may have heard this before, but this European funding gap is where the Nexit fund is focusing on – tech companies digitalizing B2B markets and ready for international scaling but perhaps not sexy enough for larger international funding rounds.

Some trends for 2022

Digitalization

We have written about this topic many times before – and nothing has changed in our thinking in the big picture. We believe we are entering a decade of fast digitalization of all business processes that offer nearly unlimited opportunities to smart growth companies:

The world is quickly becoming deeply digital with increasing numbers of advanced sensors creating relevant data, and ubiquitous wireless communication giving access to it.
We get excited when we find a new (or just untapped) source of data enabling proper optimization of a critical process – making it more efficient, intelligent, and user-friendly.
This development will produce new treasure troves of data for bright entrepreneurs to take advantage of.

The availability of comprehensive high-quality data will be a crucial factor in successful AI and ML projects. The basic tools for digitalization are already widely available but the development is naturally never-ending: we are now witnessing an ongoing and almost endless maturation of AI and Machine learning.

All business sectors are naturally widely affected but right now especially hot areas are:

Fintech – Sample hot areas include:
1. The digitalization and automation of the processes of the traditional financial world is a huge effort for this decade.
2. A new breed of disruptive Fintech services and players are emerging to challenge the incumbents: new solutions are emerging from the crypto and DeFi realms with their distributed architectures, open interfaces, and a mindset that eschews centralized control.
Health tech – Sample hot areas include:
1. Virtual clinical trials for faster drug development
2. The already hot telehealth sector will see a greater emphasis on remote patient monitoring
3. The consumer-products-as-medical-devices trend creates an opening for big tech companies, their vast ecosystems, and AI skills to create and bring to the market solutions far beyond the scope of typical medical device makers

Cyber security

The VC funding in the Cyber Security space jumped up already in 2021 and is expected to continue at high levels. Our recent investment in Tosibox is a good example of modern and Cyber Safe VPN connectivity:

“TOSIBOX platform ensures data flow within operational technology networks with 100% security.”

Increasing digitalization creates more opportunities for cybercriminals. Cybersecurity technology will need to develop accordingly to protect the increasingly digital businesses
The hostile actions of Russia and the growing risk of state-sponsored cyber-attacks increase the need for cybersecurity even more

VC funding in Cyber Security is rising rapidly.
Source: CB Insights

Climate tech

Climate tech has gotten lately increasing VC attention, but (unlike in typical SW-based solutions) finding good returns on investment is challenging as the capital costs are high and the (short term) scalability of the companies is typically limited in this industry.

The importance of ESG considerations has grown markedly in the decision-making process and investment strategy of VC firms – largely guided by the Limited Partners providing the funds. As a consequence of this, climate tech took a big leap forward in 2021. Furthermore, the limitations on fossil energy trading with Russia (with its effect on enlarging the Russian war chest) create extra pressure for a fast and comprehensive change, especially in Europe.

Equity funding in renewable energy is also growing rapidly.
Source: CB Insights.

Some important Climate tech-related trends include:

Electrification of everything – battery tech will make substantial steps forward in the next 12-24 months, enabling electrification to new levels
Energy conversion and storage – hydrogen, power-to-X, etc.
Food tech – artificial meat, alternative proteins, vertical farming
Fusion energy – a decades-old topic, but suddenly, in 2021, fusion energy-related investments were rapidly up

Creating Gen Z shopping experiences

To paraphrase F. Scott Fitzgerald, the zoomers are different from you and me. This is perhaps most evident in how they shop. This has created some interesting new trends and opportunities in e-commerce:

Killing or at least remaking the credit card. Buy now, pay later purchases facilitated by e-commerce sites will become more frequent and higher in value as millennial and Gen Z shoppers gravitate away from traditional cards.
Ultrafast delivery. Retailers will join forces with cash-burning ultrafast delivery companies to help win over consumers.
Consumer privacy. Consumer privacy become even more of a strategic business priority in 2022, potentially giving big tech an even greater advantage.
Digital twins. Revolutionizing supply chain management by simulating the lifecycle of an object in a supply chain.

Metaverse

No tech predictions for 2022 and beyond would be complete without discussing the Metaverse – one of the hottest buzzwords of recent months.

While defying precise definition, the metaverse is generally regarded as a network of 3-D virtual worlds where people can interact, do business, and forge social connections through their virtual “avatars.” Harvard Business Review calls it “a virtual reality version of today’s internet”.

The term itself is not very new – it was coined by Neal Stephenson in his seminal 1992 sci-fi novel Snow Crash (a good book, worth the read!) as a portmanteau of “meta” and “universe.” Even implementations of metaverses are not very new: in the early 2000s, there was a lot of buzz about platforms like Second Life (which still exists, by the way).

But this time around, there is reason to believe metaverse is more than just a flash in the pan. This was really underlined in 2021, as Facebook was renamed “Meta Platforms” and Chairman Mark Zuckerberg declared a strong company commitment to developing a metaverse.

Unlike before, all the technological underpinnings required for truly functional metaverses are now either available or becoming available: virtual reality platforms, gaming, machine learning, blockchain, 3-D graphics, digital currencies, sensors, and VR-enabled headsets.

While it is still a work in progress in many respects, metaverse has become big business, with technology titans and gaming giants such as Meta (previously Facebook), Microsoft, Epic Games, Roblox, and others all creating their own virtual worlds or metaverses.

However, until recently, metaverse was seen as entertainment and its implications for the world of business have received little attention. This is now changing.

The increased attention on metaverse among businesses is at least partially related to the effects of the pandemic — especially its limitations on physical meetings and travel — which are spurring a search by enterprises for more authentic, cohesive, and interactive remote and hybrid work experiences.

The metaverse can reshape work in at least four major ways:

new immersive forms of team collaboration
the emergence of new digital, AI-enabled colleagues
the acceleration of learning and skills acquisition through virtualization and gamified technologies
the eventual rise of a metaverse economy with completely new enterprises and work roles.

We see the importance of the Metaverse as a part of the digitalization wave. Efficient and easy-to-use digitalization of large and complex processes requires a better user interface between the digital and the human world and the Metaverse is part of the solution.

The Metaverse is a big subject and really deserves a blog post of its own. We plan to return to it in a dedicated post at some point.

Web3

If there is a buzzword that can challenge Metaverse, it is Web3. Celebrities are hawking NFTs on talk shows, DAOs are formed left and right, and taxi drivers are talking about blockchains (this is true).

While crypto and Web3 are not synonymous, VC activity in crypto is a decent proxy for how hot web3 is. According to Pitchbook, VC firms had invested ~$30 billion in crypto startups globally as of late November across 1,278 deals.

Many big VC firms are betting on crypto in a major way, including industry leaders such as Sequoia, A16Z, and Tiger Global.

We believe Web3 represents a fundamental shift in how the internet works and what it is used for. This will create huge new business opportunities. But the development may not be as linear and easy as it is often predicted to be.

We will cover Web3 in more detail and depth in an upcoming blog post, so stay tuned.

So, what does it all mean?

Apart from the technology trends, our outlook is as follows:

From a short-term valuation and exit perspective, the VC market will reap what Nasdaq sows.
But regardless of how the Nasdaq fares this year, the world is full of problems, challenges, and new needs that can be solved with new technology and innovations.
Venture capital as a mechanism has shown its capability to react to these challenges rapidly and to advance new developments by funding and supporting innovative new businesses and energetic and ingenious entrepreneurs.
VC has also proven its ability to create good returns for investors and this is now also evident in Europe.
VC investors will pay increasing attention to ESG matters in their investment decisions.

In a word: yes, I am excited!

Some data sources used and further reading

Below are a few interesting articles that we believe you might also be interested in reading. As always, should you know of other good sources, we’d love to hear about them.

Happy reading!