State of Tech 2019: The year of mega-rounds, Emerging Markets and AI
Daniele Pe - Associate Partner
Dino Saric - Research Associate
(Download the full report PDF at the bottom of the page)
Tech investment continued to soar in 2018 as fundraising hit its highest level so far. Global VC investment surpassed $250 billion last year – an annual increase of 45% - thanks to bigger funds targeting later-stage companies. The increase in mega-rounds and the so-called SoftBank effect fueled this growth: the top five deals alone accounted for around 15% of all investment.
This excess of cash keeps fueling valuations, which increased a worrying 30-40% in 2018.
Surprisingly, money isn’t flowing into China. Many had expected VC’s cash to find a home in Chinese startups, allowing the unicorns of Beijing, Shanghai and Shenzhen to flourish over their US rivals. Instead, the US funding ballooned to $132 billion from $83 billion a year earlier, while China’s growth was in the low double digits.
Emerging Markets, on the other hand, are finally making a mark in the race. Brazil, Colombia, Mexico, Malaysia, India and Indonesia attracted more than $15 Billion in investment in 2018, a 59% increase year-on-year, thanks to major investments in companies like Grab and Tokopedia. Overall, Africa was the fastest growing region with investment surging by 300% to $726 million.
FinTech disruptors attracted 15% of total funding. With online lending platforms, consumer finances products, such as budget and expenses management, and insurance Tech all bringing dramatic change to the legacy banking sector, it has never been clearer to identify how overhyped the potential of blockchain was.
While FinTech leads the investment stakes, it’s Artificial Intelligence that sets investors’ pulses racing. AI, now the second largest vertical for Tech investment, thanks to its transformational power and large spectrum of application, spanning automation, self-driving vehicles, image and facial recognition and social media analysis.
With all the excitement surrounding self-driving cars and AI, its easy to forget e-commerce – the previous young pretender of the startup and Tech investment scene. Online retailers are going through a renaissance thanks to new social trends with a 28% increase in investment to $28.3 billion. By 2022, the e-commerce sector could be worth $5.94 trillion as more Direct-to-Consumer players emerge and sales via social media channels surge.
The exit scene pretty much mimics the investment one. While exit values increased by 55% there were fewer, bigger overall exits. Across the world, venture-back exits slipped 15% to 1,441 and is now in a four-year slump. VCs made around $206 billion from 180 IPOS last year – the highest amount of capital ever raised – with household names like Spotify, Tencent Music Entertainment and DropBox leading the pack.
For 2019, we believe it’ll be difficult to match last year’s VC activity, both in terms of investment and fundraising. Later-stage companies will continue to grab the attention as investors seek safer bets and while this will cause even higher average deal sizes, we forecast that the number of deals will slip further.
Chinese investment could return with vengeance thanks to its booming AI sector and other large emerging markets will continue to thrive.
Overall, we expect valuations to cool off as VC’s analyse last year’s growth as excessive. In fact, the only realistic curve ball could a second iteration of Softbank’s “Vision Fund”. But for those with skin already in the game, 2019 promises to be rollercoaster with some of Tech’s major unicorns preparing to go public.
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© 2019 Delta Partners.