The year 2020 brought us many unexpected twists and turns along with remarkable changes in the VC & Startup environment regarding COVID-19 as the main variable. However, instead of treating it as a threat, it should be perceived as a stop-start period for companies that in 2021 will kick off with a fresh perspective on their business goals and approaches aiming to show dynamic growth. According to our research, among the leading industries worth the market players’ interest in 2021 are Energy & Cleantech, Fintech, E-commerce, EdTech, and Healthcare.
In order to validate the sentiment towards further VC market development and emerging opportunities, we have asked market experts from active VC funds to share their thoughts and predictions on the upcoming months in terms of the sweet spots within different growing industries as well as general opinion about upcoming changes influenced by the pandemic. Marcin Łączyński - Partner at Next Road Ventures, Łukasz Skarka - Head of CEE Early Stage Cleantech Investments at EIT InnoEnergy, Georg Ioannidis - Managing Director at Uniqa Ventures, Júlia Véglesi - Investment Manager at Impact Ventures, Gerald Parloiu - Partner at Global Founders Capital shared with us their forecasts concerning the visible trends that will shape the VC scene in the upcoming months.
Moving To Online
The pandemic by itself changed the daily routine of the VC market and currently many fundraising processes, events, startup-investor relations and even closing the deals and signing investment agreements are happening online. Market players tend to perceive this arising trend as a great time-saving opportunity - startups have a chance to get in touch with more investors from all around the world while VC funds make use of digital improvements to quickly evaluate startups and create solid long-distance relations that are hard to manage in offline reality. At the end of the year, we closed a 100% online investment in a foreign company with few fellow overseas VCs - several years ago it was simply unthinkable. It’s a significant change in the way VCs approach the investment process - comments Marcin Łączyński, Partner at Next Road Ventures.
This digitalization trend is growing in every industry at an accelerated pace. Although most day-to-day tasks had to move from offline everydayness to the online world unexpectedly, we believe that many of these are long-lasting trends that will continue developing post the pandemic. Now, both the companies and customers had a chance to realize the value and strength of the digital space in every industry - adds Gerald Parloiu, Partner at Global Founders Capital.
The COVID crisis will further boost pressure for digitalization - which at the same time, is a strongly favorable environment for startups. On the macro side, there is a lot of money on the VC market and savings rates in most mature economies went up significantly. Some market consolidation/M&A where startups that were not able to create sufficient value in terms of growth during COVID times is still expected - noticed Georg Ioannidis, Managing Director at Uniqa Ventures - Those might have issues raising subsequent rounds with new investors and there is definitely a trend for flight to quality on the market with high valuations on winning teams.
Fintech On The Leading Edge
Fintech is indicated as a strongly appreciated industry worth investing in 2021. It triggers development opportunities and implements innovations crucial for many businesses and their customers especially nowadays. It is expected that 2021 will show a further surge in e-commerce and integrated buy now pay later (BNPL) solutions that offer superior flexibility on a payment schedule, as well as great improvements of user-experience, compared with traditional credit cards. Especially in CEE, where BNPL still accounts for less than 5% in e-commerce volume - comments Georg Ioannidis - Digital assets, not limited to cryptocurrencies, will continue to be another hot topic. Smooth and compliant KYC/KYB/AML and digital identity management are definitely also considered hot topics.
The significance of solutions concerning financial operations for SME is currently increasing in Europe so this area is definitely worth investors’ attention and focus. SME financing, when it comes to small-/mid-sized amounts, shows short-term disruption due to adjusted risk models on the supply-side and players moving out of that currently risky market. But still, such capabilities will be needed in the future in a fragmented European landscape with high relevance of SMEs – currently also to allocate state subsidies to eligible entities - claims Georg Ioannidis. He noticed that mid-term also open banking will be more relevant, enabling more organic growth for players leveraging that opportunity with the right partnerships. Furthermore, in InsurTech embedded insurance is another emerging theme building on the embedded finance idea and allowing non-insurance brands to augment their offerings with value-adding insurance products. Last but not least, machine learning and AI - they will also continue their growth - sums up Georg Ioannidis.
Energy & Cleantech On The Spotlight
In 2021 also the dynamic growth of the energy and cleantech sectors will show its strength - the market is already opening up to new environment-friendly solutions as companies are more sensitive to energy efficiency. New energy generation capacities will be created on the basis of renewable energy sources like wind and solar, most often in a distributed system, closer to end customers and on a much smaller scale than before - predicts Łukasz Skarka from EIT InnoEnergy - However, there is still the market potential for offshore wind and large energy storage systems connected.
To start resolving environmental issues, some actions from governments as well as funds supporting these tech solutions are essential. We notice greater than before the availability of funds at various levels: local or regional - indicates Łukasz Skarka - The European Green Deal is the future, but the funds for the energy transition are already flowing into the market in a large stream. This only helps the future diversification of energy sources.
Everything fosters the energy sector development - the advanced technology, increasing investor’s interests in sustainability solutions as well as societal engagement. All of those aspects make it easier to transfer digital solutions used in other markets to the energy sector. As a result, the scalability of projects has increased, and there are also state guarantees, increasing the credibility of the energy interest for investors. New technologies, such as blockchain support the conclusion of transactions between market participants or verification of the origin or method of energy generation - comments Łukasz Skarka.
Impact investing is expected as another rapidly growing trend powered by investors determined to generate social and environmental change - this trend is awaited to make a difference in the region. Albeit this trend is still in its infancy in CEE, more impact funds and social enterprises have been emerging in recent years than ever before - and the (post-) COVID era is likely to fast track this trend - claims Júlia Véglesi, Investment Manager at Impact Ventures. She singled out three market drivers that are especially apparent for 2021 when looking at the future of impact investing - the digitalization of schools and healthcare providers, demand for alternative protein sources, and upcoming policies.
New Challenges Blowing Up
The pandemic put in the spotlight the areas such as Edtech and Medtech that definitely need improvements and also showed us how unaware or ignorant society was concerning both the education system and healthcare. Currently, the skyrocketing unemployment rate, mental health issues, digital inequality, or cyberbullying are some of the main burning social challenges that are fortunately not only addressed by governments and policymakers but also by social entrepreneurs.
Looking back at 2020, EdTech and MedTech were areas in the spotlight as an increasing number of startups entered these markets and/or grew immensely with their digital K12, reskilling, corporate training, telehealth, mental health, etc. solutions in the wake of the pandemic - underlines Júlia Véglesi. This trend is expected to continue as lockdowns persist, though timing might matter: ‘those who reacted early could strengthen their position by acquiring new users at a tremendously fast pace. Like the Swedish video-based healthcare provider Kry launched in the US after COVID-19 created a spike in demand, marking the firm’s first non-European expansion. However, there are still underpenetrated markets in the CEE region offering space for innovators with local know-how and cultural fit - two crucial factors in both sectors - adds Júlia Véglesi.
Another trend, which started well before the pandemic, gained the main interest during and won’t stop growing after, is the increasing number of consumers following health- and environment-conscious lifestyle. As a response, startups have been rising to cater to the need for, among others, meat substitutes and alternative protein sources - noticed Júlia Véglesi - These products are already available - not only for human consumption (e.g. the US-based Impossible Foods or Beyond Meat) but also for livestock feed (e.g. the Bulgarian Nasekomo or the Hungarian Grinsect) - yet not widely accessible and affordable given high R&D and manufacturing costs associated with their production. However, as the technology matures and more funding flows into innovation and underlying manufacturing processes, large-scale production is forecasted to drive both costs and end-user prices down. We should also consider the impact side - changing traditional meals including animal meats into their substitutes will bring environmental changes such as a substantial decrease in carbon footprint and water usage - claims Júlia Véglesi.
Most areas mentioned above are supposed to find their reflection in new policies that are expected to support them in 2021. Every new year brings new changes and is actually a good reason to draw conclusions and imply some necessary actions and adjustments also when it comes to some governmental regulations. Marcin Łączyński admits that 2020 has been an unprecedented year and the aftermath of COVID and actions taken by governments all around the world are about to stay for long. On top of that - Western countries embracing the European Green Deal, the ongoing discussions if FTC should force Facebook to divest (this may apply to other tech giants in the future), general outrage caused by changes to WhatsApp’s privacy policy and the Wallstreet Bets phenomenon make us think that 2021 will be a very important year - he adds. Having said that, I believe that in 2021 the hottest growth sectors will be Blockchain & Crypto, Artificial Intelligence, Remote work, Healthcare, Cleantech, and Environment.
Related Posts:
Trends That Will Shape VC Scene In 2022 (by Olga Chechłacz, Editor, Vestbee)
How Is Coronavirus Affecting Startups And Their Valuation (by Magdalena Balcerzak, Manager, Vestbee)
Most Popular Questions VC Fund Will Ask Your Startup (by Leszek Orłowski, Investment Director, bValue)
