How has the pandemic impacted the European Venture capital industry?
The pandemic has greatly impacted the world we live in. Habits and behaviours have changed. One significant shift was how people began to work remotely using more and more technology. But the biggest challenge was to the scientific community who had to find a long-term solution to the pandemic, the vaccine. Technology and Healthcare have always been of great importance for Venture Capitalists and looking back at the past 12 months we can clearly understand why. These two key sectors have managed to grow significantly during the pandemic while at the same time demonstrating their importance in our day-to-day lives. If we are able to communicate through Zoom or receive a shot of Moderna’s vaccine, it’s due to upfront investments made by Venture Capitalists that help guide and develop these companies into what they are today.
Venture Capitalists are an important part of the business activity because they finance start-ups with significant investment at the riskiest point in the company’s life cycle. With the banking industry having to respect regulations and cope with Basel-type requirements, they cannot afford to lend money to companies that have no revenue, very little assets, and which are usually forecasting substantial losses for the foreseeable future.
Though Venture Capital has enjoyed high growth over the past few years, it is still one of the lesser known classes of alternative assets primarily accessible by institutional investors. However, the skyrocketing valuations of key start-ups have changed this perception. The number of Unicorns (start-ups valued at > 1 billion USD) have grown over the past years (810 per CBinsight as of 8 September 2021). As a result, many countries through state funds, traditional assets managers or well-known entrepreneurs, developed interest to support and invest in start-ups. They understand the importance for future growth and the potential of new jobs that this can create. Looking at the level of dry powder available on the market and the need for financing from start-ups, we expect the European VC landscape to continue its on-going growth trajectory after the pandemic.
Specifically in Luxembourg, the country has created an ecosystem which is favorable to attracting new start-ups. For instance, the Luxembourg House of Financial Technology (LHoFT) Foundation is a public - private sector initiative that was created to drive technology innovation for Luxembourg’s financial services industry, connecting the domestic and international Fintech community. Similarly, the EIF and the Société Nationale de Crédit et d’Investissement (SNCI) have launched the Luxembourg Future Fund (LFF). The LFF is a EUR 150 million fund which aims to stimulate the diversification and sustainable development of the Luxembourgish economy by attracting Venture Capital fund managers and early-to-later stage innovative businesses to Luxembourg. All of these efforts are contributing to the development of start-ups (Luxembourg is the home of around 500 start-ups) and the venture capital industry. The ultimate goal is to drive prosperity and innovation. This cannot be done without the support of Venture Capitalists.
Since the second half of 2020, VC activity (number of deals) has picked up per PwC research, the overall trend over 2021 is very positive as investment activity increased and numerous unicorns have been created. With Q3 2021 already underway, the future of VC is brighter than it has ever been. Globally, the pandemic has brought to light the significance of VC’s two key investment sectors, which are Healthcare and Technology; but new challenges that can be transformed into opportunities for Venture Capitalists are on the horizon such as Climate or Agriculture.
