A Brave New World [Part 1]
Samaipata is a pan-European VC fund investing into digital businesses with network effects at Seed stage.
We started 2021 cautiously hopeful. We thought the worst of the pandemic was behind us, we were assured by plans for rapid vaccine roll-outs and above all, at least for us, we were curious how this new world would look like. How will we live and work? What new businesses will there be? Will it ever be ‘normal’ again? While we don’t have all the answers to these questions yet, 2021 was definitely a preview. It was a roller coaster ride through cycles of virus variants, where life continuously stopped and started. At the same time, it was amazing to see society adapt to new modes of working, as companies turned remote-first and full-time workers switched to ‘gigs’, and new modes of living. It was a groundbreaking year for investment in innovative projects looking to address the challenges of our rapidly evolving world. It was also a frenetic year for Samaipata as we saw the final closing of our second fund above target, our first home run, first markups on Fund II and we continued investing in people, with key hirings joining the team.
The broader macro environment continued to be extraordinary. In a historic milestone, society developed a vaccine and vaccinated 4.6b people or 59% of the world’s population (OurWorldInData) in record time. The interaction between vaccines and new strains dictated the volatile pace of the year. The world’s GDP bounced back 5.5% driven by developed economies emerging from subdued activity in 2020. Even if some degree of uncertainty prevented record high household savings from translating into the much discussed ‘roaring twenties 2.0’ during 2021, developed economies registered strong pick up of activity and potentially cashed in the so-called ‘productivity dividend’ as a result of accelerated digital adoption. Towards the end of the year inflation indicators steadily took off, spurred by supply chain bottlenecks across the world and soaring energy prices. Central banks were put on the spot and gradually shifted from a ‘transitory inflation’ narrative to a change in forward policy guidance to cool down potentially overheating developed economies. 2021 marked the beginning of the end of the pandemic-driven macro environment as societies and economies have learnt to co-exist with the virus. As in monetary policy, some aspects of our lives will go back to normal while others have changed for good.
Turning to markets in 2021, investors started the year on an upbeat tone underpinned by the resilience of the global economy in 2020 and fresh hopes of a fast and effective vaccine rollout. Even though the reality turned out to be bumpier than expected, risk assets such as growth/tech stocks continued receiving inflows driven by accelerated technological adoption and a widespread ‘there is no alternative’ sentiment fuelled by low rates and all-time high liquidity levels. The equity markets persevered in looking beyond short term turbulence triggered by virus strains and lockdowns, with the MSCI World Index returning +22% in 2021. Within global equities, technology assets consolidated the eye-dropping 2020 bull run, with the Nasdaq 100 performing in line with the overall equity market. However, high growth names lost steam towards the end of the year as the macroeconomic and policy tide began to turn and some privacy and other regulatory related matters raised some concerns among tech investors. The 2021 IPO cohort performed very poorly as aggressive listings throughout the summer quickly stalled in the unfavourable Q4 investor sentiment. Nevertheless, the 2021 overall capital allocation sentiment remained favourable to technology and risk-taking, continuing to drive a frenzy of activity in the private capital markets. In particular, global venture capital investment set a new record at $643B, almost doubling 2020 and representing a tenfold increase in a decade (Crunchbase). Europe also registered record-breaking levels of activity. Over ~$100B was deployed in 2021 with ~23% in early stage companies, representing almost 2.2x growth YoY (Pitchbook). The year saw landmark deals by European tech companies such as Hopin’s $450M Series D, Sorare’s $680M Series B and Klarna hitting a $46B valuation and raising $1.6B in the year, to name a few. These figures illustrate the momentum enjoyed by the global and European VC markets in 2021, propelled by structural and cyclical tailwinds in harmonos sync.
2022 is off to an eventful start in the capital and technology markets as some of the cyclical drivers unwind. The post-pandemic macro outlook has prompted policy change signals and a shift in sentiment across asset classes. The equity markets have seen a deep rotation from growth (most tech companies included) to value assets as investors repositioned their portfolios for a changing environment. This rotation has removed some froth from growth valuations in the first weeks of 2022, with tech assets at the forefront of the episode. We are starting to see this correction in public market valuations gradually cascading down to the private markets, starting with pre-IPO and late stage venture. While this is likely to temporarily mute the tech IPO market — affecting exits and late stage valuations — we believe the record amounts of dry-powder waiting to be deployed will continue to support intense deal-making activity in VC in 2022 and beyond, partially isolating the asset class from short-term volatility. At Samaipata we keep an eye on the broader environment as curious investors. However, our investment horizon requires us to focus on positioning our portfolio to capture the long term fundamentals of technological innovation over any short term valuation driver. A normalisation phase of the market conditions that have strengthened the foundations of the VC asset class in Europe is only the end of the beginning.
We have no doubt that the recent record levels of tech investments have sown and fertilised the seeds to power the next wave of tech.
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