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  • Yannick Oswald

What happened, and what will happen?

Updated: Jan 19

First off, happy 2022, everyone! I guess you can still say this, can't you? I am confident that 2022 will bring us more positive surprises than the last two years. Looking at consumer behavior (see chart below), it looks like we can finally put COVID disruptions behind us and return to some kind of normalcy.



The surprise of 2021 Venture funding: Europe

Venture funding in 2021 broke records across the board. Global investments totaled $643B in 2021, compared to $335B for 2020 - marking a 92% growth yoy. With this meteoric rise in available venture funding, it is clear that we have the incredible opportunity, and duty, to invest in companies and technologies that will shape a better tomorrow.



The surprise of last year was Europe. While global venture funding grew by 92% yoy, Europe grew by 159% with 98 new unicorn startups in 2021, compared to 11 in 2020. European IPO's are also catching up.



My partner Roy also shared some interesting facts on the Israeli ecosystem with me.

For Europe, this trend seems to be poised to continue in the future. The old continent still has much catching up to do, and plenty of space and tools at its disposal to do so. For example, Europe has long had more developers than the US (42% more), and the EU developer base is growing 7% yoy while the US one is flat. If you combine this with the increasing number of tech M&A activities by traditional incumbents, European tech seems to (finally) be entering its 'golden decade'. Europe not only has the talent, but also the capital, exit opportunities for its assets, and, most importantly, the ambition to compete globally.


Finally and the best of all is that this trend is happening all over the place, and is not centralized in one or two key hubs. Opportunities are everywhere in Europe and Israel.



Not all is great in startup land... Herd mentality alarm!

While the number of later-stage investments is up, fewer early-stage companies have been backed. This is, however, not a result of less money flowing into early-stage companies. So what then is causing this decline? Like in any overheated market, hype is dominating the minds of investors and entrepreneurs leading to a concentration of investment in that smaller number of hyped early-stage companies. For founders, it is harder to raise money, but the few that do can raise much more than ever before. For example, only 188 seed deals happened last year in Tel Aviv.


Another driver of the decreasing number of early-stage deals is that more potential founders are staying in their 'golden corporate cages'. Everyone wants more, not just the founders and VCs. Tech companies are paying better salaries than ever: 'Why get bothered with changing the world if I live like a king now...'



Late-stage mega deals have increased as well, of course... This is partially driven by the new kids on the block, entering from the hedge fund and PE world who are writing later stage checks at the same speed as early-stage investors.


Finally, VCs raised almost $100B for their new funds in 2021. However, fewer firms have raised these funds than before: $100B for 526 firms in 2021 vs. $85B for 665 firms in 2020.


Return to some kind of normalcy in 2022?

2021 has been an outlier year, beating all forecasts and predictions. The question is if 2022 will be an outlier year as well. Uncertainty & volatility will mark this year. This we can predict for sure.


Public markets got off to a rocky start in 2022, with many tech stocks having plunged from their highs last summer and the SPAC bubble bursting at the end of last year.



Mid and small-cap tech companies were hit by 30-70% from their peak in 2021... 'When looking at median multiples for cloud software businesses, we are now below where we were pre-covid. The overall median multiple is 4% below pre-covid highs, 17% above where we were on Jan 1, 2020, and 5% below the previous peak in August 2019.'


But, overall, tech multiples are still high. This is mainly driven by high-growth software multiples that are still strong. 'Looking at high growth software median only, we are still 52% above pre-covid highs (22% if I remove the recent IPOs from the high growth bucket), 80% above where we were on Jan 1, 2020, and 20% above the previous peak in September 2019.'


Now, people tend to forget that, if we look back historically, pre-Covid levels were (at the time) near all-time highs! We could certainly continue falling well past pre-Covid multiples. But, before we get hung up too much about the short term, cloud software is here to stay post-pandemic, of course, and will continue to grow. This chart says it all. People are not going back to on-premise software.



Crypto may also be in for a shock in the short term. 'The recent correction in crypto prices suggests that crypto is still highly correlated with other speculative asset classes and sensitive to interest rates. There may also very well be endogenous shocks (Busting of the art NFT bubble?) or exogenous shocks (counter-productive regulation?).'


The big question now is if we are in for a soft landing, or not. The extraordinary levels of public debt accumulated will have to be dealt with, for example. We are also still seeing massive supply chain disruptions which will keep prices up, even if less money is pumped into the economy.



The surprises of 2021: Space and NFTs.

- Space tech has exploded with record investments of $14.5B in 2021 and is getting ready to become a key tech platform over the next decade. When hearing about space, people often think of space tourism. But it is so much more (space tourism representing only $1B of the global $350B annual space economy). Satellite constellations are growing dramatically, and soon internet access will be delivered globally from space. Mainly a hardware-driven industry today, software will take over in this decade. Space tech allows us to leverage data that wasn't available before. More on this in our next post. 2021 was really the year of space Spacs: a dozen space companies or so went public this year through reverse mergers. We can expect a large portion of the capital raised to go towards space software development over the next years. Finally, the Webb Space telescope was launched successfully (see below). This has been the result of the collaborative effort of many countries. It sometimes feels like a new era has started.



- NFTs were one of the big surprises for me last year. Putting aside for a moment if you are a lover or skeptic, a maximalist or hater, the growth of this space is insane. A startup shared the figures below with me. I don't know the source, but directionally the growth feels correct.



Of course, NFTs are massively hyped, and there is a full-blown bubble in art NFTs, but so much innovation is happening in the space. I am confident that great companies will come out of it. I am meeting many great companies leveraging the tech, and some of our companies are planning to utilize it to improve and expand their models and reach. It is still very early. Making and distributing these things still requires a lot of technical sophistication. Established players are also getting into the space. Shopify has just launched a beta program to sell NFTs, for example.


What to expect in 2022?

There is a lot of frothiness in the market, especially in the private markets. But public markets will impact the private ones sooner or later. It is our job as investors to help entrepreneurs navigate this environment as well as possible.



1. We probably will see some downward correction of the S&P 500, mainly of the FAANG+M, which will drive some of the mid/small caps even further down. However, more importantly, companies that continue to drive growth with good unit economics will gain momentum even in a bear market. Tech is being adopted faster than ever by most industries. It is very different from 20 years ago. It is safe to say that tech will continue to lead the stock market over the next decade.


2. The early-stage trend will continue: fewer companies, bigger rounds (cash and valuation), and more late-stage players going early. But it will be the disciplined investors and founders that will drive outsized performance in the mid-term. New entrants will continue to offer easy and quick money over value add/involvement, but early-stage companies need partners to build strong foundations. We will only see this more clearly once the dust has settled. Hype will continue to drive the headlines until then.


3. Many unicorns from the 2020/1 batch won’t be able to make a successful public market entry anytime soon. This won't kill them: most of them raised enough to continue to operate for quite some time, while their investors will continue to support their valuations for the next 2-5 years (we started seeing this in H2 21) if only because they need to continue to deploy their capital.


4. It will also take longer for the 2022 vintage to make it to unicorn status. We will see fewer new unicorns than in 2021 as investors will be more diligent on valuations.


5. Some industries will continue to see outsized adoption of tech while many go back to normal. Many of these odd-looking curves such as the one below will resume their normal shapes in 2022 when things gradually start to normalize.



Some of the sectors that will continue to see accelerated tech adoption are Healthcare, Silvertech (it is simple demographics), B2B data (data management became a key priority for all types of organizations with the rapid adoption of new software), and Education. One of the great outcomes of the last two years is that we are finally able to bring to bear the deflationary power of technology and its better user experiences to more categories than ever before.


7. Travel is back. As Covid completes its transition from pandemic to endemic by the summer, business travel will increase and might even reach new heights: Spain's Travelperk already claims to be running now already at 4X pre-pandemic levels...


I spent New Year's Eve in Sri Lanka visiting a good friend. The island is truly spectacular, the hospitality of the locals amazing, and the history so rich. Sri Lanka is definitely worth a visit.


Life is awesome,

Yannick



Other content I have found useful

- Our company Wellster announced their $60M Series B: 'It cements our ambition to continue our established leadership in the European market and expand our offering to more people in need of personalized, in-home healthcare services.


- APIs & the financial industry: Threat or Opportunity? A great read by Subscribed on how banks and other financial institutions can leverage open banking and API to their advantage. The secret is to embrace your customer. When you use APIs to listen and understand your customer more effectively, then you’re suddenly in a whole new world of opportunity.


- U.A.E. Just Invested $100 Million in Israel’s Tech Sector as Both Countries Get Closer: 'Abu Dhabi’s Mubadala Investment Co., which manages $250 billion in assets, invested up to $20 million in six Israeli-based or focused venture capital firms, including Mangrove Capital Partners, Entrée Capital, Aleph Capital, Viola Ventures, Pitango and MizMaa, according to a spokeswoman.'


VC Europe

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