How will European Venture Capital change in 2020?
The end of the year is the perfect time to take a step back and look more closely at some of the wider context and trends in our industry. Here, we take a look at some of the trends we expect to see in 2020, and explain why we’re excited by the challenges and opportunities next year will present:
We will see a greater specialisation across the venture capital market, which is natural as the market matures, with an increasing number of new businesses requiring specialist skills and knowledge from their VC backers. Many VCs are generating good returns as generalists, and over time we expect to see greater expertise developing where there is complexity in the technology or market segment – for example areas such as fintech, blockchain, and industry 4.0 sectors, including smart cities and the Internet of Things. This trend is great for businesses seeking specialised investment, but presents a challenge for investors looking to navigate an increasingly fragmented and specialised market.
More and more VC funds will adopt an impact investing approach, where returns will be measured alongside metrics such as sustainability. We see investors, mission-driven founders and end-users all increasingly attuned to sustainability, purpose and corporate social responsibility (CSR). As a result, Environment, Social and Governance (ESG) factors will become a key metric in investor asset allocation decisions. Equally, as investors seek to understand portfolio risks more clearly, transparency on corporate sustainability reporting will become crucial.
There will be increased interest in European technology from international investors, allowing the industry to continue its upward trend. US-based VC firms continue to increase their European investments, and more will establish offices in Europe. International cash balances of US companies will remain important, and will continue to encourage deployment of their cash in international markets. Moreover, traditional investors in Europe will increasingly turn to private markets technology and venture capital investment due to persistent lower returns in other asset classes.
Prices will rise, as capital flows into the market from larger regional funds, US VC investors, corporate VCs and non-traditional late stage investors. Increased capital drives increased competition for access to high-potential companies, which in turn drives increased prices. Europe is still an excellent bargain relative to other regions, but it will be even more important for investors in all segments of the venture capital system to act with price discipline in the coming year.
Any economic downturn will likely have a smaller impact in Europe, where venture capital valuations are less inflated and companies tend to use capital more efficiently. European VCs in particular may even begin to ramp up activity if the economic downturn materialises as predicted. Venture capital returns show a slightly counter-cyclical nature, meaning downturns are often great times to invest, thanks to compressed valuations and lower competition.
2020 will be a year of opportunity for European venture capital, despite the economic backdrop potentially taking on a gloomier outlook. The European technology industry continues to mature and develop, and will be a source of strong returns for investors, provided they are equipped with the specialist knowledge and expertise needed to make the most out of a sometimes fragmented and complex landscape.