The beginning of the new decade has brought to us the worst economic turmoil since the Great Depression. At the lowest point of the crisis so far (March 2020), S&P was 31% since the beginning of the year. Nevertheless, the index has since rebound and is currently being only 11% down since January 2nd. Some other world indices have not recovered the same way, such as the IBEX in Spain, which is still 30% down on the YTD basis.
Although there are several reasons affecting the performance of one index over another, one factor definitely to be considered in the current environment is the technology component. Taking a look at an S&P500 breakdown by sector, it is clear that Energy, Financials, and Industrials are among the biggest losers, dropping 41%, 21%, and 19% respectively. At the same time, sectors such as Information Technology, Health Care, and Communications were able to flourish due to their inherent strive for innovation, and in the case of Health Care, also the ever-more-relevant need for new forms of care and treatments. Delivering 22%, 13% and 4% respectively since the beginning of the year, these sectors demonstrate the role of technology in the modern world. It is also interesting to note that the tree successful sectors listed above constitute the majority of what is considered the traditional VC playing field (Note: VC-Backed companies constitute 57% of all companies founded since 1979 and listed in the US, by Market Capitalization).
Delving deeper into the technology sector (including healthcare), it is important to consider the performance of the target listing market – the NASDAQ. While S&P500 is currently 22bps below the level 12 months ago, NASDAQ is up 12% and is showing no signs of a slowdown on its way back up to pre-COVID levels. (Note: Zoom, listed on NASDAQ, currently has a Market Cap. of $42bn, more than the sum of the five largest airline companies in the world ). The VC market, which actively feeds the NASDAQ listing pipeline by supporting the best Tech companies for many years before they are ready to be listed or acquired, is showing no sign of slowdown either.
In fact, looking at VC investment levels it is clear that investors nor founders are willing to stop innovating and developing new products and services. VC investment in Europe has reached €8.3bn in Q1 of 2020, only slightly below the €9.8bn in Q1 2019 which was a record year for European VC. On the US side the slowdown is also not major, €30.7bn down from €35bn. Interestingly, the average round size in the US continues to grow, while Q1 in Europe has seen a slight decrease compared to the prior year. The average round size in the US was €17m in 2019 and €19.4m in Q1 2020 and €7.3m and €6.6m respectively in Europe.
If we take a more detailed look at the impact on the economy, we see that it is hard to find traditional companies which have not suffered in the last two months. On the other hand, in the technology space, there are many that are significantly outperforming the market, probably more than those that are underperforming. Companies such as Zoom (telecommunication), Teledoc (telemedicine), Peloton (Digital Wellness), Hellofresh (Food Delivery) and Zynga (Gaming) are enabling this new way of living and are performing extremely well.
If we look at valuations, VC exits have remained on par with 2019 levels, with European companies averaging €54.6m exit valuations in Q1, and the US €77.6m, while the entry level in European companies is 3x lower than in their American peers.
Tech will continue to require funding and support of investors with experience of navigating throughout the cycle. Over the last 20 years Europe has produced such VCs, Northzone, Atomico, Index, Gilde, LSP and Abingworth, among others are the perfect examples of long-standing European tech success drivers. In fact, considering the historical VC data, it is clear that large and established funds able to actively support their companies have some of their best performance vintage funds during and following the economic downturn. Companies such as AirBnB, Whatsapp and Uber (all founded in 2008-09) are perfect examples of the successes of crisis years, and there is already a new much bigger wave of post-COVID world disruptors along the way.
In conclusion, it is clear that the investors must strategically rethink and address the way forward. In a social shock like the one the world has experienced in the last two months, the need for digital services, AI, med-tech, drug development, etc., has become more evident than ever before. With services such as food delivery and streaming providing a huge relief during the confinement, and new AI applications and Drug Development technologies helping define de-confinement processes the role of tech in the new modern world is already experienced by most in everyday life. Although we still do not know how the traditional economy of infrastructure, hospitality, transport, energy, tourism, or real estate will change after this crisis, we can already see that this transformation will be led by technology, at a much faster pace than before. As a result, contrary to the general belief, Technology has become the safest asset while still retaining the highest value creation potential. A paradox of the new decade.
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