The Hottest VC Trends – Our Predictions for 2021

In our previous blog post, we looked at general VC activity and exit trends in 2020. Now we make some bold predictions for 2021 and beyond.

Inspecting Our Previous Predictions

Let’s start with a little bit of introspection (or, self-flagellation, if you will) and assess our predictions from our last year’s edition of this blog: how did we do?

Last year we gave the following predictions for 2020: (This was written on the 6^th of March, 2020 when the full impact of COVID-19 was still very much unclear.)

“We do not believe 2020 will beat 2019 in exits or 2018 in VC investment volumes. Not only are we competing against two record years, but there are new macro-level clouds on the horizon, the coronavirus being a critical source disruption.”
“Our faith in the great importance and long-lasting potential of the digital transformation and AI is getting even stronger and more focused.”
“CVC activity will follow the tech fever (~Nasdaq index movement) quite closely, albeit with a small delay.”
“It also looks like even VC-backed companies will start looking for a purpose beyond just growth and profit. We expect ESG (Environmental, Social, and Governance) matters, diversity, etc. to become increasingly important in our business.”

Well, a few weeks later we thought the markets – and, as a consequence, the VC/PE business – would collapse. But the money printing presses started humming and the finance sector took off. At the end, we turned out to be pretty close to the mark with our predictions about Digital Disruption, the CVC market and the ESG angle. The volume of the VC and PE investments did, however, exceed our estimates in many ways.

This prediction business is pretty hard…

SPACs Galore

The current hot issue in VC/PE market is SPACs.

SPAC (a Special Purpose Acquisition Company) is a company with no commercial operations that is formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring an existing company. SPACs are a form of reverse mergers, in which a private company merges with a listed empty shell to go public without the paperwork and rigors of a traditional IPO.

Since summer 2020, SPACs have become increasingly hot, attracting big-name underwriters and investors, and raising a record amount of IPO money in 2020.

Over 50% of US IPOs were SPAC-based (248 out of 450)
Over $80 Billion were raised in those 248 SPAC IPOs
$25 Billion was raised in January 2021 alone

The SPAC frenzy has been fueled by the stupendous rise of tech stocks during the pandemic in combination with the growing IPO boom in the US. (To read a well-written, detailed explanation of the inner workings of SPACs, see this article from Digits to Dollars.)

The quality of SPACS so far has been reasonably good – there have been only a few true flops (see this article for a notable failure and its aftermath).

We expect to see more SPAC flops as greed takes over – the SPAC fever will settle down accordingly after a while
If NASDAQ takes a serious hit, the SPAC phenomenon might slow down much faster

The rise of SPAC fundraising has grown at a dizzying speed since 2019. Source: Bloomberg

Megafunds and megarounds

Huge funds and huge investment rounds are not going to abate. But the dynamics are a bit different in the US and in Europe.

US Megarounds

The statistics showing the constant rise of VC deal volumes in the US can be a bit misleading. While the abundance of megarounds (i.e. rounds of over USD 100M) does increase the total dollar volume of investments, the total numbers of VC rounds starts to be worryingly small.

Does the focus on megafunds and megarounds mean the saplings – the early-stage companies that can grow to be the next unicorns – are forgotten and neglected?

Fortunately, the decades of successful VC activity in the US has created an exceptionally wide and functional angel investment ecosystem that can pick up at least some of the slack.

Meanwhile in Europe

In most European countries, the situation is quite the opposite: VC funds are typically relatively small and the average investment size very meager. And even though angel investment activity in many European countries is growing robustly, the total volume and average ticket sizes are still very small.

If the tech stock market remains strong, we believe plenty of private capital will flow into VC and PE funds in the coming years. This should help grow the average size of funds and create a much-needed layer of growth VC investors to supplement the already quite active early-stage VC activity.

The biggest gaps are in the EUR 5 to 20 Million ticket range: the typically much smaller Europen VC funds (median fund size has been around 50M whereas in the US it well over 100M) cannot reach this ticket size while these tickets are typically too small for the large international funds.

Digital disruption and AI

We have written about this topic before, but 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:

Consumer and corporate behavior is going to continue changing significantly
We will see numerous restructurings, pivots, new companies growing rapidly, and big companies disappearing
Disruption will continue on every level imaginable: personal, professional, societal

All aspects of our lives will become increasingly digital:

Work-life – working from home will not disappear after we get vaccinated for Covid
Education – distance learning will become more prevalent and create new opportunities for students, educational institutions, and companies alike
Corporate operations – distributed operations have been forced upon us but for many companies, there is no going back to the old way
Commerce – e-commerce and new payment technologies have been some of the big winners during the pandemic and they will keep transforming the retail landscape
Healthcare – telecare will create new opportunities and make high-quality medical care more affordable and more accessible throughout the world
IT infrastructure – there will be a growing need for AI, computing power, bandwidth, and cybersecurity
Travel, tourism – new innovations will be needed; even though travel restrictions will be relaxed at some point, environmental and responsibility concerns will give rise to new paradigms in travel and tourist

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.)
Companies can utilize a vast trove of great tools that are available inexpensively or even free of charge from massive open-source projects. Many excellent tools for both AI and Block Chains technology are available for free – this means that core AI research and basic tools may not be among the most profitable VC investments in general.

Gartner’s latest Hype Cycle for Emerging Technologies gives a glimpse of their thinking:

The Hype Cycle highlights technology profiles that will significantly change society and business over the next five to ten years

I’m So Excited

We get really excited when we find a new (or just untapped) source data enabling proper optimization of a critical process – making it more efficient, intelligent, and user-friendly:

The world is quickly becoming deeply digital with increasing numbers of advanced sensors creating relevant data, and ubiquitous wireless communication delivering access to it.
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.

We believe we are entering a decade of fast and wide digitalization that offers nearly unlimited opportunities to smart growth companies.

And please stay tuned – the next blog post will look into ICOs, Blockchains, Cryptos, and NFTs

Sources and more data

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 it.

Venture Activity Numbers 2020 and early 2021

PWC MoneyTree/CB Insights: US Venture Activity
PitchBook / NVCA Venture Monitor: US VC and Exit Activity
PitchBook / NVCA Venture Monitor: European VC and Exit Activity
KPMG Venture Pulse: Global VC Activity
KPMG Venture Pulse: European VC Activity
Fenwick & West: Silicon Valley VC Survey
Invest Europe: Pan European VC & PE activity (many of the reports are for members only)
Argentum: Nordic Venture Activity
Finnish Venture Capital Association: statistics on Finnish VC & PE activity
PWC Global: IPO watch
EY Global: IPO trends
Silicon Valley Bank: State of the Markets Report Q1 2021
Battery Ventures: Software 2021: The Rise of the Cloud
PitchBook: Nordic Private Capital Breakdown 2021
(Great that we have a Nordic specific VC/PE report. Sadly this report has some annoying errors in the source data)

Digital Disruption and AI Related Stories

CB Insights: Top Tech trends for 2021
KPMG: AI adoption accelerated during the pandemic
Forbes: 10 AI Predictions For 2021
VentureBeat: The future of AI deployments reaching production is bright in 2021
PwC: AI predictions 2021
Gartner: Top Strategic Technology Trends for 2021
MIT Technology Review:10 Breakthrough Technologies 2021
MIT Technology Review: A new horizon: Expanding the AI landscape
IDC: IDC Forecasts Improved Growth for Global AI Market in 2021
CapGemini: 2021 Predictions: AI

Happy reading!

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