Feb 18, 2022
New-Age Technologies: The Most Favourable Sector for VC Investment
To run a new business or start-up, founders need funding from various sources. Venture capital (VC) investment is the growth engine for start-ups. Public firms have access to funds through financial markets through stock exchanges, but for private firms, it is a long way to get funds through these sources or modes like Initial Public Offer (IPO) and others. As a subcategory of private equity, venture capital concentrates on new and relatively small businesses with growth potential. Notwithstanding the risks, venture capital investment has been gaining momentum worldwide. Countries with favorable regulatory frameworks and industries with a higher level of innovation have witnessed substantial growth in venture capital investment activities in recent years. North America, especially Venture Capital firms in Canada and the US lead in terms of VC deals, and Asia follows close behind.
Venture Capital eyes on High Growth Sectors
Venture capital investments amounted to 25.9 billion US dollars in the internet industry in the United States in the first quarter of 2021, as per an industry assessment. Healthcare, computer hardware/services, mobile, and telecommunications are other prominent areas in terms of venture capital investment.
Enterprise SaaS across sales and support enablement, upskilling and life-long learning tech, cross-border commerce, and banking services are key areas of interest. On the healthcare front, digital and consumer health, tech-enabled healthcare services, next-generation manufacturing, and innovation are examples of focus areas.
Some emergent sectors include Web 3.0 or crypto-based investments, creator commerce, B2B commerce, and core sectors, such as agri-tech and health tech. According to Venture Capital Report 2022 by Bain & Company, three sectors-consumer, technology, fintech, and SaaS- continued to account for over 75% of all VC investments by value.
Deal size growth was largely seen in e-commerce and SaaS, reflecting the maturity of the sectors, while the deal size and volume growth was seen in fintech and other consumer-driven sectors such as Edu-tech and Gaming. Gaming can be considered a venture capital investment in the entertainment sector. Several investment new themes emerged or continued to gain traction in 2021, and new e-commerce models (social commerce, video commerce), D2C brand aggregators, Short-form video or social networking, and Neobanks are expected to dominate venture capital investment.
Venture Capital: Increasing Market Size
In 2021, despite challenges due to cascading effects of the COVID-19 crisis, the world's venture capital investment market reached a value of US$ 211.3 Billion in 2021. IMARC Group projects the market to reach US$ 584.4 Billion by 2027, exhibiting at a CAGR of 20.1% during 2022-2027. Keeping in mind the uncertainties of COVID-19, venture capital firms in Canada and the US are continuously tracking and evaluating the direct as well as the indirect influence of the pandemic on different end-use industries.
Global venture capital investment in 2021 witnessed robust growth despite challenges. Emerging economies continued with their large appetite for investment. India's VC investments surged a record 1.9x over 2020, as well as behemoths US and China, which saw investments grow 1.9x and 1.3x, respectively. Venture Capital firms in Canada raised US$824 million in the first quarter of 2022, according to the latest KPMG Private Enterprise Venture Pulse Q1 2022 report. While the total amount raised by Canadian companies increased over the previous two quarters, it was huge Series C raise that dominated the market. In 2021, India's proportion of worldwide VC capital had doubled, from less than 3% to 5.6%
Venture Capital Investment Trends
Apart from market expansion due to the rising number of start-ups, the expanding investment activities in diverse industry verticals, such as healthcare, biotechnology, agriculture, and media and entertainment, are also strengthening market growth. Furthermore, venture capitalists canada are utilizing algorithms and machine learning (MI) to identify start-ups with a higher growth potential to make better investment decisions. However, the market growth was significantly impacted by the global spread of the coronavirus disease (COVID-19) and its cascading effects on human lives and the economy. The entire world witnessed a sudden halt of operational activities, and it was unprecedented and unexpected. In the new normal venture capitalist firms are also modifying their plans to leverage their already acquired financial strength in the rapidly changing market conditions.
Venture Capital Firms in Canada
In terms of total venture capital investment, Canada received US$3.5 billion in the first three months of 2021, up from $3 billion the previous year and $2.8 billion in Q4 2021. Only 213 agreements have been signed, a substantial decrease from the previous year. However, while the number of deals is decreasing, the value of those deals is increasing. Corporate venture capital investment is declining, even while deal and fundraising quantities are increasing. The downturn in corporate venture capital activity that began in the final three months of 2021 continued in the first quarter of 2022, with fewer deals than the previous quarter and the previous year. The value of deals was also lower than in the previous three quarters, though still greater than the previous year.
Similar to the global and the US venture capital landscape, technology still reigns supreme for Canadian investors, be it in Ottawa, Ontario, or Toronto investment circles. The majority of deals were in information technology. Out of this, the software took the lion's share. Other focus areas for funding include artificial intelligence and machine learning (30 deals), fintech (28 deals), and crypto-assets/blockchain (17 deals).
Healthcare is also a strong area of investment, with 34 deals, the bulk of which were in healthcare technology. Credit goes to a situation created by the COVID-19 pandemic for driving innovations, especially in health tech. The new normal trends are likely to continue. The entire world is now concerned about climate issues. Another sector gaining traction for venture capital investment is Cleantech or climate tech. It closed 16 deals in the quarter. The Canadian government has allocated huge funds to promote cleantech firms. Hence, venture capital firms in Canada will watch this high-growth sector closely.
VC Investment: Key Markets
The venture capital firms in Canada and the US indicated their preferences for investment in internet and tech-enabled business. They witnessed a steep ramp-up in consumer adoption during the pandemic that shortened the earlier envisaged digital adoption cycle. Along with the US and Canada, venture capital investment in India in 2021 manifests a global trend. Preferences of venture capital firms globally can be easily judged by the trends in high-growth sectors emerging in the Asia-Pacific region, especially India.
According to a report by consulting firm EY, Software, Pharma, Biotech, Media, and Entertainment lead in attracting venture capital firms. In India, for the first time, 14 sectors received over $1 billion each in investments in 2021, with tech and financial services cornering most of the investor capital. Technology and E-commerce dominate the venture capital investment landscape. The technology sector triggered the growth of start-up investment, and thereby the number of unicorns in the sector has increased significantly. The tech sector fetched nearly $16 billion in investment from venture capital firms. E-commerce with $15.9 billion occupies the second slot. Giving a clear indication of emerging key markets, demand-driven technologies and e-commerce sectors accounted for 42% of all the investments in 2021.
The financial services sector dropped to third place, despite receiving a record $11.7 billion in funding after being a leader over the previous decade. These top three sectors were followed by infrastructure ($5.4 billion), real estate ($5.3 billion), media and entertainment ($4.9 billion), education ($3.7 billion), pharmaceuticals ($2.3 billion), healthcare ($2 billion), retail and consumer products ($1.95 billion), automotive ($1.74 billion), telecommunications ($1.42 billion), food and agriculture ($1.27 billion) and logistics and transportation ($1.25 billion).
It is expected that North America and Asia-Pacific, especially the Venture Capital ecosystem, will continue to attract sizeable investment for the next few quarters. It would not be surprising to witness extremely busy Q3 and Q4 of 2022 and beyond.