With under two months to go in what has been another pandemic disrupted year, it’s a good time to take stock of the year that’s been and provide observations about some key trends in the capital markets.
Following an extraordinary year in 2020 which saw the US print 40% of all of the money it has ever printed in history, record levels of government stimulus have persisted throughout 2021, creating a rising tide in many asset classes. Although countless people have been severely affected by the economic fall out of the pandemic, many have not, and the flow of money from governments in an attempt to stimulate economies has meant that the capital markets are flush with capital looking for a return. Putting the March 2020 blip to one side, the stock market has continued the longest bull run in history to seemingly keep going with no end in sight.
However it is not only public stock markets that have seen record levels of investment. Record levels of stimulus have resulted in record levels of investment in both private and public markets. We have observed a growing demand for alternative investment options as investors seek yield that has been tough to find.
Snowball Effect works with a wide range of investors, from individuals, family offices, venture capital funds and private equity funds, and we’ve observed strong demand to deploy capital across all of the investors we speak with. At an individual level, many have more disposable income to invest from not being able to spend disposable income as easily during the pandemic. Various funds on the other hand have been the benefactors of the large capital flows from central banks into the hands of institutions.
To illustrate the impact of there being more money in the system looking for a home, Crunchbase data shows that Tiger Global, with an estimated US$65 billion in total assets, is investing in startups in 2021 at 10x the pace it did a year ago. In the first 5 months of 2021 alone, Tiger led or co-led rounds totalling US$10.5 billion, ahead of other investors aggressively deploying large amounts of capital such as the SoftBank Vision Fund who had led or co-led rounds totalling US$8.6 billion over the first 5 months of 2021.
According to Crunchbase, global venture capital funding in the first half of 2021 shattered records with more than US$288 billion invested worldwide. That is up by just under US$110 billion compared to the previous half-year record that was just set in the second half of 2020.
Locally, according to PWC’s mergers and acquisitions data, border restrictions subdued deal activity in 2020, from 94 deals in 2019 to 46 in 2020. In Q2 of 2021 a strong rebound in activity saw a record 47 transactions announced or completed, with 70% involving NZ buyers (up from 51% in 2020). In terms of NZ startups, the October edition of Startup Investment produced by PWC and the Angel Association stated that the first half of 2021 saw nearly $260m invested by early-stage and New Zealand based VCs. Of note, 10 companies raised rounds of over $10m, demonstrating an encouraging trend of high growth New Zealand businesses buckling up and raising large amounts of capital to take on the world.
Another important dynamic in 2021 has been the number of large liquidity events from the sale of NZ tech businesses. In 2021 so far we have seen Vend sold for US$350m, Sequeent for US$1.05bn, and Ninja Kiwi for NZ$266m. These successes lift the investment ecosystem in New Zealand by highlighting New Zealand’s innovation on the world stage, attracting the attention of more offshore investors, and recycling capital and expertise back into the local economy.
This means that now is a great time to be raising capital to drive growth, and we have seen several companies capitalise on the supportive capital raising environment by looking to raise bigger rounds and in quicker succession. For example, we worked with UBCO to close their US$10m round in June 2021 and the company is now launching its US$30m Series B capital raise 5 months later. Like UBCO, ArchiPro, who we helped raise a further $5m of equity in June, will soon be looking to raise a much larger round to drive offshore expansion.
Although these trends paint a positive picture of the capital raising environment, this doesn’t mean raising money has necessarily become easier. Investors are still applying the same scrutiny to their investments, and although good companies have been able to land significant amounts of capital, they have done so because they have hit the mark with their offering. Well organised companies with a solid understanding of their market, their competitive advantage and strategy, and with a strong execution team in place are very attractive to investors.
In terms of Snowball Effect’s capital raising trends, there are a few statistics that standout and align with the bullish investment themes noted already. In the 2020 calendar year we raised a total of NZ$23m, up from NZ$16m in 2019. Comparatively, in the first 9 months of 2021 we’ve already raised NZ$33m. We expect this momentum to carry through to the final quarter of the calendar year and into 2022 with record levels of investment coming through Snowball Effect.
In 2019, the split between wholesale and retail investment dollars for the year was approximately 60:40 in favour of wholesale investment, moving to 40:60 in 2020, then back to 60:40 in 2021. This shows a fairly even split of investor demand between wholesale and retail investors, and aligns with trends across the wider capital markets.
In terms of industry split, in the first 9 months of 2021 we raised for companies in the following industries: software, food and beverage, VC and PE funds, medtech, pharma, fashion, hardware, gaming, and consumer products. Software is the standout, with 32% of the total invested via Snowball Effect going into software companies.
Looking to 2022 and beyond we expect strong investor interest to persist in software companies. The pandemic has fast-tracked digital adoption, forcing us to quickly live and work differently to pre pandemic times with a much greater reliance on technology. The green shoots that emerge from this leapfrog effect present exciting investment opportunities. We also expect to see strong investor demand in health and in businesses looking to address the climate crisis.
Although there is ongoing disruption from the pandemic, there is light at the end of the tunnel, and a world awash with capital looking for a return. At Snowball Effect, we’re looking to work with ambitious founders building a brighter post pandemic world. Come and talk to our team if you’d like to learn more about how we can help your business with its capital requirements.