Year on year more VC funding flows into the European startup ecosystem - in 2021 the amount hit 100bn EUR mainly due to increased investment tickets, a great deal of newly-launched funds, and innovative solutions fostered by the still influential pandemic. On the other hand, such a trend indicates high competition within many different funds present on the European VC scene. Consequently, startups are becoming more selective while choosing the right VC fund for their business - no longer only money matters but also experience, industry expertise, and connections are crucial factors that VCs bring to the table.
What else will shape the VC & startup ecosystem in 2022? We have asked investors and experts from leading VC funds to share their predictions and comments concerning the future sweet spots and the general direction of future investments. Among them Ewa Chronowska - Partner at Next Road Ventures, Grigoriy Leschenko - Chief Investment Director for CEE Region from Huawei Technologies, Cenk Bayrakdar - Founding Partner & Managing Director at Revo Capital, Jan Habermann - Partner at Credo Ventures, Valeri Petrov - Partner at Eleven Ventures, Alexander Pak - Investment Director at TMT Investments, Krzysztof Mazur - Investment Manager at PKO VC, Başar Yenidünya - Vice President at 212, Andreas Nemeth - CEO at UNIQA Ventures, Claudia Czigony - Investment Manager at Impact Ventures, Özge Öz - Partner at QNBeyond Ventures, Richard Illes - Investment Director at OXO holdings, Maximilian Schausberg - Managing Director at Elevator Ventures. According to our research, Sustainability, IT, Blockchain, Fintech, Healthcare and Future of Work are the growth-driving industries worth the market players’ interest.
European VCs’ Chances & Struggles
The tendency of American VC funds heading towards Europe shouldn’t be overlooked. The US-based VC funds are present in 1/4 of European deals, especially later-stage ones, though, the increased interest in early-stage ventures is expected. Such a trend is caused by increasing European startup ecosystem potential as well as the overpriced US market. The average amount of money invested by an American VC firm in early-stage companies is $5 million while it's only $1 million on average for EU funds - comments Ewa Chronowska, Partner at Next Road Ventures and Founder of Vestbee. This can be seen as a positive effect on European startups which will get more capital to grow faster, reach international markets and expand there.
Regional startups encouraged by venture capital firms expansion are more often choosing VC funding as the best financial source not only due to high investment tickets but also other benefits such as networking, tailored support from market experts, advice and more. Consequently, there is high competition among both startups and investors and it’s easy to get mismatched. “Additionally, numerous young investors from Gen Z/Yolo started appearing on the market looking for ways to invest in startups perceiving VC investments as alternative asset classes that can diversify their portfolios with higher potential returns than traditional investments like stocks or bonds. The main roadblocks for this trend would be regulations put in place by governments that can limit who's allowed or able to invest into certain asset classes - adds Ewa Chronowska.
Another issue concerning future VC investments are inflated financial markets. Despite the fact that matured VC funds have mostly benefited from high valuations disposing of early portfolio investments and generating huge returns for their LPs, newly arranged VC funds will effectively see lowers returns if their active investment period fell between 2020-2023 due to high multiples set for startups of all stages (seed to matured) - claims Alexander Pak, Investment Director at TMT Investments. However, he noticed that such situations are boosters influencing VC funds to try new verticals as it might be the only way to get exposed and discover hidden potential and this is how new trends are shaped.
Also, Cenk Bayrakdar, Founding Partner & Managing Director at Revo Capital remarks that capital efficiency has returned as king. While it has long been a desirable trait in early/growth stage businesses, over the last few years, an abundance of capital combined with a “growth at all costs” mindset, allowed founders to deprioritize efficiency and sustainability - he comments. Due to that fact, founders will definitely pay more attention to efficiency-oriented-approach and at the same time, investors will pay a premium for efficient businesses.
CEE Region’s Potential
Central & Eastern Europe is still trying to catch up with Western Europe in terms of VC investments in the ecosystem. Nevertheless, Valeri Petrov, Partner at Eleven Ventures underlines that 2021 was a record-breaking year for the VC industry, especially valid for the CEE region’s development. The larger players in the most developed ecosystems in the world will continue increasing their focus and attention towards the region looking for undervalued fast-growing tech companies with global potential - he adds. Ewa Chronowska forecasts the wave of new VC funds from the West with pre-A and A capital. Investors focusing on Series A rounds show huge interest in the CEE region and have the potential to fuel regional startups due to bigger investment tickets. That increases the before-mentioned competition and forces VCs to become more innovative and showcase clear differentiation (value proposition).
Andreas Nemeth, CEO at UNIQA Ventures claims that one of the assets of CEE is the large talent pool of IT developers available in the region. Due to low costs of living compared to Western European countries and the possibility of remote work we observe the opposite phenomenon to brain drain - hundreds of thousands of programmers are currently living in Central & Eastern Europe. Consequently, some of the individual countries have become world leaders in certain programming languages which clearly gives the entire region a competitive advantage. Moreover, CEE is very strong in enterprise software and has produced great startups (like Avast, UIPath, Pipedrive, Skype, LogMeIn). We believe that Enterprise Software with the subcategories such as Process Automation, Cybersecurity, Sales & Marketing Tools and Developer Tools will continue to be the defining theme in 2022 - commented Andreas Nemeth. He also believes that sectors that have been somewhat underrepresented in CEE compared to the rest of Europe such as Healthcare and Wellbeing or Fintech will develop dynamically in the upcoming years.
Impact Investments On Top
Most investors, without any hesitation, pointed at environment-related trends such as Climate Change, Energy, or Sustainability as the future direction of VC investments. Claudia Czigony, Investment Manager at Impact Ventures brings awareness to the fact that societal and environmental problems are increasing on a daily basis and impact investing is the right answer. There is still a significant lack of sustainability-oriented VC funds, however, the popularity of eco trends is believed to increase the number of impact-driven startups and investors that understand and appreciate their specificity. We are happy to see an enormously growing number of companies raising funds in the clean energy, mobility tech or agritech verticals, aiming to reduce the effects of climate change. In 2022 we predict more innovations to emerge in the topics of energy storage, the electrification of transportation or agricultural innovations - comments Claudia Czigony. Richard Illes, Investment Director at OXO holdings also sees a huge potential in CleanTech and FoodTech solutions as both startups and investors care about the future of our planet.
Based on Raiffeisen Research’s market outlook, Maximilian Schausberg, Managing Director at Elevator Ventures expects the positive impact of the European Green Deal funds on related investments in CEE. Trends of ESG and Green Finance give opportunities to new business models and startup innovation - he adds. ESG is definitely one of the major drivers in the VC industry and it will continue shaping the investment landscape with more and more VC funds starting to incorporate environmental, social and governance factors into their investment decisions. That’s why, we can expect investors looking for business investments that can generate long-term returns with lower risk and a shift from purely financial considerations towards wider concerns about the environment and society-related issues such as gender equality or human rights - contributes Ewa Chronowska from Next Road Ventures.
Also, the rise of Artificial Intelligence and other deep technologies foster tackling societal issues and enhancing sustainability.
IT Services Development
IT fosters the development of innovative solutions that influence the way we work and function, however, we should be aware that such changes don’t happen overnight. That’s why innovations should be closely watched on a macroscale and considered not only next year but the near future in general - as new technologies need time to adapt and revolutionize industries. Taking for example web3 which is continuously developing - its mass adoption is yet to be seen. Özge Öz, Partner at QNBeyond Ventures believes that web3 will be a huge trend - we will see both big techs and incumbents flock to this space, thus the investment activity will increase dramatically.
Intelligent words are the future we are heading towards and every day we are getting closer. By 2030, yottabytes of data will be generated every year. Computing energy efficiency will increase 100-fold and AI will use digital technologies to do everything from making the industry more intelligent, to helping us achieve true carbon neutrality - comments Grigoriy Leschenko, Chief Investment Director for CEE Region from Huawei Technologies. Future networks won't just connect billions of people - he continues - they will connect hundreds of billions of things. We envision those connections as being maintained by future AI-native networks that are green, integrated, secure, and trustworthy. Also, quantum computing is worth our attention as more and more VCs are pouring money into this promising area.
Moreover, the further rapid growth of automation, technology implementation, and robotics is observed in all areas of the economy – 2021 showed that heavy reliance on humans across whole value chains (especially in service industries) may no longer be sustainable for many businesses - noticed Ewa Chronowska. The huge startup boom on low-code and no-code platforms has already become, along with the need for wealthtech startups and healthtech services - each of them created in accordance with the saying “The wish is father to the thought”.
Blockchain Revolution
Blockchain is gaining huge popularity recently, its implementation in crypto markets, DeFi and NFTs revolutionized the approach towards information storage & security, online transactions, and investments. Özge Öz believes that those verticals will continue to be a rising star with the potential to scale to masses. Asset tokenization and DeFi space are also the areas of Maximilian Schausberg's interest due to their application in the financial industry. Unfortunately, there are still some uncertainties within the EU regulations concerning crypto assets, the fundamental question is - will they become a gateway to mass adoption or excessive requirements.
In 2021, VCs invested globally more than $30bn (which translates into around 5% of the total VC investments) into startups in crypto and blockchain - comments Başar Yenidünya, Vice President at 212. Such numbers definitely assure the strong significance of blockchain technology in the future. Moreover, he noticed that gaming saw tremendous growth in P2E (Play-to-Earn), and consequently earning economic weight in gaming will gradually become a popular approach. Therefore, traditional gaming studios will move into crypto gaming revolutionizing the industry's direction.
Fintech Market Penetration
Fintech was on the leading edge in forecasts for VC scene in 2021, however, it doesn’t slow down and is expected to get even more penetration and adoption - assures Alexander Pak. Cenk Bayrakdar confirms that the accelerated interest in the disruptive Fintech sector has been observed due to more and more consumers turning to contactless payments and the accessibility of investment options. However, people still remain cautious about the stability and security of digital-only financial platforms so there is a growing need for cybersecurity & KYC solutions - he adds.
On the other hand, Richard Illes claims that Fintech per se will become a bit mainstream, as the VC market is crowded with startups working on banking solutions. Nevertheless, there is still a need for such solutions as banks and regulators are suffering from excel files and paperwork - he adds. Additionally, quite new directions for the finance sector such as RegTech or Neobanking will uncover their potential in 2022.
Covid-19 Gleanings
Obviously, we are not over Covid-19 yet, and we still see it taking a toll on the way the economy is functioning. Despite its devastating effect, the pandemic boosted the growth of many businesses and fostered innovation, so we can’t ignore it while forecasting VC trends for the upcoming years. Some investors call it even a catalyst for rapid changes especially in retail, healthcare, and education - admits Grigoriy Leschenko. Krzysztof Mazur, Investment Manager at PKO VC also highlights its impact on the startup & VC scene - before the pandemic many investors were looking for „quick wins’' in such sectors as e-commerce, social media tools, or simple SaaS solutions, which made these sectors overheated. The pandemic turned investors’ attention to more traditional technology that can be found in chip shortages or vaccine productions. Thus, the future will belong to such deep technology like AI, cyber-sec, biotechnology, quantum computing, or energy storage. From a VC perspective, it requires a change in our mindset: investment time horizon is getting longer, close cooperation with science is needed and old concepts (like „tech sovereignty”) come back into use.
Instant grocery and food delivery have surged and while this shift has been seen as temporary and primarily driven by the pandemic, it continues to thrive with both pioneers and new entrants raising significant funding.
Supply Chain is a complementary sector that VCs will be investing in due to the rising pressure of the digital economy and the post-pandemic struggles global companies face. Cenk Bayrakdar highlights that instant grocery and food delivery has surged and while this shift has been seen as temporary and primarily driven by the pandemic, it continues to thrive with both pioneers and new entrants raising significant funding. As a result, budget allocations will focus on supply chain monitoring and technologies like real-time big-data analysis that will facilitate delivery procedures and make them much more efficient. Also, businesses are demanding better visibility across delivery and supply channels, quicker shipping capabilities and the ability to source products on-demand to reflect real-time conditions at the consumer level. We view this as a compelling backdrop for new entrants seeking to address gaps in the status quo and see areas of growth across the value chain - comments Cenk Bayrakdar.
However, two main areas that were revolutionized by Covid-19 and will draw VC funds interest in 2020 are Healthcare and Future Of Work.
Healthcare
I think one of the great winners in the short to medium term will be the Healthcare industry - indicates Valeri Petrov - where we will see further rapid digitalization and exponential growth of telehealth services. Also, POC and at-home testing will be more accessible and not so unrealistic with much improved ways of diagnosis and health monitoring compared to the current ones. At the same time, the generated data will be better utilized via various AI solutions, supporting a more individualized, data-driven and patient-centric approach to our health - adds Valeri Petrov . Pandemic has made an effect not only on our physical health but also mental wellbeing which is nowadays more important than ever before. As a result, we see strong growth in the Healthtech sector.
Future of Work
The way we approach work nowadays definitely has changed, almost every task is now possible to handle online, and it’s worth noticing how quickly such a solution was adopted in many industries. Başar Yenidünya sees a huge potential for further development on the freelancer market that has already started to gain significance. The rise in the freelancer market and possibilities to be more independent will push Future of Work and Remote Working Tech solutions (like individualized working SaaS tools did) to continue as an important trend in 2022. Entrepreneurs will persevere to make education accessible by finding new solutions to upskill existing employees and freelancers - he claims.
Remote ways of working impacted also the VC market and the way an investment process is run. Many investors feel comfortable making investment decisions remotely, often without ever meeting the founders in person. While it is not a problem to collect all information via digital channels, the quality of the relationships built without real personal interaction is substantially worse - noticed Jan Habermann, Partner at Credo Ventures. The reintroduction of in-person meetings into the investment process and even more importantly into the ongoing startup-VC relationship is crucial in succeeding for both startups and investors, and hopefully it will be possible to bring back such practice in 2022. At the end of the day venture capital, and especially early-stage VC is a people business - sums up Jan Habermann.
Related Posts:
New VC Funds Investing In European Startups - Overview 2021 (by Olga Chechłacz, Editor, Vestbee)
New VC Funds From Central & Eastern Europe - Overview 2021 (by Olga Chechłacz, Editor, Vestbee)
Trends That Shape VC Scene In 2021 (by Olga Chechłacz, Editor, Vestbee)
