By Alex Di Santo (pictured), group head of private equity at Crestbridge – Despite Covid, venture capital activity across the globe remained robust throughout 2020 and deal activity, thus far in 2021, suggests venture capital will continue to fly high this year.
Below we outline Covid winners, challenges and opportunities in ESG within the VC space and discuss what managers can do to thrive in this new financial environment.
The winners
• Healthcare and life sciences. Unsurprisingly, healthcare and life sciences have done particularly well. According to Rock Health, 2020 has seen more digital health funding than any other year with USD2.4 billion invested each quarter — significantly outperforming the last 2 years’ quarterly average of USD2.1 billion.
The US was particularly strong in this sector. Q3’20 hit USD36.5 billion, a 7-quarter high for VC companies and is an increase of 30 percent from Q2 2020.
Driving this trend is the consumerisation of healthcare, in the form of on-demand, remote access to doctors, medical products and other related medical services (such as primary healthcare company, Kry).
This sector is a target for investors of all shapes and sizes. Covid has been a healthcare crisis as much as a health crisis and this realisation should continue to stimulate investment into the space. Healthcare is also resilient, as an essential service it is well placed to protect against economic slowdowns.
• E-bikes. The macro trend away from congesting and carbon emitting forms of transport combined with the lockdown fuelled micro trend of anti-public transport has stimulated investment into e-bike start-ups.
According to PitchBook, European VCs allocated more (USD165m) into e-bikes in 2019 and 2020, than the previous four years combined. Indeed, e-bikes are now becoming more popular than normal bikes in many countries.
• Gaming. Data from The Gaming Economy shows a total of USD2.107 billion in venture funding, an increase of 942 percent from Q2. This is a trend that is here to stay. Gaming start-ups have a huge surplus of demand. With VR in its infancy, “gaming and media companies are poised to grow 10x and more consumers are looking for ways to entertain themselves online,” said Yuki Kawamura. Kawamura was responsible for Netflix content strategy and analysis at launch, he is now a partner at Akatsuki Entertainment Technology (AET) Fund.
• Online shopping has dominated. This is in large part due to changes in consumer behaviour, some of which may have pre-dated Covid-19 but the epidemic has accelerated it. Forbes reported that in a year where traditional retailers have struggled; ecommerce has hit a 129 percent year over year increase in the US. Statistica forecasts that by 2023, 22 percent of global retail sales will occur online. Stay at home start-ups may continue to see success outlast lockdowns as consumers move more into the digital space permanently, Covid merely acting as a catalyst in this larger trend.
The challenges
• Hospitality, retail, tourism, and live entertainment. Short-term challenges have affected sectors built around the proximity of people, but some were able to quickly adapt. Burning Man redefined the art of the possible by calling on its dedicated community to build the Burning Man Multiverse to host the festival virtually. The virtual event had over 78,000 attendees, an increase from 70,000 in 2018. The Multiverse was undoubtedly a success, virtual experientials are still in their infancy but may be here to stay, watch this space.
What are the opportunities?
• The adoption of ESG among institutional investors has rapidly increased over the last few years but venture capital has historically trailed other asset classes in this respect. This may be because of a lack of international guidance and ESG standards around issues VC managers may face when deciding where to make an allocation. 2021 represents a real opportunity for VC managers to make positive contributions to ESG. We have seen an acceleration of female economic empowerment, the will to tackle climate change and the democratisation of healthcare over the past year. VC managers could drive innovation in these arenas, and they are likely to be rewarded by investors if they do.
Three ways of adapting to this new status quo
Outsourcing
Outsourcing middle and back office administrative tasks allow a firm’s investment team to focus solely on originating, executing and managing investments while guaranteeing quality assurance. The key is finding the best partner to realise this. A partner with experience working with private equity firms and venture capitalists of all sizes is paramount, but the right partner offers added value beyond the core services. Finding an outsource partner who can offer these services alongside bonus capabilities is exceptional. Bonuses can include, central London office space, flexible credit terms, EuVECA licences and automation proficiencies.
Whether you are a new manager starting out or a veteran of the industry these bonuses give your firm that competitive edge. Not only can you focus solely on investments, you can do so in a central London office, with passporting capabilities across EU member states and even with delayed payment terms (for debut managers). Certain partners will have offices all around the world, including in jurisdictions where you may wish to domicile funds.
From reporting, restructuring, management company or depositary services to regulatory services, the right partner can take this all on so that you can focus on what matters most.
Digitalisation and automation
Digitalisation of the investment process allows for the automation of key administrative tasks with minimal human intervention. By minimalizing human interaction, a company can increase data integrity, improve efficiency and curate a centralised interconnected hub of information allowing for 360-degree visibility along the investment line. This arms venture capitalists with increased time to make key strategic decisions that require human experience, intuition, and decision-making abilities.
Automation means that all data is stored and propagated across the system. Subsequently, all data only needs to be inputted once for it then to automatically populate any new documents or forms with the correct data henceforth. This data can then be utilised to perform accurate analytics, formulate financial forecasts, and calculate investment statistics in seconds.
While minimising the time taken to perform complex tasks, automation also reduces the chance for errors. If errors do occur the centralised nature of the system simplifies the process of tracking and correcting the errors and will identify any anomalies in real time as the data is inputted.
However, choosing, installing, and maintaining a complex digitised system of automation can be very expensive and initially time consuming. Therefore, finding an outsource partner with automation capabilities is the most effective way of upscaling your benefits while reducing your downside.
Process management
Correct process management can be a type of human automation in which a procedures manual or document depository is formed so that anyone moving into a new position, whether permanently or temporarily, can immediately take on tasks with minimal time spent on training or re-educating.
This system allows for the quickest possible transition of personnel across all facets of the company with minimal disruption to the investment process. If someone is sick for a prolonged period this procedures manual allows their replacement to continue their work nearly effortlessly, maximising downside protection. These measures also help to increase accuracy and consistency throughout the company.
