2020 was a stop, start year. Normal levels of activity until around March, a three to four-month pause, and then almost back to pre-pandemic levels.
As we go into 2021, the funding market is experiencing a high degree of bifurcation, with early-stage funding slowing down and later-stage funding experiencing something of a mini-boom. Here are two trends to watch.
Raising first-round capital increasingly difficult
The U.K. is under intense economic pressure from the Covid-19 pandemic and Brexit. Even in the most optimistic scenario, there will be a recession and job losses. This will take money out of the angel and pre-seed stages of the investment market, which are most reliant on casual investors writing smaller checks. As a consequence, it will become more difficult for founders to raise their initial round of capital. Founders starting their journey in 2021 will need to focus on building as lean as possible.
Buoyant later stage funding market to continue
The end of 2020 has seen feverish activity from growth investors – Series A and upwards – looking to secure spots in increasingly competitive funding rounds. With considerable sums of dry powder to deploy and a finite number of companies achieving the growth metrics necessary to deliver sufficiently attractive returns, this is set to continue into 2021. Highly competitive and pre-emptive rounds will put founders in the driving seat when it comes to the choice of funds and valuations. Given such a strong end to 2020, there may be a slight pause for breath in the first few months of 2021 owing to human capacity constraints within funds, but this will be time-limited.
Unless you are raising your first round of capital, or are in a sector directly impacted negatively by the pandemic, 2021 is likely to be a good year for venture-backed technology companies.
When it comes to different sectors of the economy, Covid-19 has not treated them equally. Sadly, many parts of our economy have been left reeling from its impact. Fortunately for those working in technology, the impact has generally been less pronounced and some areas have seen uplifts in activity.
Here are the top six areas that investors will be keenly watching in 2021.
The conditions in place for the accelerated adoption of automation technologies earlier this year will strengthen in 2021. Previous challenges around accuracy and costs have been largely addressed with advances in artificial intelligence and robotics. In the U.K., the reduced availability of labor from the European Union from 1st January 2021 will be a further catalyst driving business owners to adopt technology. Expect to see increased investments in this sector, particularly in heavy industries.
Many technological, regulatory and public acceptance challenges remain in the field of autonomous cars, but in other areas, things are moving more quickly. For example, the first drone trials delivering medical equipment from the British mainland to the Isle of Wight were carried out in May, precipitated by the pandemic. And there have been several announcements recently in the field of autonomous shipping. Investors are recognizing that away from congested public roads there are myriad opportunities for investment.
Many industries are running on outdated technologies – banking, aviation, telecoms, and more. These are often extremely expensive, on-premise solutions that have stayed in place because of an “if it ain’t broke, don’t fix it” mentality. The pandemic was a wake-up call to companies that were living with decades-old technology to make the change. It shook up boardroom complacency on tech and unstuck years of inertia to the benefit of startups. Incumbents in every industry will continue to be disrupted by new, cloud-native solutions, and investments will keep flowing into this space.
Many founders working in HealthTech got an unexpected boost from the Covid-19 pandemic. Business models that focused on remote patient management and care benefited from rapid growth as access to medical services were severely restricted and digital solutions became an essential service. Other startups providing support to fight the pandemic also saw fast-track procurement processes and reduced sales cycles. This positive momentum will continue into 2021 as the NHS continues to tackle the pandemic and the backlog of patients requiring treatment in other specialties. However, to receive funding, new entrants must be genuinely differentiated and not “me too” services attempting to ride on short-term trends.
The media was full of stories throughout 2020 declaring the end of the office and an all remote future. The reality – hybrid work – is more nuanced. Some teams will thrive with full-time remote work whereas others will need a balance between remote and office work. Regardless of where each company settles, there are significant opportunities for founders and investors in this space as we re-imagine how we use real estate, remove international borders to sourcing and hiring talent, and work to find the optimal way to operate.
A number of factors have come together in 2020 that will make 2021 a breakout year for Infratech. First, governments spend heavily on infrastructure investment during times of economic crises. Second, Prime Minister Boris Johnson’s recently launched Green Industrial Revolution comes with a goal of net carbon zero emissions by 2050. Fulfilling this lofty ambition will require a significant investment in new infrastructure, particularly in renewables and distribution. Third, increasing margin pressure has encouraged traditionally conservative customers to engage with startups, enticed by the benefits technology has had in adjacent markets. Finally, the acquisition of Spacemaker by Autodesk in November was a milestone for the European ecosystem and will encourage more investment into this sector.