How venture capital is changing the world
The pandemic has boosted stock exchanges and markets around the world, with companies posting above-average profits. These developments are, in part, due to the influence of venture capital. But what's next?
Companies continue to experience a positive impact from the pandemic
Corporate profits and margins have been rising worldwide since the start of the coronavirus pandemic. In addition to increasing digitalization, this is because companies across almost all sectors have taken a number of small steps to improve their operational processes and products. These trends are also likely to shape the coming year.
One other, albeit underestimated, development is the growth of venture capital investments (VC investments) on the European capital markets. These niche investments have gained a foothold in many areas over recent years.
Venture capital is becoming increasingly important
Over the past decade, venture capital funds have averaged a respectable 17% annual performance, illustrating the risk premiums that venture capital offers and why the asset class is attracting increasing attention.
While VC investments still represent less than 2% of global pension fund investments, some of the companies they have supported have changed the world – for example Google, Apple, and Facebook. Over CHF 533 billion are expected to flow into venture capital investments this year, ten times the amount seen a decade ago.
Can venture capital turn today's startup into tomorrow's agent of change?
VC investors acted as founding patrons for seven of the current top ten companies worldwide. By developing innovative products, they went from startups to global agents of change. Today, they have a joint market valuation of around CHF 17 trillion.
VC-funded companies represent half a percent of all companies founded in the US each year. Venture capital and Silicon Valley are perhaps the most important secret of the US economy's success. Until around two years ago, more than half of global VC investments were made in Silicon Valley, followed by China.
Venture capital success stories can also be found in Europe
Venture capital is now also catching on in Europe. In addition to the high returns offered by VC, other contributing factors include locational qualities, the scarcity of investment alternatives, and the disruption caused by the pandemic. Furthermore, successful European VC funds have also emerged in recent years.
Venture capital investments will generate a valuable impetus for the European economy in the medium term. The Financial Times Group estimates that of the 170 unicorn cities worldwide, 65 are now located in Europe. This term describes cities in which startups are headquartered that have a valuation of over USD 1 billion.
According to this estimate, for the first time in five years there are now more unicorns in Europe – with 296 – than in China. What's more, the current European VC year has been particularly successful. According to startup data platform Dealroom, 72 unicorns have been created in Europe already in 2021, more than three times the number seen in China.
What do venture capital investments mean for investors?
Investors should be aware that a single VC investment is associated with both above-average returns and levels of risk. In many VC portfolios, one spectacular success offsets multiple failures. For this reason, collective investments are particularly preferable to direct investments for private investors, as well as for most pension funds.
Furthermore, the operational assistance provided by professional VC investors goes beyond the usual activities seen in an investment process. In short, for private and institutional investors, diversified VC investment instruments can offer excellent portfolio enhancement and diversification.