Global Investor Roundtable: Cathay Innovation’s 2021 Predictions on What’s Next for VC; Startups Across North America, Europe and Asia
January 28, 2021
In reflecting on the last year, a year so markedly defined by the global battle with the coronavirus pandemic and related economic fallout, many of the landmark news events, deals or initiatives fall to the wayside. However, despite being one of the most challenging periods we’ve lived through yet, 2020 saw remarkable innovation and evolution on several fronts.
We saw coronavirus vaccines developed in less than a year (compare that to the previous fastest vaccine developed for the mumps at over four years), we saw SpaceX launch the world’s first crewed commercial spaceflight and we saw big business take a stand against climate change with carbon neutral commitments. It’s also been quite a year for the technology industry with tech giants expanding into new areas from Amazon Pharmacy to Google’s entrance into banking. We saw a string of big IPOs from the likes of Snowflake, OneMedical, Palantir, Lemonade, Doordash and Airbnb along with mega deals in M&A from Salesforce’s acquisition of Slack, Visa’s Plaid purchase, Intuit acquiring Credit Karma and the list goes on.
But perhaps most striking was the mass acceleration of digitalization spanning industries as a result of the sudden shift to remote work for the world under quarantine. At Cathay Innovation, as an investment firm that is truly global in nature, we’re uniquely positioned to see these trends unfold firsthand from our teams on the ground across regions — from North America to Europe and Asia. So, as we close out 2020, we asked our teams from around the world what’s in store for 2021.
See below for our predictions for the coming year, and don’t forget to visit our new website www.cathayinnovation.com to learn more about how we invest in entrepreneurs impacting the world!
From the whole Cathay Innovation team — we wish you a very happy and healthy new year and may 2021 bring us to the end of the pandemic!!
Global outlook: two of the top 2021 trends for the VC & startup landscape
MingPo’s Prediction: The Gap Widens Between Large Generalist & Small Boutique Firms.
COVID-19 didn’t have as large of an immediate impact on the VC industry from the number of deals or valuations as anticipated. However, in the post-COVID world, there will be a sharper division of the VC ecosystem between generalist large technology financing platforms and smaller boutique and specialized firms. It will become harder to be a generalist VC firm and remain a small fund. The larger firms will also look to expand activities into new areas such as crypto, debt or fund of funds. More generally, the frontier between the various asset classes (such as VC and PE) will blur as technology is expanding and is increasingly becoming a key driver of any activity, while investors will look for growth in a low credit interest world. We are already seeing this materialize in China, where large platforms are addressing more and more of any kind of investment at any stage.
Denis’ Prediction: Impact Investing on the Rise with the Convergence of Risk, Returns & Impact.
Until now, there was a clear separation between “investing for returns” and “impact investing” (including ESG related practices) due to the misconception that sacrificing returns was necessary to invest in “tech for good”. Moving forward, the VC industry will see a shakeup as the two merge with “tech for good” scaling and others struggling to create long-standing companies. All stakeholders — including LPs to customers — will push for a risk-return-impact framework which more VCs will adopt as the new purpose driven generation of entrepreneurs rises. This will also result in an evolved ecosystem of collaborative cross-industry relationships or alliances — from startups and investors to the Fortune 500 — working towards a more sustainable economy with tech being the main driver of change. It will take a village to build the world of tomorrow!
For more of Denis’ predictions, see his full 2020 to 2021 letter here.
Spotlight on Europe: Southern & Eastern countries to boost EU tech to international prominence with electric vehicles, “quick commerce” and digital health top of mind
1. Southern & Eastern Europe to Strengthen EU Tech & VC Landscape as Region Gains International Prominence.
2. Mobility 2021 — Government Subsidizations & Renewed Focus on Sustainability to Boost Europe’s Electric Vehicle Market.
1 The European venture capital and startup landscape is evolving with technology hubs gaining prominence in southern and eastern countries from Spain to Romania. We’ll see more international funds interested in the region driven by the strong presence of AI, data science and engineering talent along with the fact that European startups are now demonstrating that they can scale beyond local borders with the speed and agility to become market leaders. Despite concerns around a COVID-19 related slowdown, there will be no shortage of VC financing, but a wider gap between average and breakout companies, as more funds compete to invest in increasingly larger rounds of the region’s clear winners.
2 Coming out of the pandemic, we’ve seen a renewed focus on technology for good or innovation to address macro issues particularly around climate change or sustainability which will result in a major boost to the electric vehicle market. Tesla may be the obvious leader today, but with EU governments pouring money into the subsidization of electric vehicle purchases (such as the Renault ZOE), we’ll see more players emerge in the next 5 years to build the necessary infrastructure while providing EV options in a more widely accessible price range.
1. 2021 to See the Rise of “Quick Commerce” Enabling Delivery of Any Kind in Less Than 30 Minutes.
2. Digital Health Remains Hot Shifting from Telemedicine to Data-Driven Drug Development in 2021.
3. WhatsApp’s Dominance in the European Market Is Good for (New) Business but may cause issues for Elections.
1 The next-generation of commerce will be laser focused on speed, enabling a better consumer experience not with next day delivery or even in hours, but in the matter of minutes. While the concept has been realized with meals, we saw startups in the last year begin to build the broader infrastructure with micro fulfillment for brands and e-commerce players and the emergence of darkstores. The sector is still in its infancy with 2020 being all about the groundwork and 2021 being the year we see quick commerce come to fruition with the delivery of goods from food and groceries to makeup, shoes and more.
2 In 2020, the digital health sector saw massive growth led by the rise of telemedicine. In the next year, we’ll see the digitalization of drug development come to life driven by the urgent issues healthcare institutions and pharma companies experienced during the pandemic from suspending clinical trials to seeing hospitals in panic mode. With new ways to leverage data, such as operational data in hospitals or real world evidence, pharma will significantly reduce time to market for critical drugs. The COVID-19 vaccine is just the beginning — we’ll see the bigger impact come from drug development as a whole with 10 year development cycles simply no longer being sufficient.
3 WhatsApp has gained deep market penetration in Europe, particularly in France, along with emerging regions such as Brazil. What started as a messaging app primarily for younger generations is now being used for entire families from teenagers to grandparents. This opens up new opportunities for emerging business models to leverage the platform to hack customer acquisition, as we saw in China with the rise of social commerce on WeChat. On the other hand, in the age of misinformation and deep fakes, this also paves the way for further complications during elections given the impossibility to moderate content on the platform.
Germany’s Budding Tech Ecosystem to Get Boost from COVID-Driven Acceleration of Digitalization.
The German Mittlestand, the mid-size companies that form the backbone of the economy in Germany, has historically lagged behind other regions in terms of digitization. However, with the massive COVID-driven acceleration of digitization initiatives we’ve seen unfold across the world, and cross-industries, this specific segment will see an outsized pace of digital adoption, as all previously offline activities — from facilitating internal meetings to taking out a loan — come online for the first time. This will provide a major boost for startups and tech companies serving the German B2B segment across various verticals, from financial services, to supply chain optimization. We’ve also seen recent announcements around the birth of a giant German Fund of Funds, a promising indicator for the future of venture capital and startups in the region.
Looking to the US: remote deal making & innovation beyond Silicon Valley from fintech and insurtech to automation in the workplace
1. VCs Embrace Another Year of Remote Investing.
2. Incumbent Banks to Leverage Distribution Advantage to Embrace the FinTech Surge.
3. Digital Services to Permeate Throughout the Healthcare Ecosystem.
1 Following last year’s transition to remote work and investing, venture capitalists will continue to conduct remote deals in 2021 at all stages even after the return to the office. One lasting impact of COVID-19 is that it has proven that the remote culture is feasible even in the venture deal making landscape. In the new year, the best companies will continue to receive multiple offers for funding as the specific location of the entrepreneur matters even less.
2 Similar to how trading commissions disappeared overnight, traditional banks will need to modernize to stay relevant with the rise of fintech. Incumbent banks will increasingly look to find ways to incorporate themselves into this new wave of finance by leveraging their brand and distribution to form partnerships. However, depending on the integration, the role of the traditional bank may change completely as new apps are dominating the mindshare of consumers.
3 While we’ve seen tech-enabled healthcare services reach areas such as mental health and fertility, new technology-first business models will soon take new light in 2021. From untouched areas such as menopause, weight loss, autism to other developmental disabilities, these new business models focused on either employer benefits or direct to consumer have proved their feasibility and will continue to broaden.
1. Innovation Anywhere: The Global Frontier Beyond Silicon Valley.
2. The Future of Fintech is Embedded, Customer Friendly and Inclusive.
3. The Future of US Healthcare is Transparent, Fair, Open and Consumer-Driven.
1 Silicon Valley, along with a handful of technology hubs, used to be the center of innovation — but now there’s a new landscape that is borderless with innovative startups and technologies coming from anywhere. The new frontier that will continue to unfold in 2021 lies far beyond just Silicon Valley, with new technology hubs gaining strength globally and in the US particularly in the Midwest.
2 Fintech will soon be engulfing the world and in 2021 we’ll specifically see the acceleration of embedded finance, an enabler that can now touch industries far and wide and incorporate financial products and services into any offering. In addition, fintechs are helping to enlarge the overall financial industry pie with more and more new services for the previously underserved and unbanked populations.
3 In the last year, the pandemic put a spotlight on the major gaps in healthcare in the US, highlighting a broken system that is one of the most expensive and least distributed in the world. While we’ve already seen many boutique healthcare companies emerge to address issues around personalization, quality and convenience, the next few years will be focused on giving the power back to consumers, specifically with the rise of insurtechs, in fixing the transparency, affordability and incentive issues that have plagued the private-based US healthcare system until now.
1. A Flood in Early to Late Stage Capital to Create a 2021 Barbell Effect.
2. COVID-19 Accelerates Automation in the Enterprise.
3. Low Code & No Code Adoption Soars to Compete in a New Digital Era
1 As more money gets poured into the earliest stages of funding (pre-seed & seed) and late stage funding rounds (Series C+), the investment landscape will experience a barbell effect in 2021. This can be attributed to a flight to quality, which is contributing to the increasing round sizes of later stage financing. At the seed level, we are seeing a plethora of new talent exiting large tech platforms to forge their own path.
2 In the wake of COVID-19, the sudden shift to remote work put stress on existing business processes in large corporations resulting in an acceleration of digital transformation efforts. Enterprises were able to test the flexibility & robustness of their existing back-end infrastructure during this time period. In 2021, we’ll see more CIOs look to re-engineer these inefficient back-office processes by adopting various automation tools focusing on four specific areas: process automation, process discovery, the automation and analysis of unstructured data, and vertical/domain specific automation platforms.
3 Recent acceleration of low code and no code adoption can be tied to three situational enablers of a transforming digital era: the broader adoption of the cloud and APIs, the proliferation of software and SaaS, and the increasing technical talent gap seen across many industries. In 2021, we will see success in solutions targeting functional or vertical approaches, such as in financial services with incumbent banks competing to stay relevant, as the solutions enable users to create flexible software applications with higher velocity and more customization.
All Eyes on Asia: China to Reach Next Phase of Digital Revolution as Southeast Asia leads emerging markets
MingPo Cai & Denis Barrier
China to Reach Next Phase of Digital Revolution in 2021 with the Combination of AI, 5G and IoT Transforming the Physical World:
China has quickly emerged as a powerful tech-center, particularly in areas such as e-commerce and AI, thanks to having the largest (and most digital-savvy) population in the world producing a treasure trove of data leveraged by an enormous pool of engineering talent. Add to this its leadership position in IoT as the “factory of the world”, the rise of 5G and immense government support — and we’ll see China become one of the first tech leaders to realize the next-phase of digital revolution with AI-driven software that will permeate across verticals and interact seamlessly with the physical world, everywhere. China is also go on its way to becoming the first country in the world where people will have a digital avatar, an AI powered double of themselves making the surrounding environment respond in a targeted way both digitally and in real life. While the government will maintain its access to data, we are also seeing the beginnings of a GDPR-like policy to protect personal data from potential wild, or unregulated, use in the private sector.
Tech Hubs to Watch in 2021 — Southeast Asia, Latin America, Africa:
We’ll see more global funds increase their investment activity and set up shop in Southeast Asia as the region produces more innovation out of companies raising big money. We’ll see the beginning of the technological leapfrog — similar to the Chinese tech playbook — as mobile penetration increases, new business models and solutions scale and large companies emerge that will surpass incumbents in developed regions. SEA continues to be the frontrunner in emerging markets, but closely following in its footsteps are Latin America and Africa — all favoring impact tech.
Parting thoughts from the Cathay team
As the world continues its journey to digitalization, we are incredibly optimistic for all the new possibilities and opportunities that will materialize from innovative technologies, solutions or business models across regions. At Cathay, we strongly believe that innovation and startups are a key component in the transition to a more sustainable and inclusive economy — but they can’t do it alone. Looking to 2021, we remain committed as ever to bringing together the wider ecosystem of investors, the Fortune 500, and entrepreneurs to back the startups positively impacting the world.