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What is driving record levels of fundraising by technology companies?

Technology and life sciences companies overwhelmingly dominated fundraising markets in 2021, beating all previous records for amounts raised.

Data from Crunchbase suggests that the previous USD100 billion quarterly record for technology fundraising was consistently superseded during 2021, with Q1 funding reaching USD135bn, Q2 rising to USD159bn, Q3 up at USD160bn and Q4 looking equally strong.

These figures reflect the hunger for cash among high-growth technology companies as they look to fund R&D programmes, acquire talent, assets and customers, invest in new technologies, and move into new markets.

The busy fundraising market demonstrates a continued trend over recent years and, as the pandemic has underlined the economic and social importance of these companies, they are finding a host of investors eager to buy into their growth story.

As a result, funding rounds are growing in size and becoming more frequent in order to satisfy these cash-hungry business models and take advantage of eye-catching valuations. Getir, the fast-expanding, Istanbul-based delivery company, staged three funding rounds in six months, for example, before reportedly raising further capital from an existing investor, while AI specialist Databricks raised USD2.6bn in two giant funding rounds. In some cases, fundraisings are happening with such regularity that companies do not even announce them to the market.

Unicorns – a more common sight

Given this level of fundraising, we are now seeing a profusion of unicorns – start-ups achieving a valuation in excess of USD1bn – with around 1,000 now in existence. Most are U.S. based, but not exclusively. Southeast Asia, side by side with India, for example, has seen a huge growth in these super-fast growth companies.

An increasingly diverse range of investors is now entering both the venture capital and growth markets to invest in technology, including PE, hedge and sovereign wealth and pension funds, and investment banks.

Tiger Global, a New York-based fund, has been particularly active, last year raising USD6.7bn for a new investment fund, twice as much as originally sought.

Some VC funds are adapting to this competition by raising bigger funds, writing bigger cheques and participating in later rounds. Sequoia, has announced that its European and U.S. investments will be channelled through a “singular, permanent structure” called the Sequoia Fund, which will not be closed-ended.

For growth companies, selecting backers is not only about the amount invested or the valuation achieved but the sort of relationship that comes with the investment. VC players, with their long experience of investing in technology, are well placed in this regard but are starting to see challenges from strategic and PE investors who boast a range of attributes to offer such companies.

Going public

Although the market for new Special Purpose Acquisition Companies (SPACs) has cooled in the U.S., SPACs are still actively looking for targets to buy, with Babylon Health, Lucid Motors and Cazoo among the companies that have chosen this exit route. Amsterdam remains the most active SPAC market in Europe.

Across many main markets, IPOs are strongly back on the agenda, not least in London, where around 100 have been staged in 2021. New York dominates, but other exchanges, including Amsterdam, Frankfurt and Mumbai, have also been busy.

And now London has modernised its approach to IPOs, in allowing dual-class share structures, where the founders can maintain majority control, in premium listings, as is the case in New York, Hong Kong and Singapore.

A question of timing

Judging the right time to go public remains a critical decision for growth companies. The path to an IPO may be blocked for a company yet to establish solid revenue streams and still in the process of developing a key technology, although some life science companies are exempt from this.

For many, seeking a public listing remains an obvious choice once the right level of maturity has been reached, although others may wish to remain private while they decide their own destiny or pursue M&A opportunities.

Klarna, the buy-now-pay-later Fintech, which has seen its valuation quadruple in a year through successive funding rounds and is now Europe’s most valuable start-up, is notably playing a long game in deciding whether or not to seek a listing.

Investor caution

Despite the exuberance in many fundraising markets, investors are showing greater caution in others, China in particular.

Investors, both international and domestic, who have had their fingers burnt in more challenging times, are assessing investments with greater care, although key technologies, such as blockchain or cloud computing, continue to attract high levels of investment.

A raft of regulatory changes in China, including tighter national security controls, new data protection laws and recently published draft rules on cybersecurity, are also giving investors reasons to pause to see where the regulatory regime settles. China/U.S. tensions continue to impinge, not least around Chinese companies seeking listings in the U.S.

While India remains a smaller fundraising market than China, it is experiencing faster growth. But there have been some glitches here, not least in the November listing of Paytm, the payments company, whose USD2.5bn IPO was the biggest ever in India. The listing got off the ground, but the shares fell 27% on opening, with commentators suggesting that domestic investors remain unconvinced by the company’s planned path to profitability in a highly competitive market.

While events such as this may worry some investors, it is safe to say that wider exuberance for technology investing around the world shows no signs of diminishing.

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