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March 9, 2021updated 01 Aug 2022 6:07am

Investor appetite for tech is driving ‘megadeals’. Will start-ups suffer?

Investors sought exposure to high-growth tech scale-ups last year but digital innovation requires a pipeline of early-stage firms.

By Claudia Glover

Investor interest in the tech sector was already growing before the pandemic but it reached fever pitch in 2020, as lockdowns moved life online. Investors flocked towards a select group of late-stage tech companies with proven business models seeking capital to fund their global expansion. As a result, tech investment was funnelled into a handful of ‘megadeals’. But the digital innovation ecosystem depends on a steady supply of smaller start-ups testing out new ideas: is this pipeline under threat?

tech megadeals

Controversial retail investment app Robinhood raised a combined $1.3bn in the second half of 2020. (Photo by Justin Sullivan/Getty Images)

The recent spike in technology investment reflects the intersection of three trends: an increase in capital looking for investment; the growing appeal of technology as an investment destination in particular; and the preponderance of scale-ups looking for capital to fund their global expansion.

After a brief drop in the early months of the pandemic, global investment bounced back with a vengeance in the second half of 2020. Investors such as private equity and venture capital firms need to make investments to make returns, and by the summer they were looking to make deals, says Duncan Down, transactions services partner at Deloitte. As a result, “there’s probably never been as much money in VC and PE across Europe and globally as there is now”.

Even before the pandemic, the technology sector had become especially popular among investors. “It’s a safe place to put your money: it’s resilient, revenues are recurring, it has good cash generation, all of those good things,” says Down. Tech became all the more attractive when lockdowns accelerated digitisation.

The potential for tech companies to scale makes them an especially valuable prospect for investors seeking high returns, explains Peter Westlake, director in financial services at KPMG. “Technology companies are borderless and much more scalable than the physical,” he says. “So the belief is if you build a really good business model, you can scale that to move to different geographic markets and obviously that creates a much bigger opportunity.”

“There’s probably never been as much money in VC and PE across Europe and globally as there is now.”
Duncan Down, Deloitte

But scaling globally requires investment, says Axe Ali, head of financial services deal strategy and value creation at KPMG. Tech start-ups “need a lot of money to scale and operate in the way that people want them to,” he says. “Without the right level of capital, which is sometimes pretty extensive, you just can’t operate.

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“It requires a significant amount of upfront investment to build and expand the infrastructure,” adds Westlake. This means the appetite to invest in tech is more than matched by the sector’s demand for capital.

The year of tech megadeals

The confluence of these trends led to a concentration of ‘megadeals’ in 2020 and early this year, with late-stage tech companies raising significant funds at large valuations.

The trend could be seen around the world and across technology subsets. Predictably, medical technology had a good year as Covid-19 spurred demand for treatments and related products. In 2020, the US and EMEA medtech sectors witnessed 42 investment rounds that raised $100m or more, with a combined value of $15.3bn, according to research by Silicon Valley Bank, a commercial bank that serves the high-tech sector.

Climate tech experienced a banner year for late-stage seed rounds boasting more than 351 tech deals in 2020. Some of the sector’s biggest deals include a $600m series-B round for Swedish electric battery company Northvolt; a $100m raise by carbon-capture provider Climeworks in June; and a $140m round for indoor farming start-up Plenty in October.

Fintech was another hot sector. Retail investment app Robinhood attracted the largest VC investment in the second half of last year, raising $650m in July followed by another $668m in October. Also in fintech, Swedish digital lender Klarna raised $650m in September, and US neobank Chime raised $534m, states analysis released by KPMG.

In 2020, investment in the UK’s cybersecurity sector reached record levels but was concentrated in a handful of companies, including Snyk, which raised $350m, and OneTrust, which raised $510m. And six Israeli tech start-ups raised a record $1.44bn in January of this year alone.

This concentration of investment is the continuation of a decade-long trend. According to Pitchbook, the majority of private equity investment has gone to companies worth $10bn or more since 2011. But 2020 saw its apex: 70% of technology investment went towards companies of this size.

Is the shift to ‘megadeals’ a threat to innovation?

Does this shift towards ‘megadeals’ threaten funding for early-stage start-ups and, therefore, the pipeline of tech innovation? In the UK cybersecurity sector, the rise of megadeals was accompanied by a decline in early-stage rounds, according to investment data provider Beauhurst.

This pipeline of smaller start-ups is vital for the longevity of the technology sector, says Ali. “There needs to be a proliferation of companies to actually translate,” he says. “And yes, they’re not all going to turn into the next Paypal or Worldpay or whatever, but there needs to be enough incubation across all levels, not just angel and seed levels, but also that critical middle layer that is almost the defining part of the company.”

Economic conditions may make it even harder for tech start-ups to break through. A “K- shaped recovery” has divided the technology industry into ‘winners’ and ‘losers’, according to a recent report from PwC. “Larger well-capitalised companies will look to grow through transformative acquisitions and acquire competitors that are less equipped to weather the storm,” it says.

However, the success of some of the big investments made in 2020 may provide funds for some smaller, riskier investments this year, says Nooman Haque, managing director for UK & EMEA life sciences at Silicon Valley Bank. “Some of their portfolio companies will have raised quite a lot this year, so it gives investors a little more capacity for perhaps newer, alternative investments,” he says.

Many start-ups make it through their early days without angel or seed investment, says Deloitte’s Down. “We still see some that go it alone and don’t take external funding until they’re ready, at a series-B [or] series-C type level.”

Ed Lascelles, a partner at venture capital firm AlbionVC, believes current trends in investment are beneficial to innovation. Early-stage investors have become more discerning, he says. “I’ve seen that the angel and seed rounds seem to be not growing in number, but I think they are growing in quality and excitement.”

And for start-ups that demonstrate they have a scalable business, investment is abundant, he says. “It’s normally really obvious early on if [a company] is going to be an absolute success, and funding for those companies comes quite easily to them.”

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