Q1 2021 Benchmark
North America, Europe and Latin America
To the Status of Venture Capital Report Q1 2021
welcome to the NFT craze!
Q1 in a nutshell
All-time record number of funding and unicorns minted - Covid is definitely not stopping the growth!
Startups have started 2021 by smashing through previous years’ records, 98 new unicorns have been minted in Q1 alone compared to 61 in Q4’20, and it’s just getting started. Venture funding in the USA is up 74%, and in Europe is up 37% percent compared to Q4 2020. Deal value in Europe amounted to $19 billion. The USA topped $68 billion, which is over 2x above last year’s Q1 for both continents!
This growth is likely due to the stabilizing covid situation
Particularly in the United States, which has yet to experience a major economic fluctuation. The emerging and existing startups operating within growing sectors that have not been affected by COVID and might even have benefited from it and accelerated their growth are also a likely contributor to these numbers.
High Growth Sectors
Growth in VC activity was particularly high within a Few Key Sectors
Namely: delivery, robotics, logistics, automotive, fintech, and cloud computing. These sectors have been adversely affected by COVID and have shown their resilience to this pandemic. Automotive is a curious outlier, however, with the massive uptick in electric vehicle spending, it comes as no surprise that VCs will look to fund the next Tesla.
Rise in amateur retail Investment
the public markets have momentarily benefited From The Craze
With the rollercoaster of a ride that was Robinhood and GameStop this year and the rise of the amateur retail investor, fintech has seen a resurgence in funding and much can be said about the SPAC boom. Companies looked to consolidate and compete and with SPAC deals arising left & right, hitting records not seen since the 1980s, it is no wonder that the public markets have momentarily benefited.
Deal counts picked up in Q1
even though deal counts continued to drop as investors’ flight to quality continues
VC market also followed the public market, particularly in later-stage VC - Series C and later rounds – that grew by 262% over Q1 2020. Aggregate deal values are starting off with a blast in 2021. Deal counts picked up in Q1 but, are still dropping compared to Q1’20. This is to be expected as investor’s battle for quality and the VC industry becomes ever more competitive.
Funding in Q1 has overtaken Q4'20
At $90B, Makes Q1 the biggest quarter in investment dollars ever
COVID is still ravaging through Europe and yet, funding has increased by 135% vs Q1 2020, this shows the overall appetite in the market is only growing.
Declining deal counts have risen
compared to Q4’20, This year has seen a rise of 26% in the US and up 17% in Europe
However, across regions and stages deal counts declined in Q1’21 compared to Q1’20 as the total deal counts across the United States and Europe were down 13% and 28% respectively.
What Does This Mean...
The declining deal count is due to data shown for the companies that have been able to use the pandemic lockdown to their benefit and actually significantly grow their business.
The macro-economic situation, whilst far from perfect, has also been stabilized with the rapid rollout of vaccines and with the Federal Reserve stating that it would not raise interest rates until 2024.
let’s look at the numbers….
USA VC Landscape in Q1 ‘21
In the USA, the VC dollars invested skyrocketed to 217%
Versus Q1 2020 for a total of over $68 billion. The deal count also increased 26% since last quarter but, dropped 13% over Q1 ‘20.
Europe VC Landscape in Q1 ‘21
Europe seems to be riding the upward trend that we saw in the USA
as the VC dollar invested jumped 37% over last quarter and 135% over Q1 ‘20 for a total of $18.6 billion. The deal count rose even at 17% since Q4 ‘20. It is worth mentioning, however, that the deal count is still declining when compared to Q4’20 as it is down 28%. This shows how competitive the European market has gotten and how the early-stage funds will play an ever-increasing role in VC strategy.
LatAm VC Landscape in Q1 ‘21
In Latin America, the VC dollar invested has increased by 102% since last quarter!
This is a phenomenal start to the year with $2.9 billion invested so far in Q1. The deal count equally managed to increase and was up 49% since last quarter but down 12% over Q1 ‘20.
The jump in dollar invested is due to a few select funding rounds
These rounds contributed to 41% of the total dollar invested. The largest include:
Something to keep an eye out for:
SoftBank has requested authorization from the SEC for a $200M SPAC that will be exclusively focused on Latam tech startups. The SPAC is backed by Citigroup and J.P.Morgan who are book-runners on the deal.
Diving deeper into the stages tells us what’s happening at ground level…
At $2.7 billion, seed funding in Q1 was up 8% since last quarter
And 17% over Q1 2020, per Pitchbook data. Note that data lags for seed funding are the most pronounced, so these percentages will likely increase overtime.
The industry’s transition to digital dealmaking has been relatively steady
As people become accustomed to the new norm, however, investors have ultimately closed roughly 55% less deals than in Q1 2020 and 12% less than last quarter of Q4 2020.
Current figures show a decline in first-time financings
Relative to the past several years. This goes to show how the VC market is shifting towards extracting value from “kindergarten” startups that have high potential as they invest larger amount of capital for higher valuations.
Early-stage is Also Doing Extremely well
Early-stage deal activity started remarkably strong in 2021
Even within global uncertainty and the ongoing COVID pandemic. Early-stage funding racked up $20 billion deal value in Q1, up 15% since last quarter (Q4 2020) and beating Q1’ 20 numbers by more than two thirds at 66.5%. Overall, early-stage VC in 2021 shows no sign of slowing down and is an early sign for what could be a fantastic year in the industry.
It is one of the fastest companies to become a unicorn, achieving its status in a mere 10-months! Another indicator that the delivery sector, whilst consolidated, is still open to innovation and significant investor capital.
The remarkable upwards trend in Early-stage Q1 funding comes as no surprise.
Meanwhile… Late-Stage funding is not merely riding the wave… it IS the wave!
Unsurprisingly, late-stage total deal value absolutely smashed both Q1 & Q4 2020 with an increase of 162% and 98%, respectively. The industry is booming at the moment.
the strongest by country mile
Late-stage VC is the strongest segment so far of the Venture ecosystem in 2021 and by a long-shot
We saw an uptick in both deal value and count for these mature startups, while totals for the rest of the market were flatter. For the first time ever, investors deployed over $67 billion in a single quarter to late-stage companies, which represented a record 3/4 of total VC deal value in Q1.
CApital Fueled Growth
The sheer amount of capital available to late-stage Has Fueled Its Explosion For The Last 3 quarters
The SPAC craze and the capital gains from VCs have been widely used to fuel this growth. The late stage market is attracting more non-traditional investors to its ranks, which in turn drives the demand from VCs to find the best possible startups in order to unload their capital onto.
Sectors that saw the biggest funding in late-stage include, non-surprisingly, health care
But also financial services, transportation, commerce and shopping. Sectors that saw the biggest increase year over year include administrative services, lending, and sales and marketing.
Investors have increasingly concentrated capital into mature companies and for many reasons, among them now the shift to remote work and the companies that have adversely affected by the lockdown.
Quarterly VC-Backed Exits by Type
Starting Q1 there were over 600 acquisitions of VC backed startups totaling a staggering $57 billion in deal value.
The pace of M&A only increased in Q1, rising 26% QoQ and 44% YoY. However Billion-dollar acquisitions in Q1 totaled only 15 VC-backed companies, down from 20 in Q4’20 which was an all-time record.
VC-BACKED Global Acquisitions
This comes as no surprise, with the SPAC boom in full force during Q3/4 2020
...And continuing its trend in Q1 2021. It was clear that acquisitions would skyrocket. We expect billion-dollar acquisitions to increase during the later periods of 2021 as Covid vaccines continue to roll out and markets begin to open up again.
Notables in q1 2021
Notable Acquisitions in Q1 '21
Notable IPOs in Q1 '21
In the IPO market, decacorn valuations continue with unprecedented growth in Q1 with 8 venture-backed companies debuted at a valuation above $10 billion, marking the highest count in the last decade. For reference, a total of 13 IPOs above $10 billion happened in the whole of 2020!
The NFT Craze, Explained
What Is This You Ask?
Well this is what we call a Non-Fungible Token (NFT) and believe it or not, it sold for over $700,000…
Yes We’re Serious.
So what exactly are NFTs?...
An NFT is what's known as a “Non-Fungible Token”.
These tokens represent a unique set of files that are stored within a blockchain and essentially, allow people to verify the ownership of digital art works such as the one above. The buyers usually have a form of limited rights that allow them to display the digital artwork, however, they are mostly symbolic and are used as assets that will be sold later down the line. Think of it as owning an original work of art from Picasso. Whilst I may have a copy in my home or on my computer, I don’t own the original. NFTs are using the same concept but, with digital art.
And why does this matter?...
As NFTs are located within a unique and extremely secure blockchain, they can effectively be used to store all kinds of data, both private and public. This data could range from your health records such as date of birth or medical conditions, or as previously mentioned, real estate property and other assets.
ITs Real Value is still TBD
and of course, is far from today’s reality
We do however, know that where there is risk there is reward, and it is worth taking a closer look at how this will impact future startups and as a consequence, the VC industry.
What we are expecting in 2021
“The most successful businesses have an idea for the future that's very different from the present - and that’s not fully valued.” – Peter Thiel.
Financial innovation is coming and its coming big time. Decentralized Finance (DeFi), is a concept in which financial products are made available on a public & decentralized blockchain network which makes them open for anyone to use. This effectively eliminates the need for middlemen such as banks or brokerages and thus has the chance to provide real value.
To be more specific, DeFi refers to a system where software written on blockchains makes it possible for buyers, sellers, lenders and borrowers to interact in a peer to peer fashion. This approach provides the solid foundation for new financial services and regardless of the technology or platform used.
DeFi systems are designed to remove intermediaries between transacting parties. Services such as borrowing and lending can now take place in a fully decentralized way, without involving financial (especially banking) institutions.
This new financial ecosystem is already operational. Within only two years, DeFi protocols have locked in over $19 billion in assets, and there are DeFi coins that have outperformed Bitcoin (BTC) this past year! It is worth mentioning that the total value locked in DeFi contracts is over $41 billion, as of March 2021, this already shows the traction it is garnering with investors.
DeFi IS STILL IN KINDER GARDEN STAGE
The DeFi ecosystem, whilst promising, is still riddled with infrastructural mishaps and is open to hackers.
Scams are also quite common (as they are in general with crypto) in the rapidly-evolving DeFi infrastructure. The core issue of course is the responsibility, there is no state sponsored or market player that is liable if for example there is a system crash, a hack or a scam.
STILL FAR FROM GOING MAINSTREAM
These issues raise many questions
Which ultimately need to be worked out before DeFi becomes a mainstream system adopted by the masses.
It is without a doubt something to look out for in 2021 and the in the coming 3-5 years as we believe the topic will spread in popularity.
We expect to see an acceleration for the need of emerging managers
There exists a unique opportunity in the market now for emerging fund managers. These managers are driven by the desire to fill funding gaps, look for underserved markets and founder classes to make and cultivate innovative early ventures. This trend has already been quite prevalent within VC however, the need is only accelerating.
Specialist emerging managers that can provide unique insights, networks and value as they can efficiently deal with certain industries or geographical areas and especially, with the complexity of diverse founder backgrounds and personalities.
We believe this will be increasingly emphasized in the coming years within the VC industry as players seek to establish deeper roots within certain industries/geographies as a way to differentiate themselves from competitors. It is this ultimate competitiveness that is driving the need for a more focused and strategic approach towards investing.
As Kauffman Fellows wrote here, we may expect to see a $20B+ investment opportunity in the emerging manager and micro-VC subclass in the coming year. Identifying, assessing and supporting high-potential managers thus represents both a challenge and an opportunity for the VC industry.
Traditional VCs may be slowly outperformed by specialist emerging managers
Though often overlooked in favor of well established institutional VC firms, the data shows that emerging managers and smaller funds tend to outperform established players: The Kauffman Foundation has found that new and developing funds have consistently constituted the majority of top 10-ranked VC performers over the past 15 years.
Quite frankly, this only reinforces the notion that specialist managers that have successfully built their network and expertise will be needed to take the competitive edge. They will be key to enhancing a companies strategic advantage over others.
What We'll See In Early Stage
We expect that founders will continue to have significant power to select investors & negotiate deals
It is no secret that as VCs continue to compete for the best startups with the highest potential, the power that those founders have is also steadily increasing.
institutional funds certainly provide a set of unique advantages compared to smaller lesser-known funds.
Specifically, their investment can make a statement of confidence from the industry veterans which makes further investment more attractive and with higher potential.
strong value prop
Institutional Funds may add value through larger capital allocations
As these firms constantly compete with other investors such as private equity funds, SPACs and non-traditional investors. They may add value through larger capital allocations, more favorable equity terms, extensive networks and industry connections. As the space becomes more crowded, the competitive nature of the industry only increases.
This allows founders, particularly in the early stages, to negotiate for better deals
And have terms that will benefit them the most. This effect is certainly not harmful to the VC industry as it allows space for meaningful relationships to blossom. The insider network here will be a definitive advantage and one that is likely to be quickly capitalized upon by many firms.
The only issue we see is that this may lead to further inflated valuations for early stage startups
Including those that do not yet have a clear path towards implementing the value that they are marketing. Ultimately, these waters must be carefully navigated with a longer term vision in place.
The evolution of the workplace
Remote is here to stay
Remote work and virtual meetings show no signs of fading away
Although they are likely not to be as intense as during the pandemic’s peak. A good example of what's to come is PwC who has told staff that they will split their work between office and homeworking post Covid. They have defined the split as a 40-60 split between the time working at the office or client sites and the time at home. How effective this will be and the impact it will have is yet to be determined.
other firms will follow suit
as we can see so far from multiple surveys...
Such as “a survey conducted of 278 executives by McKinsey in August 2020 found that on average, they planned to reduce office space by 30 percent”. This could likely be replicated by many other firms globally as they find new ways to cut costs and optimize their productivity.
bad news for the travel industry
The shift to remote work may also significantly reduce the business travel worldwide
With the rise of Zoom, Microsoft Teams and other videoconferencing tools, there is likely to be a new age of online client and internal company meetings. McKinsey has a fantastic article on this topic with the following figure to support the theory.
Hottest Sectors in 2021
Pay attention to Remote work, Fintech, Gaming, HR tech, Health & Hospitals, and Blockchain & Crypto - the hottest sectors in 2021.
Life slowly Shifts BAck To normal
With the vaccines rolling out at an increasing pace and working toward mass distribution in 2021
Q1 was a record quarter and is setting the pace for what is likely to be another milestone year. With the rise of blockchain tech adoption, the increasing importance of emerging managers and the appearance of NFTs — we ask what effects will technologies of the next wave deliver?
still too early to tell...
Will the next decade create the productivity gains and automation that technology promises?
Pr will they eliminate jobs and create economic turmoil? Will we improve the standard of living globally? As whole industries continue to be transformed and new ones emerge, it is going to be exciting to watch.
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