Even though 2021 was not an easy year economically, the performance was outstanding. Europe saw growth in VC investments, and it looks like we have learned to live with covid19. The outlook for 2022 is uncertain. We still have to wait and see how inflationary pressures will play out and whether economic growth will continue. It is difficult to predict the future. So let us recap 2021 and make some bets for 2022!
I love asking my colleagues, clients and friends to think about the future and how different the present might be. I think it's good that we challenge ourselves and make some forward-looking statements and review them in a year's time.
While many of the trends we saw in 2021 and the predictions for 2022 are global or at least European, I propose and explain them, focusing on CEE, Slovenia and Croatia - markets where we are directly active. In the inflation of articles with predictions for 2022, I hope this will come as a refreshment to your reading list.
For those who do not want to read my lengthy explanations, here are my predictions for 2022:
- VC growth in Europe will continue
- VC in Europe will remain fragmented (in 2022)
- Crypto is here to stay
- The return of the office space
- the number of tech IPOs will increase
What has happened and we thought that is worth mentioning
1. VC grew to a record high in Europe
2021 was a record high for Europe in virtually all VC KPIs. I recommend you read Atomico's State of European Tech Report for details. A record $100 billion of capital was invested, and 98 new unicorns were born. There are now more investors in Europe than ever before, and investors from the US are investing in Europe for the first time with their feet on the ground. However, Europe remains fragmented, with capital, talent and projects scattered across the continent. Instead of a one-takes-it-all effect, we see unicorns from different countries driving newer hubs.
I am most excited that the beasts from the East have woken up! We have seen strong growth in funding in Estonia, the Czech Republic, Croatia, Portugal, Bulgaria and Romania. It hurts me to see Slovenia not moving, but I have high hopes for 2022! In other words - I am extremely bullish for VC in Europe 2022! Fil Rouge Capital was the most active VC fund in Croatia!
2. Covid19 was our curse and blessing
Covid19 is a tragic story, and many have lost their immediate family and friends. Unfortunately, it seems that Europe has not yet found an effective strategy to deal with it. Vaccination rates are still too low, and freedoms are still restricted. Many companies operate with severe restrictions, travelling through Europe is complicated, and each member state has its own rules again. There is a Reopen Europe App to help you understand the restrictions when you travel.
People are unlikely to change unless they are forced to. And Covid19 has brought change and innovation to the further digitisation of life. Working from home or anywhere has become a standard and perfectly acceptable way of working. It has helped many to coordinate their work and family commitments. Hybrid forms of work are on the rise, and I am a big fan of them. If the proper organisation and culture are in place in a company, the hybrid workplace can significantly impact employee productivity and satisfaction. Nlaw was already a company where you could work from anywhere at any time, and this culture has evolved even more in the last two years. The teams in Ljubljana and Zagreb work together daily, and while some employees prefer to work from home, others enjoy coming to our (new and cool) offices in Ljubljana and Zagreb.
3. M&A activity was record-breaking
Merger and acquisition activity has reached an all-time high globally, and Europe was no exception. There are some good reports out there, like Q3 2021 report by Pitchbook, and trends remained unchanged in Q4 2021. Europe continues to be dominated by private equity transactions, and the number of public transactions (IPO) remains at a record low.
In terms of trends, the locked box mechanism retained its share. We have seen a massive increase in the use of warranty and liability insurance in M&A deals, which I approve of. We have had nothing but good experiences using insurance secured by Nlaw's insurance partners.
There were similar trends in Slovenia and Croatia. The Slovenian market was shaped by the acquisitions and mergers of Abanka, NKBM and SKB banka. In the VC world, we celebrated the sale of Celtra, one of the best-known and most successful start-ups by Slovenian founders. Finance has a good overview of the deals of 2021. I could not find a good overview of Croatian M&A activity, but one stood out - the joint venture between Rimac and Bugatti. While I am not surprised by Rimac's success, it is a true fairy tale that a brand like Bugatti finds its home in Croatia as part of the Rimac Group. Read more about it here and here.
4. Brexit hits (Great Britain and EU) hard
The UK has felt some painful effects of Brexit. They ran out of workers, including lorry drivers, further exacerbated supply chain problems. Trucks with drivers were stuck at customs. Many Britons also felt it was unfair that they could no longer move and work freely in EU member states as if they had never really understood what the EU was all about. Unsurprisingly, there are many good articles from FT on this subject, and here is one of the latest.
While London continues to enjoy the status of venture capital hub for investors and founders, European entrepreneurs face a new challenge. Before the Brexit, London was a well-established hub for start-ups, fundraising and company building and provided a good alternative to the sometimes cumbersome continental legal systems. With Brexit, founders began to look for solutions within and outside the EU. While many founders chose Delaware instead of London in the hope that it would give them easier access to capital, the race for the VC centre of the EU is not yet decided. Berlin and Paris have grown (and so have many other hubs and mini-hubs), but there is no clear EU winner when it comes to VC (except Luxembourg as the undisputed hub for setting up alternative investment funds in the EU.
5. Nlaw has delivered its second web application – NDA Generator
Yes, our second app! The first one focused on Slovenia and was our most visited app so far! It helped users create a declaration they needed to travel around the country during the Covid19 closures. The second app allows users to create confidentiality agreements. We have not marketed it, but we have received positive feedback from those who have used it. Check out the app here.
Although we were one of the few law firms to develop apps, the legal tech industry was quite active. As a result, some interesting insights into the legal tech industry can be found here.
But we will not stop here. New online legal services from Nlaw are coming soon in 2022! Stay tuned!
What we think (or hope) will happen
1. VC Growth in Europe will continue
I believe that the trend will continue and that 2022 will surpass 2021 in terms of the amount of VC capital invested. This is not just a guess; numerous new funds have raised and will deploy additional capital for 2022. I like to follow the Euro VC bot, which tweets about every freshly launched EU fund.
Fundamentals are also strong. Of course, interest in the US remains strong, but European founders have discovered that you do not have to build a business in the US to access US markets and capital. There is good access to seed capital in Europe, and pre-seed or pizza money is easier to raise here than in the US. Also, the cost of doing business is much lower in Europe, so more can be done for every euro of start-up capital than in the US.
The latest European venture trends are in products that are not software at their core. There is a strong push for agri- and food tech, green technologies, longevity, industrial products, etc. There is a vast supply of talent in the EU, especially engineers in these areas. I think non-software start-ups will be the stars of 2022!
Entrepreneurship is popular, and successful exits encourage many young people to start their businesses. Exits like UiPath's in Romania have huge spillover effects in the CEE region, as the founders and employees (mafias) make a lot of money. After indulging in a few toys, they start investing their capital in new, mostly local businesses.
We expect more funds to be established in Slovenia and Croatia as well. A tender for a technology transfer fund supported by the EIF is currently underway in these countries, and a growth fund (also supported by the EIF) is expected. In addition, we see that foreign investors, including those from the US, are scouting the CEE region and investing in local start-ups.
To sum up: I am bullish.
2. VC in Europe will remain fragmented (in 2022)
Until recently, the recipe in the US was straightforward: move to San Francisco and incorporate in Delaware. In Europe, things were also pretty straightforward. You move to, and you incorporate in London. Now things are complicated. The Brexit has made many European founders rethink where they want to start a company and where they want to settle, and in the US, many have fled to Miami, mainly because of the lower costs and taxes.
There is no clear winner from Brexit in terms of venture capital centres, probably just a lot of losers. London is still a strong VC hub, both in terms of investor and founder presence, but its dominance has diminished. Berlin and Paris have seen strong growth, and it seems that Amsterdam, Madrid and the Nordic countries are doing better every year. Eastern Europe has a strong talent pool with energetic founders who have also achieved their first exits. But the European venture capital market is still fragmented, and I do not know of any European country that has decisively and aggressively started to adapt its regulation and infrastructure to foster venture capital growth.
I believe the market will remain fragmented, and we will see more VC growth in Berlin and Paris and the emergence of mini-hubs across the EU. So there will be no clear winner. But is that necessary? Yes. In the next five years, the space will consolidate, and one of the cities will become the hub of EU VC and a solid alternative to Delaware (+Valley) and London. Consolidation is inevitable for two reasons, i) regulatory suitability for incorporation and rapid growth and ii) notwithstanding all the telecommuting trends, talent wants to be based in a place where they can meet other founders, investors and smart people in general.
3. Crypto is here to stay
Today is 6 January 2022, and cryptocurrencies are down more than 10% on average in the last 24 hours (for no apparent reason). But I remain bullish on crypto, blockchain, decentralised applications, web3 or whatever you call it for numerous reasons (except for Metaverse, which I have no idea what it is and believe will soon be forgotten).
Bitcoin has been around for 13 years and has been declared a "dead asset" several times. Regardless of its weaknesses, many understand it to be a store of value. As long as a (part of) society sees it as such, it will have some value. If it were to die at that stage, it would already be dead.
The application segment of the crypto space, i.e. all programmable blockchains, is in a kind of chaos. We have seen many exciting ideas, from crypto kittens to ape NFTs to decentralised finance and so on. While we can legitimately question whether these are entrepreneurs looking for solutions to real-world problems or developers figuring out what to use their technology for, it seems that blockchain can be an excellent solution to many (but not all) challenges.
While I have no idea what will happen to the monetary (i.e. fiat) value of many crypto assets, I think we will see exciting solutions for applications that are also, and not only, based on blockchain technologies.
I also think organisations need new approaches to their governance, which is a question of management and ethics, not a technical question. Organisations are global these days, and stakeholders do not want to be as tightly bound to them as expected to be in the old corporate structures. Blockchain is not necessary to implement and operate new governance arrangements, but many insights and solutions from DAOs could be handy. I believe we will see growth in DAO and realise that the old limited liability company/partnership is not the only way to run an organisation. Look at Aragon, which has a technology stack and pays a lot of attention to content and the different concepts of governance in organisations.
4. The return of the office space
Working from home is great, but hybrid workspaces are even better. The relocation of work has brought many benefits to businesses and individuals. But working from home is only perceived as a benefit when it is an option. The office brings people together and allows them to build relationships, interact face-to-face, brainstorm and have pointless water fountain conversations that sometimes produce the best ideas and solutions.
Covid19 got everyone working from home, and in the post-Covid19 world, a hybrid office will prevail. This means that employees will come into the office, but not necessarily all the time, and they will choose their work location daily. Employees will find this a significant improvement in the quality of their working lives and will find it easier to manage their work and families. As a result, productivity will be increased, not decreased.
So office space will change. It will be better suited to allow staff to come in and out all the time and hold more meetings. In addition, the organisation and technology will be such that a process can run when the employee is physically present or not, without the need for adjustment.
5. The number of tech IPOs will rise
There used to be two most common forms of exits in Europe: a) private exit to a PE or strategic investor or b) IPO in the US. This is still predominantly the case, but trends may be changing.
We have seen a record year for tech IPOs in Europe. The five-year average for Europe is 4.8 tech IPOs per month, while the US surprisingly averages 3.3 tech IPOs per month. The year 2021 was very successful for both, with Europe recording a record 122 tech IPOs and the US 90. More than 1 in 3 companies founded after 2015 prefer the US to Europe for a listing, mainly because of easier access to capital for tech companies. Most European companies that went public in the US were from the UK. Check out the awesome State of European Tech 2021 Report for more insights.
Globally, the market capitalisation of listed technology companies was highest in the US, followed by China, Taiwan and the Netherlands, which ranked fourth. This means, of course, that the Netherlands is home to the largest European listed tech companies. I bet many would have thought this would be London. Prosus, ASML and Adyen are Dutch listed tech stars. Germany follows, led by SAP, Infineon, Zalando and Delivery Hero.
I think the trend will continue. If we look at the fundamentals, we have more start-ups and VC early, and growth financing than ever before, and capital is still flowing into the public equity markets. The profitability of tech companies will also attract new investors to the public markets.
I am very excited about IPO growth in Europe. This has been a missing puzzle in the European VC ecosystem. Exits are important and where they happen is not irrelevant. We now have the full venture stack - from seed and pizza money to growth and IPOs.
Let's build on that!