Period of major change drives up venture capital investments

The current economic climate is not holding back venture capitalists’ desire to spend their money. Both globally and in Europe, investments in startups increased over the past three months. 

Global professional services firm KPMG has been tracking developments in the world of venture capital for years, and every quarter the firm shares its insights with a 30+ report full of analyses, charts and expert commentary.

Its latest edition of the ‘Venture Pulse’ comes with a somewhat notable conclusion. Despite the considerable uncertainty in the economy and in the future viability of startups, investors have continued to open their wallets. In fact, globally, $73.2 billion was invested in startups in the third quarter of this year, $3.2 billion more than in the second quarter of 2020.

In Europe, investments increased from $11.5 billion to $12.1 billion, and in Asia $21.1 billion was pumped into young, innovation companies. Among the largest investments in the third quarter were the funding rounds in SpaceX ($1.9 billion), China’s WM Motor ($1.5 billion), India’s ($1.3 billion), Sweden’s Klarna ($650 million), Germany’s ($632 million) and UK’s Revolut ($580 million). 

According to the Dutchman Mark Zuidema, a partner at KPMG Corporate Finance, a clear trend is emerging in the type of investments. “In the past three months, investors have focused on companies that are able to adapt to and respond to the 'new normal'. The global pandemic has dramatically changed consumer behavior and accelerated a number of digital trends.” 

An obvious example are startups that help companies work remotely and learn from home. “They are currently getting much attention,” said Zuidema. Another group are players that provide products/services that help responding to the changing needs of consumers, such as online shopping and healthtechs, which have become central to the Covid-19-induced healthcare sector. 

At the other side of the table, investors have grown their capital stock. As is stands, venture capital funds have already raised as much capital as in the whole of 2019, meaning that there obviously no shortage of funds.

The downside

The Covid-19 crisis is naturally throwing up challenges to some startups. New startups, for example, are particularly affected by the current pandemic, because they face more difficulty attracting money given they still lack a tried-and-tested or proven business model. Valuations have also declined during the crisis, mainly because future revenue flows are now more uncertain. 

“Global investments in early-stage startups has only declined over the past six months. The limited availability of capital for these companies is expected to continue in the coming year,” predicted Zuidema.

But across the board, Zuidema expects that venture investments in startups will remain stable in the coming months. Zuidema: “With many countries facing a second wave of Covid-19 infections, venture capitalists will continue to focus on solutions that meet the ‘new-normal’ and digital needs of businesses and consumers.” 

Yet, caution remains in the market. “Covid-19 developments understandably continue to worry investors, and uncertainty could be exacerbated by the upcoming US presidential election and a possible hard Brexit,” the KPMG partner concluded.