A pile of US dollar banknotes.
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In March last year, a leading venture capital company named Covid-19 as the “Black Swan of 2020”.
“Private financing could give way, as it did in 2001 and 2009,” Sequoia Capital told portfolio company founders and CEOs in a memo recalling his “RIP Good Times” presentation during the 2008 crisis.
Fast forward to July 2021, and tech investors are writing bigger checks than ever. Startups have raised $ 292.4 billion worldwide so far this year, according to CB Insights, well on their way to surpass the $ 302.6 billion raised in 2020.
The number of so-called “mega-rounds” – massive venture deals worth more than 100 million US dollars – has risen to 751 in the year to date in 2021 and has thus already exceeded the 665 mega-rounds that were raised last year .
“It feels a lot like 1999 to me,” Hussein Kanji, a partner in UK venture capital firm Hoxton Ventures, told CNBC. “You had so much offer, so much enthusiasm.”
“There was an era when stocks would rise in the public market if you used dot-com on your behalf,” he added. “There was so much enthusiasm to catch the next big thing.”
Dot-com companies were all the rage on Wall Street in the late 1990s as the internet kept getting stronger. Speculative investments increased the Nasdaq Composite stock market index by 400% between 1995 and 2000. By October 2002 it had fallen nearly 80% from its peak.
In the past five years, the Nasdaq has nearly tripled, with the market values of several large-cap tech stocks, including Amazon, Google, and Facebook, surpassing the $ 1 trillion mark. Microsoft and Apple are currently worth more than $ 2 trillion.
Now the skyrocketing valuations of private tech companies are worrying some investors. U.S. payment processor Stripe was valued at a whopping $ 95 billion in March, illustrating the growing trend for startups to stay private longer.
According to CB Insights, 249 companies achieved a record valuation of 1 billion unicorns in the first half of 2021, almost double the number of unicorns produced over the last year.
“It’s a great time to fundraise as an entrepreneur,” Andrei Brasoveanu, partner in venture capital company Accel, told CNBC. “The quality of the companies and the speed at which these companies are growing is simply unparalleled.”
The ‘FOMO’ factor
Tiger Global, a hedge fund known for betting on pre-IPO tech companies, has gained a much larger presence in the venture capital space of late. The Japanese conglomerate SoftBank has shaken up the world of start-up investments in recent years with its huge Vision Fund.
The intensified competition in venture dealmaking has not gone unnoticed by investors. Reviews of private tech companies are “moving further and further away from reality” because of “fear of missing out,” said Kanji of Hoxton Ventures.
Iana Dimitrova, CEO of UK fintech start-up OpenPayd, said her company was in the process of raising money. “We have investors who say, ‘They’re asking for a ticket that’s too small, we’re only writing tickets over $ 100 million,'” Dimitrova told CNBC.
Some investors have “very limited understanding” of OpenPayd’s software that enables other companies to provide financial services, but are making offers “simply because it’s the right place now”.
Fintech companies represented 22% of global venture capital funding in the second quarter, according to CB Insights.
“Investors keep writing higher checks,” continued Dimitrova. “To be honest, I see this as detrimental to the long-term sustainability of our industry, as companies are not geared towards creating value, but rather about burning and using money.”
A low interest rate environment has resulted in a large amount of “dry powder” being used in risky risk bets, she added.
Europe’s tech boom
According to Kanji, there are a number of differences between today and the dot-com bubble of 1999. For one, the ’99 bubble was much more “hype” than fundamentals, he said, while now “the markets are there and the companies are there “.
Another trend is “bootstrapped” firms that did not raise outside investments until substantial initial rounds of funding were announced. The US software company Articulate, founded in 2002, announced a Series A round worth $ 1.5 billion in early July.
Although Europe has lagged America and China for a long time in technology, the continent is seeing a significant increase in start-up investment. Europe saw tremendous growth in venture investments this year while funding from China-based companies declined.
“All this remote working trend has accelerated digital transformation and given European companies access to global markets,” said Brasoveanu. “You can sell from Romania just as easily on Zoom as you can in New York.”
According to Factset, startups in Europe raised nearly $ 50 billion in the first six months of 2021, surpassing the $ 38 billion that companies on the continent raised throughout 2020. The valuations of a number of European technology companies have risen into the double-digit billions, including the Swedish battery manufacturer Northvolt, the provider Klarna, which has to buy now and pay later, and the German business software start-up Celonis.
A number of European start-ups achieved the Unicorn rating in record time last year. Earlier this year, online food app Gorillas became the fastest company in Europe to achieve unicorn status, surpassing a record set by online events company Hopin in 2020.
The hustle and bustle of private technology capital-raising has resulted in a growing pipeline of companies expected to go public. The US saw a spate of major tech listings last year, including Airbnb and Coinbase, while the UK held one of the largest European IPOs of 2021 last week with the blockbuster direct listing of fintech firm Wise.
And the Special Purpose Acquisition Company (SPAC) phenomenon has offered yet another alternative for high-growth companies planning their debut in the public market. British health technology company Babylon, for example, will go public later this year through a merger with a blank check company.