The 2021 European Venture Report from Pitchbook has just revealed some of the insights concerning the European venture capital ecosystem. Even with the relentless uncertainty of the COVID-19 pandemic and macroeconomic volatility (particularly, rising inflation), 2021 was a surprisingly exceptional year for the European venture capital ecosystem. Deal value, exit value and non-traditional investor participation reached new records, with the number of completed VC deals reaching a record of 10,583 valued at €102.9 billion– the first calendar year to ever exceed €100 billion. That value doubled the record set in 2020 (€46.8 billion). Furthermore, exit value more than tripled the previous best in 2018 (from €42 billion to €142.53 billion). No matter the challenges 2021 saw, investors were more than willing to seek and support highly skilled talent looking to leverage technology to create innovative start-ups.
With such growth, local ecosystems in Europe matured– Israel being one of them. A new high of €11.2 billion was invested into Israel-based start-ups in 2021, nearly triple the amount from 2020. Exit value spiked to €17.1 billion in 2021, as founders and investors took advantage of conducive market conditions for tech-enabled businesses. Notable unicorn exits included the IPO of productivity tool Monday.com, which was publicly listed at an impressive €5.1 billion pre-money valuation. As Pitchbook's EMEA VC Analyst Nalin Patel stated, “Israel has established itself as a major VC ecosystem globally, and we expect investment to increase moving forward.”
Let’s dive into some of the trends the European VC ecosystem saw in 2021.
Move Over Hardware…
Software technology and companies took the reins in VC deals. The technology sector saw 3665 deals (representing 37.9% of overall deals), with a deal value of €36.26 billion (representing 35.2% of overall deals). The tech sector outshined the sectors of commercial services, consumer goods and recreation, energy, HC devices and supplies, HC services and systems, IT hardware, media, pharma and biotech and transportation. Much of this is related to the COVID-19 pandemic, as intermittent restrictions forced us to adopt a new way of life– one that revolved around software solutions.
From a consumer standpoint, the pandemic constrained us to rely on online products and services more than ever before. This, in turn, led to the digitization of economies, which therefore brought more VC investments into the tech sector. It has also allowed businesses that have historically required physical footprints, including pharma, biotech, retail, and health & wellbeing, to make the transition to operating online, whereas they otherwise may have struggled during these unprecedented times.
The workforce was compelled to make similar changes due to the pandemic. The digitization of economies mentioned above came about in part due to companies moving to work remotely; remote work required companies to arrange their businesses on the cloud so that they could continue to hire, work, and grow, even with the lingering pandemic. Cloud-based businesses have many advantages. For one, they cost less, but can also be scaled rapidly across borders. The tools adopted can be rolled out to large workforces via business licences or can be scaled via online referral schemes, social media, viral marketing campaigns, and/or targeted advertising. As a result of this change, many cloud-based businesses have seen immense growth in active users, growth rates, potential future, or recurring revenues; wherever there is growth, investors will follow, which further explains the heightened investments in the tech sector.
Non-traditional investors such as investment banks, PE firms, hedge funds, pension funds, sovereign wealth funds, and corporate VC (CVC) arms decided they wanted a piece of the European VC pie. So much so, that deal value with non-traditional investor participation hit new records reaching €78.4 billion, whereas in 2020 it was only €34.4 billion. Again, we can attribute much of this to the coronavirus pandemic. The pandemic caused global supply chain issues and raised prices which hampered international businesses and trade. However, tech-enabled companies were generally less affected, and thus created an attractive investment proposition for non-traditional investors. Non-traditional investors seek long-term outlier returns from high-growth areas, so with the growth the software sector saw, it became a prime target for non-traditional investors. The share of VC deal value with non-traditional investor participation in the software sector was 34.9% which equated to €27.33 billion. Emerging start-ups dealing with strategic partnerships and synergistic opportunities, such as food delivery and production, also gained much of their attention.
Exit values reached a new peak in 2021, spiking to a staggering €142.5 billion— more than triple the previous best set in 2018 (€42.0)— as investors and founders pushed ahead with liquidity events. A record number of companies exited in 2021, at 1,241— nearly double the quantity from 2020— thanks to bubbling market valuations and favourable market conditions. This past year, public equities were volatile; Europe-based companies saw a record-breaking 186 public listings, which generated an astonishing €117.3 billion, nearly four times larger than the previous peak set in 2018. Since the tech sector has grown immensely (largely in part due to the pandemic), conditions for tech-enabled companies to exit were ideal. Israel saw some notable exits this past year, the greatest being from Monday.com. More generally, Israel saw 93 exits (8.7% of European exits) with a value of €17.09 billion (equating to 12% of the total made).
Capital commitments for both emerging and established GPs increased as strong return profiles and high-growth investment opportunities attracted capital to be raised. In 2021, 203 VC funds closed and raised €21.7 billion, which represents a 31.9% decline in fund count yet a 10.1% increase in capital raised from 2020 figures. The amount of capital raised this year is the second highest of any calendar year, falling short of €22.7 billion raised by 270 VC funds in 2017. Notable collections for the Israeli market included Accel raising €539.1 million for investments in Europe and Israel as part of a larger €3.0 billion effort. Moreover, the share of capital raised by Israeli VC funds was 6.6%, raising a total of €1.43 billion. Not surprisingly, pandemic-induced growth in sectors such as software, pharma and biotech have aided fundraising drives. Given the exit values and surplus liquidity generated in 2021 (€21.7 billion raised, and €102.87 billion invested) 2022 will surely see similar trends.
Innovation is as crucial and popular as ever with the ecosystem seeing a lot of first-time deals this past year. Though it was predicted that 2021 would be a year in which GPs would become risk-averse and put more focus toward their existing portfolio companies, that was not the case, as capital in first-time rounds tripled from 2020 figures. In 2021, 2,865 first-time deals, representing a value of €9.9 billion, were made, compared to 2457 deals with a value of €3.6 billion in 2020. Such investments will fuel the start-up ecosystem and lay the grounds for continued innovation.
Israel Spotlight: Sustainable and Alternative Food Production
As the issues of climate change become increasingly popular amongst populations worldwide, many companies were created to play a role in mitigating its related consequences. As a result, many food-tech companies have emerged to try to illuminate the carbon footprint of the food industry and create products that will garner profits as the world slowly moves away from factory farming. In the fourth quarter of 2021, Israel-based food-tech company, Future Meat, completed a €307.4 million round with participation from the VC arms of US-based food corporations Archer-Daniels-Midland, Rich Products, and Tyson Foods.
With 2021 being such a successful year in the European VC world, it may be hard to top. But, if trends of this past year continue, 2022 will undoubtedly see record-breaking activity, as VC-backed companies continue to maximize their investment runways and growth objectives