Venture Capital in Q3 2020 – Healthcare funding on the rise

Venture Capital in Q3 2020 – Healthcare funding on the rise

Despite the economic volatility in the US and COVID-19 pandemic — the venture capital (VC) and startup ecosystem have broadly spoken, been resilient in 2020. Pitchbook and CB Insights report provides a detailed overview of venture capital funding in Q3 in 2020. Most VCs have adapted to new, remote ways of doing business and capital invested continued at a strong pace in the third quarter. VC investments to US-based, VC-backed companies hit a 7-quarter high in Q3’20 at $36.5B, up 22% year-over-year (YoY), and 30% from Q2’20.

The startup ecosystem appears to be responding admirably to the grave challenges currently facing the US. Startups and entrepreneurs look to be moving aggressively to address the major challenges of our time: climate change, healthcare and COVID-19.

Moreover, Crunchbase data shows increased investment between Q1 and Q3 2020 versus the same period in 2019 in health care, apps, payments, education, and gaming.

This surge in investment over the last two quarters could result in a five to 10 year boost for the industry.

While traditional IPOs are a good option for high-growth companies in the current climate, an alternative way to go public has gained popularity in the ecosystem: the special purpose acquisition company (SPAC).

Not all trends in the ecosystem have been positive. The number of seed and early-stage VC investments has rapidly declined, and we have seen an even steeper reduction in the number of first financings for startups, which reached a 10-year low in Q3.

Seed and Angel Investment

As the seed market continues its sluggish pace through Q3, angel investments have remained rather resilient. At $2.6 billion, seed funding in the third quarter was down 32 percent year over year and down 11 percent quarter over quarter. It’s worth keeping in mind that seed is the stage with the most extensive reporting delays, as smaller seed fundings are often not reported via the news cycle, but added by founders over time.

Source: Crunchbase

With deal sourcing moving online, the first major challenge COVID-19 brought to the venture market has slowly lessened over
the third quarter as the industry adjusted to the digital setup. With deal sourcing moving online, the first major challenge COVID-19 brought to the venture market has slowly lessened over the third quarter as the industry adjusted to the digital setup.

Early-stage VC

Early-stage VC deal activity showed signs of rebounding in Q3 2020 with $9.2 billion raised across 657 deals, bringing the YTD
total to $27.7 billion across 2,351 deals. However, early-stage VC deal activity in 2020 is unlikely to match the 2019 activity.

After a lackluster Q2, early-stage investors are becoming more comfortable investing in this “new normal” – reports Pitchbook.

Many investors have begun to step outside their comfort zones and embrace deals from entrepreneurs beyond their immediate network, particularly in sectors that accelerated due to the ongoing pandemic, such as telemedicine and education technology.

Healthcare Venture funding

Notably, 19 of the 25 largest early-stage VC deals in Q3 were in healthcare. Rock Health reports $4 billion in funding for U.S. digital health startups this quarter, much of which was driven by a flurry of telehealth investments and late-stage rounds for R&D and fitness tech companies.

That said, 2020 is the largest funding year ever for digital health. The $4.0B invested in US-based digital health startups through Q3 brings the year’s running total to $9.4B. At least $2.4B has been invested each quarter this year—consistently above the quarterly average of $2.1B across 2018-2019.

Source: Rock Health Funding

Communities and their healthcare infrastructure are bracing for future waves of COVID-19—potentially compounded by flu season. Provider systems and practices with depleted finances face the potential of months of lower utilization and a shifting payer mix with more Medicaid, individually insured, and uninsured patients.

It is unlikely that the economy, healthcare, or our personal lives will return to the “old normal” any time soon. 

Twenty-four (24) digital health companies have raised mega deals of $100M or more through Q3 of 2020.This already doubles the previous annual record of 12 mega deals set in 2018. Mega deals account for well over one-third (41%) of total digital health funding so far this year with connected fitness company Zwift raising the largest round so far—$450M in Series C funding.

The rise in mega deals reflects a trend towards capital concentration in digital health venture investment. Funding for companies that offer telemedicine specifically saw a significant spike from Q1-Q3 2020 compared to Q1-Q3 2019—$1.6B in funding compared to $662M, an over two-fold increase.

Source: Rock Health Funding

Driven by the near shutdown of our traditional healthcare system for in-person visits, utilization of the former—synchronous patient-provider visits—have skyrocketed. By one estimate, telemedicine claims in the US rose by over 4000% between June 2019 and June 2020.

Telemedicine will keep rising and we can expect to see this industry to receive more funding in 2021.

Startups in Europe lag behind the US

Startups in Europe lag behind the US

Europe presents all the necessary elements to allow tech businesses to grow and scale. Startups in Europe have seen a surge in the number of unicorns and the pace at which they are created.  Of the 99 venture-capital-backed European unicorns, 14 were added in 2019 alone. These include Germany’s online bank N26, France’s healthcare scheduling service Doctolib, and Lithuania’s online used-clothing marketplace Vinted. However, European start-ups still lag in achieving successful late-stage outcomes when compared with other start-up ecosystems.

PitchBook’s European Venture Report Q1 2020 states VCs poured an impressive €8.2 billion into European companies during the first quarter of 2020. The report states that COVID-19 could threaten the flow of US capital into startups in Europe. European startups brought in a total of €8.58 billion across 40 deals of €100 million or more in 2019. The number of VC-backed transactions, however, has been on the decline—sliding from 5,929 deals in 2018 to 5,017 last year—showing that the ever-increasing pool of money is being distributed across fewer transactions.

Attracting and retaining talent is indeed challenging — both for companies in Europe and elsewhere — but hiring is typically cheaper outside the US. This, of course, is a double-edged sword in that European tech is at risk of brain drain — the mass exodus of talented, and experienced, individuals seeking higher salaries on the other side of the Atlantic. Even though European tech has overcome challenges before the pandemic, there’s very little doubt that it still lags behind the US and parts of Asia.

European Unicorns Analysis

While Europe generates 36 per cent of all formally funded start-ups, it creates only 14 per cent of the world’s unicorns. Adjusted for population and GDP, the number of seed-stage start-ups that Europe generates is only 40 per cent of that generated by the United States, reports McKinsey.

Europe’s ecosystem has been less effective than that of the United States at turning start-ups into late-stage successes.

To analyze the steps between the seed stage and success, McKinsey looks at start-ups that received seed or angel funding between 2009 and 2014. For example, European start-ups were 30 per cent less likely to progress from seed to a successful outcome, as compared to start-ups that raised seed funding during that time in the United States.

The analysis also showed that most European unicorns have had to expand not just beyond their individual countries but beyond Europe as well, whereas only half of US unicorns have expanded outside the continental United States. That said, European start-ups have to focus on wider internationalization earlier in their journey than do US start-ups.

There is also a cultural difference taken into the account as the reason why European startups should perform faster in early stage than the US startups. Cultural differences and language barriers keep Europe behind the US startups that grow on a much faster pace. However, an increasing number of recent European success stories, such as Delivery Hero, Auto1, or N26, that focused on hypergrowth at the expense of short-term profitability, has shifted cultural differences.

Meanwhile, the startup ecosystem in Southeast Europe (SEE) has startups, supporting institutions, interesting technology, and founders with an ambitious mindset. Globally successful companies can be created even in this part of Europe. That being said, unicorns potential exists in South East Europe as well. Outfit7, a family-entertainment company with Slovenian founders and pioneer in the field of digital entertainment, has been sold for 1 billion USD to a Chinese investor in January, thus becoming the first unicorn in the region.

Overcoming challenges

Europe could look at how to support the culture and capital needed to further grow its start-up ecosystem. Entrepreneurs could take advantage of the improving conditions for startups in Europe and aim for global leadership. Governments could further this through more risk-willing capital, and considering allocating more semi-public funds toward growing the ecosystem, as well as fostering collaboration between ventures, academia, and industry.

Private Equity and ESG investing

Private Equity and ESG investing

Private equity (PE) asset managers have actively developed products to meet increasing demand in the ESG space.  Private equity companies have been waking up to the importance of purpose, responsibility and transparency for the last several years. The pandemic has put these ESG concepts to the top of the agenda.

There was an increased interest in transparency and accountability and in developing ESG policies by private equity firms, according to research. Increasing demand has been noted in terms of transparency and accountability, particularly around ESG policies.

Investment companies are adopting ESG policies for practical reasons as well. Decreasing utility bills and focusing on energy efficiency are the cornerstones of ESG, and in the light of the pandemic, these policies can be effectual methods of saving.

Moreover, some sources state that ESG investing has become mainstream. With the global pool of exchange-traded fund (ETF) assets under management considered ‘ESG-focused’ now reportedly exceeding $100bn (£76.2bn). Companies are raising their ESG credentials in AGMs and annual reports and on occasion, companies perceived to have strong ESG credentials appear to enjoy enhanced valuation compared to their peers. 

Private Equity ESG Intentions and Actions

In 2020, private equity firms have raised in excess of $370bn (about £282bn) of commitments to funds that integrate ESG principles into their investment decisions, according to data provider Preqin. But a recent survey by Institutional Investor found that fewer than 10 per cent of 8,810 global private equity firms, with a total of $3.4 trillion under management, are signatories to the UNPRI.

Source: Preqin and PRI, chart from Institutional Investor

Analysis by Institutional Investor shows that the majority of the private equity firms reporting to PRI have a responsible ESG investing or ESG policy. However, ESG policies focus on process, not outcomes. To assess ESG progress at PE firms is to examine their reporting. Overall, the opacity of ESG reporting by PE firms contrasts with the increased transparency provided by many public companies.

Private equity still has considerable room to deliver improved public – social and environmental outcomes. The growing prevalence and severity of environmental and social challenges have elevated the issue set to the highest ranks of PE firms.

According to a report by Private Equity International, “The current state of affairs allows flexibility for GPs to choose how much to report and how often to do it, which leaves the door open for managers to cherry-pick examples of favorable outcomes while burying unfavorable ones.” In addition, GPs can determine if they want to share ESG information at the GP or the portfolio company level.

Lastly, to address climate change and challenges, institutions, including those in finance and private equity, will have to play a more active role in social and environmental problem-solving. The current support for ESG investing appears to be a combination of several factors. The holy grail of investments that not only generate acceptable rates of return to owners and advance the better interests of stakeholders and society is obviously appealing.

Standardisation of ESG

For those working and investing in private equity, the inclusion of ESG criteria in the investment screening and decision-making process is often a recent adaptation and a learned process.

Approaches should become more standardised and more authentic, with skills more broadly disseminated. For now, there is still an experience gap that makes implementation challenging. One of the early challenges identified in the space is the plethora of metrics, standards and styles of reporting on ESG. Recently, several industry leaders agreed to make more collaborative efforts to harmonise measurement standards.

Positive change is possible and happening. Increasing the transparency and rigour of assessment and reporting will benefit performance.

Sustainability in Business in the post-COVID world

Sustainability in Business in the post-COVID world

In the post COVID, world sustainability in business is becoming more meaningful. The research found that 69 per cent of those experiencing significant disruption expecting green issues to rise in importance. 

That seems to be the truth. Despite the extremely challenging market conditions, businesses are facing sustainability is one they should prioritize. 

The research was conducted by Carbon Trust’s second annual ‘Corporate attitudes towards sustainability’ survey, by B2B International with large companies across Germany, France, Mexico, Singapore, Spain, and the UK. 

Three-quarters of organizations interviewed were negatively impacted by Covid-19, with four per cent saying it represented an existential threat to their organization. Furthermore, 32 per cent reported that their operations had been heavily impaired.

Organizations around the world are considering their role in delivering a green recovery – achieving net-zero targets at the same time as fostering economic.

Driven by fast retailing fashion and footwear industry is also facing increased social, environmental, and regulatory pressures.

Leading brands are rethinking their business models and leading the change to a more sustainable future for the footwear and fashion industry. And consumers are looking for companies with a sustainable soul. For example:

  • 93% of global consumers want more of their favourite products, services and retailers to support worthy social issues
  • 96% of people have a more positive image of companies that support Corporate Social Responsibility
  • 93% of shoppers are more loyal to brands that back cause
  • 91% of customers are likely to switch brands (given comparable price and quality to one associated with a good cause).

We should all commit to better business practices to create a more sustainable business and inclusive world for all. 

Sustainability in business practices

It is time for more sustainable supply chains, a greater focus on green finance and a commitment to social innovation. 

As McKinsey reports, there has been much discussion about the shortening of supply chains, reshoring or near-shoring, and emerging hubs of manufacturing such as the Philippines, Hungary or Costa Rica. In the McKinsey survey, 85% of respondents struggled with insufficient digital technologies in the supply chain, while 90% now intend to increase digital supply chain talent in-house.

Harvard Business Review covers in-depth how sustainable supply chains form a better business practice. The study covers how multinational corporations have pledged to work only with suppliers that adhere to social and environmental standards. In the study, the aim is to describe various ways that MNCs can tackle the risks and understand the situation.

From solar power farms to flood defences, the world needs to build more sustainable infrastructure. To build it, we need to have specific targets on the issuance of green finance. First things first, the private sector should collectively agree on a common set of environmental, social, and governance (ESG) metrics to promote green finance.

Once those metrics are established, businesses should integrate sustainability reporting into financial updates as a matter of course.

Finally, the private sector has a massive role in supporting start-ups in the social innovation space and helping ensure everyone has access to the digital tools they need. As an example, Microsoft launched an initiative to help 25 million people worldwide acquire the digital skills needed in the post – COVID world.  

If you are looking to help bring sustainability in business, lend your expertise and back the entrepreneurs. There are many examples of small business owners, start-ups and foundations who help bring sustainability to the economy. Another sustainable start-up is Agrivi, from Croatia, with a vision to change the way food is produced in its core and positively impact one billion lives by helping farmers reach sustainable, resource-efficient and profitable production.

To sum up, businesses should rethink the role of business in the economy. Bringing sustainability in business will help society when the next crisis arises, be it financial, health, cyber or otherwise.

Record Month for Green Bonds

Record Month for Green Bonds

Green Bonds can help governments raise finance for projects to meet climate targets and are enabling investors to achieve sustainability objectives. Like conventional bonds, green bonds allow the bond issuer to raise funds for specific projects or ongoing business. The “green” label tells investors that the funds raised will be used to finance environmentally beneficial projects.

A recent study by BloombergNEF (BNEF) published that Green bonds have passed their biggest milestone yet, with more than $1 trillion issued since these securities first emerged in 2007. More than $200 billion worth of green bonds – which are used to finance the pursuit of environmental projects and activities, from wind farms to wastewater management – have been issued in 2020 thus far.

Green bonds have become known for their impressive growth, with global issuance increasing every year to date, reaching a record of more than $270 billion last year. However, for 2020 the trend is slightly changing. Still, there were in September, more than $50 billion bonds issued. Germany federal government issued a 6.5 billion-euro ($7.7 billion) sovereign bond at the start of the month, making it this year’s biggest single new green bond. Adidas, French electricity firm EDF and telecommunications firm Orange, along with Germany, Egypt and Sweden, all issued green bonds last month, helping the volume jump by five times from August.

The integration of environmental, social and governance criteria has never been more important for investors than in 2020.

The ICMA defines green bonds as those which finance renewable energy, energy efficiency, biodiversity, pollution reduction and other similar projects.

Today, renewable energy is present in around half of all green bonds issued. The cumulative issuances of green bonds are below USD 1 trillion, while the global bond market is valued at around USD 100 trillion, accounting for less than 1% of cumulative global bond issuances. To grow the green bond market, co-operation between policymakers, standard setters, capital providers and investors is essential.

Last month’s boom is due in part to the fact that many operations were postponed earlier in the year because of the coronavirus pandemic. The sector still has to improve the evaluation of projects that receive the green label, however.

Other companies, such as luxury house Chanel, issue so-called sustainability-linked bonds meanwhile, reports Straitstimes. The proceeds from these bonds can be used to finance any type of project, but the borrower makes pledges to meet certain sustainability targets and pays a penalty if they fail.