Data sourced from Pitchbook report “ European Venture Report Q1 2020”
COVID-19 has presented a multitude of challenges that governments, international institutions, and the private sector are scrambling to solve. The European-wide lockdown has had a significant impact on Startups, Venture Capital Investors and LPs and this period has offered a cocktail of opportunity and challenge for the VC ecosystem.
It is apparent that the majority of European Venture Capital firms have been conserving capital in order to provide follow-on funding for their current portfolio. The propensity to use capital in a follow-on round rather than a new deal has enabled most institutions to protect their portfolio company’s and provide significant cash runways to ride out the short and medium-term effects of the pandemic. The ability for general partners to develop new relationships with Startups, without meeting founders or employees has been significantly hindered and result in first-time deals taking longer and becoming more difficult across 2020.
The UK Government’s Furlough Scheme has been crucial to reducing the cash burn level of pre-revenue, R&D business and enabled non-dilutive capital to protect earlier Angel investors in such businesses.
Software startups have accounted for 42.6% of capital YTD and Acceleris believe investment will remain strong in this sector relative to others. Startups addressing the future of work, online training and remote collaboration will continue to succeed post lockdown. This new way of working is here to stay for a number of large organisations and this will result in a significant opportunity for enabling technologies such as personal cybersecurity, education technology, technical infrastructure of home working and Insurtech.
Effective use of quality big data is a growing trend and clearly becoming highly important across a number of sectors. Acceleris are supporting Impact Data Metrics who have developed an incredible piece of technology that adds significant value to harvested big data for a number of end applications.
Educational technology has also seen an accelerated shift and additional investment in Q1 with 290 deals announced or completed. Given that schools, colleges and universities have had to rapidly adapt to educating students at home the accelerated shift is not unexpected. It is clear that schools will never be replaced entirely by virtual learning, but a hybrid system is possible to facilitate effective and efficient learning and is definitely a sector to watch across the next decade.
With an increase in phishing attacks and the uptake of information sharing technology the requirement for corporate and individual cyber security is increasing. Awareness around the importance of security, given recent information leaks has increased significantly over recent years. 276 deals were completed in Q1 2020 for cybersecurity firms.
Unsurprisingly, some sectors of the start-up community are accelerating, with €1.7bn being invested into Healthcare in Q1 2020. It will be interesting to see if over the next few quarters this continues to increase and within which specific sectors of healthcare see the biggest investment.
We believe that virtual telemedicine and digital healthcare will see a larger uptake with doctors closing their doors and individuals seeking an easier more convenient way of contacting their healthcare professionals. With this accelerated uptake of technology, the previous barriers to entry for the technology have been removed which has been evidenced by the 185 deals completed in Q1 2020. Take UK based Babylon Health who have released a digital care assistant to advise people on how to diagnose and manage suspected Covid-19 infections. The digitisation opportunity will provide strong solutions for long-term pandemic response infrastructure and will enable easier continuity initiatives and the modernisation of legacy systems.
Conversely there are a range of sectors struggling, the obvious travel related industries and companies which feed into the hospitality sector which haven’t been able to move online.
It is interesting to see that investment in research and development has reduced during Q1 as more funding is channelled towards the pandemic effort. This is likely to be sustained for as long as the Coronavirus remains prevalent and until a vaccine has been developed, tested, manufactured and distributed globally.
It is very much worth highlighting that exits in Q1 2020 totalled €727.1million, making this the first quarter since Q4 2012 not to achieve €1 billion. The number of exits completed has slowed down and we believe this is likely to remain so for a while until the economy stabilises and the future outlook is more certain. How this will effect VC fund timelines remains to be seen.
It is key to remember that there are a number of unknown’s importantly how long the pandemic will last and how long it will take for economies globally to recover. What we can deduce is that investment activity needs to happen, there are funds with annual EIS timelines that do need to deploy and there is a rapid acceleration in the adoption of certain sector technologies.