What’s happening in the investment market: Trends of Q1 2021
Shyan Khaleeli from the Investment Banking team at ClearlySo gives her analysis in this investor update
As the world comes out of a tumultuous period which tested the resilience of many start-ups, ClearlySo continues to track trends and investor sentiment to help clients better understand ever-changing venture capital investment market dynamics.
“Investments in European start-ups reached $21.4bn in the first quarter of 2021 with funding up at every stage.”
Although UK and EU GDP shrank in the first quarter of 2021 the reduction was smaller than expected. In April purchasing manager’s indices accelerated while consumer confidence rose to the highest levels recorded since the start of the pandemic. Unemployment rates have also come down from pandemic highs while consumer savings are well above pre-pandemic levels which could buoy a strong recovery in consumer spending.
Record funding levels across Europe:
Investments in European start-ups reached $21.4bn in the first quarter of 2021 with funding up at every stage. Impact investing continues to show strong growth with a number of prominent investors such as Temasek (AUM $214bn) allocating $500m to specialist impact investment fund Leapfrog and launching a decarbonisation investment partnership with Blackrock. Late-stage funding grew the most and a record 16 new companies were valued at or above $1 billion bringing the European unicorn count to 11% of all unicorns globally. Seed stage funding in the quarter was also at a record high ($1.3bn) up 26% vs Q1’20 ($1.1bn) although deal numbers declined from 1,405 to 919. Early-stage funding was up 62% relative to Q1’21 growing from $5.4 billion to $5.8 billion. Nine companies raised early-stage funding rounds above $100 million, including four in the grocery delivery space.
“For the first time in a single quarter, UK companies with at least one female founder raised over £1bn.”
Venture funding in the U.K. hit a record number (~$7.0bn) as investors looked to deploy a significant amount of dry powder. For the first time in a single quarter, UK companies with at least one female founder raised over £1bn. VC investment in Germany and the Nordics was very strong in Q1’21 predominantly driven by late-stage deals and follow-on investments. Investment in Europe was spread across a range of sectors albeit with the proportion of Software (~40% of financings), Commercial Services, Consumer Goods & Recreation, Media investments growing relative to 2020. Meanwhile the proportion of investment into Healthcare Devices & Supplies and Services & Systems and Energy shrank slightly in Q1’21. In the UK, fintech continued to receive the most investment (£1.89bn) while AI, life sciences (£798m) and digital security (£202m) also had a strong quarter.
An evolving investor mix and exit options:
In the last 24 months, 64 new European funds have been established and although the UK is still home to the most investors in Europe (306) more than a quarter of all new European funds were established in Germany, Switzerland, and Austria. The most active European venture investors were from Germany and the UK. That said, US headquartered investors (~124), led a higher proportion of funding rounds at or above $100 million relative to their European counterparts. European market with €10bn committed to impact funds launched in 2020. Corporate VCs continued to be active, investing $9.7bn in Q1’21 vs. $7.1bn in Q4’20, participating in some of the largest rounds in the quarter. We have also noted an increase in investment from new types of venture investors including private equity firms, hedge funds and pension funds which typically invest in larger businesses. As access to financial and human capital becomes increasingly decouple from geography, investors expect investment processes to become more efficient and competition between venture firms to heat up.
“As access to financial and human capital becomes increasingly decouple from geography, investors expect investment processes to become more efficient and competition between venture firms to heat up.”
Exits also picked up with 147 acquisitions of venture-backed companies done in Q1’21 ($9.7bn) one-third of which were done by US headquartered companies. Interestingly, buyouts and public listings grew to ~40% of overall volume with IPOs accounting for 70% of venture-backed exit value. Two European companies went public at valuations above $10bn, one of them (Arrival) via a SPAC (special purpose acquisition company). This implies more capital is likely to by recycled back into the broader European venture ecosystem in the coming years.
Investment criteria remain elevated:
As highlighted above, investor activity has more than returned to pre-pandemic levels and investment processes evolved to accommodate with pandemic related restrictions. Investors and founders have become more comfortable executing transactions based predominantly on digital communications. Investment criteria continues to be high as investors focus on unit economics and capital efficiency.
“investor activity has more than returned to pre-pandemic levels and investment processes evolved to accommodate with pandemic related restrictions.”
A growing number of investors expect a proven model with product-market fit, even at seed-stage with revenues and usage metrics ticking upward and growing need to expand sales and marketing teams. Ability to scale as reflected by metrics such as conversion rates, renewals and revenue run rates continues to be essential as businesses grow beyond the seed stage. A growing number of investors are also increasingly wary of greenwashing and focused on supporting investee companies to set impact related KPIs. Some investors are also linking investor and investee renumeration to impact performance.
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