How was 2020 for the early-stage ecosystem? We put the question to some of Europe's top investors, to understand how they saw the events of 2020 unfold across the UK funding ecosystem. We also asked for their predictions for 2021. With thanks to Episode 1, Augmentum Fintech and Techstars for their insight and predictions.
With prolonged round closures and the temporary pause in investments throughout Q2 2020, Covid-19 evidently had an impact on investor appetite. However, following a swift adaptation to remote investing, deal volumes seem to have recovered; and as of January 2021, we are already seeing:
Investor confidence rebounding (rebounded?) based on: deal valuations reaching or surpassing pre-lockdown levels and deal volume seemingly return to normal, although it is still too early to categorically confirm this via data.
We believe investors are now well-acclimatised to remote investing – we have already seen a great amount of interest from VCs to invest in UK businesses, and here at RLC, we have made 7 fully remote invests since the start of the pandemic. As for what 2021 has in store for the Worlds of Work, Play and Finance, take a look below:
For a more detailed overview of our perspective on what 2021 will look like for the early-stage ecosystem, take a look at our 2021 UK Startup Funding Guide – which is also a great resource for any ambitious entrepreneur looking to effectively navigate the ecosystem in 2021.
We also had a chat with our friends at Episode 1, Augmentum Fintech and Techstars to get an insight into their thoughts on what we can expect to see over the course or 2021…
It was a strange year for everyone, us included. We had to completely adapt our investment process to cater to remote-first investing, but luckily this was relatively painless. Last March/April, deal volume really dropped as most funds took time to get comfortable with the medium-long term implications of Covid and lockdown. In the months following this, we saw and backed a really large number of high quality founders (Crowd Data systems, PubX, Condense Reality, Dorm were all announced remote investments).
In terms of themes and sectors, there was unsurprisingly a substantial uptick in remote & collaboration tools, digital health & wellbeing, workforce management. Newer categories also began to emerge and court VC interest, such as audio and the passion economy.
When viewed through an optimistic lense, 2021 may be the year where economies recover, countries re-open their borders and offices refill their empty desks. Over the last few months we have seen more investment activity surrounding companies accounting for these changes, and I would expect to see Travel-Tech, physical <> digital collaboration tools and booking/ticketing software for physical experiences/activities really take off.
With respect to Audio and the Passion Economy, two relatively 'new' categories, I think we will see some really interesting innovation and investment occur in this space. As the relationships between employer/employee or individual/institution, peoples definition and understanding of 'work' itself has transformed. Niche and narrow interests enable creators to build concentrated, loyal and 'monetizable' fanbases. See Hugo Amsellem's piece on 'Mapping the Creator Economy'. I believe a lot will happen in this space in 2021.
Finally, how could we talk about 2021 without mentioning Clubhouse. $100m Series B at a $1bn valuation, could this be the next Twitter, Facebook, Snapchat? Given the parabolic growth and valuation, it may be on its way. Audio has continued to make its mark over the last 5 years or so, but for the first time synchronous and bidirectional, contrasting with the inflexible and un-engaging nature of Podcasts. I am expecting to see a lot more around social audio, as people tire of Zoom windows and move towards more casual forms of interaction.
We invest in UK-software companies transforming the worlds of Work, Play and Finance at the pre-seed and seed stage. The best way to get in touch is via our Investment Criteria page.
In 2020, we certainly saw the size and valuations of the best seed rounds go up. Money flooded towards the very best founders, as should always be the case, but it was more pronounced last year. The virus caused fund managers to take a step back for a moment to reflect, which led to a raising of ‘the bar’ that funds so often talk about - this was a consistent message from other investors we spoke to last year. Funds became more prudent in picking only the very few companies that they had extremely high conviction on. It was a good chance for us all to zoom out and think about what ‘the bar’ really is.
This effect trickled down through every stage of funding and we saw the very best pre-seed companies raising rounds that looked more like proper seed rounds - another sign that managers are desperate to put their funds into the custody of the most impressive founders.
Predicting 2021 is probably a bit like offering your head to the stake, but I’ll do so anyway. I think VCs will probably ride out much of any storm that comes this year, much as they did last year. Fundamentally, they have money to invest and there are credible founders looking for money. I think competition for the best deals will remain very high and will in fact increase as later stage funds develop more formal early stage strategies.
Additionally, we will continue along the path to democratised deal-flow and founders will increasingly choose who they take money from for reasons other than who turns up at the right time - we’ll all be turning up at the right time, and that’s great for founders.
We’re actively investing in UK-based b2b software startups at seed stage and we also do some pre-seed deals. The best way to get in touch is to email me on [email protected].
2020 was interesting once we got past the initial lockdown phase where we saw a massive concentration on existing portfolio companies. It felt like there was more capital going into a slightly smaller number of total deals. As we got towards the end of the year, there were a few that were almost like feeding frenzies. We also saw investors from the US, Japan and beyond coming in at a far earlier stage than was the case before, which is definitely going to make things spicy in 2021 and beyond.
One big thing that I’ve noticed is the amount of consolidation starting to happen. There are now a growing number of M&A conversations happening at an earlier stage than was the case before - with acquihires, expansion acquisitions, corporate buyers and more on the table. I’ll be curious to see if we start to see more European companies rolling up continental competitors as a prelude to US market entry.
I’m @eamonncarey on Twitter, and being called Eamonn Carey makes for pretty good SEO on other channels - so I’m pretty easy to find. I’m a pretty sector agnostic investor - generally looking at pre-seed and seed-stage opportunities across Europe. This article will give you a good idea of some areas I like!
As one would have expected, there was an initial investment slowdown in March as we all came to grips with the pandemic, but that subsided fairly quickly and investment activity rebounded ferociously in the latter part of the year. From there, we have seen continued validation of the fintech sector over the past 12 months as a result of accelerated digital adoption of financial services during covid. European Fintech, where the UK dominates, has seen increasing interest from overseas investors, and established US VCs have become increasingly active in Europe in recent months when it comes to Fintech and will become even more so in 2021.
Differentiation and specialism will become increasingly important for VCs, who must demonstrate their value-add beyond the capital in order to partake in the most competitive rounds. It is becoming increasingly important to demonstrate how you will deliver this even ahead of funding rounds, with competition increasing and rounds becoming increasingly pre-empted. At Augmentum, we believe that our team's deep operating experience and fintech expertise adds significant value to our portfolio companies as they scale.
Finally, we're seeing more later-stage funds become more agile and investing earlier to capitalise on the opportunities.
COVID-19 compressed years of digital transformation into the space of a few months, with the majority of the benefits accruing to customer-centric disruptors instead of incumbent institutions across all sectors, not least financial services. We expect to see this acceleration of digital transformation continue and for investment activity to continue growing at a record clip. Within fintech, the opportunity remains nascent; incumbents still owning 91% of the $11 trillion global financial services revenue opportunity. We expect B2B, SaaS and infrastructure within banking and insurance to become the subject of significant startup and investment activity, a shift that is already underway. The last 12 months have exposed the technical shortcomings of incumbent financial institutions in areas such as compliance and regtech, which are huge opportunities.
One further area where we expect to see significant growth in 2021 is the mainstreaming of crypto and Decentralised Finance (DeFi). The influx of institutional capital into crypto is strong validation and will play a big role in making it even more mainstream, and DeFi has emerged as one of the fastest-growing use cases for smart contracts built on the blockchain [GH1] [AB2] - 2020 alone saw $17 billion of capital inflows.
We're looking to meet exceptional fintech teams from across Europe that are coming to their Series A and beyond. We believe financial services permeate a variety of adjacent industries and so our definition of fintech is quite broad, which means we will look at startups with fintech angles in adjacent verticals such as proptech, legaltech, and more.
Last year was definitely a surprising year for all, and the early stage funding environment ended up being quite volatile.
While the funding activity slowed down, rounds from March to May were initiated pre-pandemic. If VC funds said they did not slow down, in practice, most of them dropped their activity by up to 70%. Fund managers were pre-occupied by their existing portfolios, and shy of making remote-only deals. Angels were even more preoccupied, reserving most of their capital to support existing portfolio companies.
June & July saw the first remote-first deals happening as fund managers, who are by nature under pressure to deploy, had to build confidence in their ability to conclude deals without having met the management teams.
From there, we started seeing a massive dispersion. Top deals got over funded rapidly, with valuation actually increasing from pre-pandemic levels. Average deals received some interest later in the year as most fund managers were pressurized to deploy. Lower quality deals ended up in limbos, failing to attract proper capital.
Interestingly, all remote first plays, digitizing entire parts of our working habits, received unprecedented interest beyond what seemed rational. These were the new moonshots.
Beyond startup funding, 2020 also saw a huge uptake of VC funds being raised; with the pole position held by established fund managers. Several single LP (family office backed) early stage funds also sprung (Begin Capital, D4 Ventures, Foundation).
Hot verticals were: future of work, digital tools, healthtech, crypto & consumer fintech
Public markets being at an all time high, we will see a lot of non-traditional players increasing their activity on private markets. This means a busier growth stage funding environment, pushing the boundaries of growth capital closer and closer to the venture space. Bringing everyone in the ecosystem further down; a momentum we saw initiated in 2020.
Family Offices will increasingly do direct deals, growth stage funds will dip their toes down to the series B stages, putting pressure on venture funds. This increased competition will shatter the 1m ARR trigger point for series A, and the most active funds will look at preempting rounds.
The early stage phase will see a lower amount of firms created, but an overall increased quality as aspiring founders will embrace the step change that the pandemic created. The new remote professional environment will also enable them to move faster. I also expect lower barriers to get started, increasing diversity from less represented founder pools.
Key sectors to watch: wellness, mental health, asynchronous communication, collaboration tools, niche social networks
We like to work with founders from day 1, to be involved in the founding team formation, to help explore the problem & solution and to build the story alongside you. If you’re thinking of your next venture, are highly ambitious and want to move rapidly then Antler is the right place for you.