The last year has been extraordinary. A sustained bull market across all asset classes, including venture capital. Rather than the mini-boom in later stage funding predicted 12 months ago, it has been a maxi-boom at almost all stages of raising investment.
Going into 2022, the market continues breaking records. Here are two trends to watch:
Inflation / Interest rates
Bull runs always seem unstoppable, until they are not. Venture capital has been a significant beneficiary of ultra-loose monetary policy boosting the supply of available capital. Inflation appears to be gathering pace which, if met by higher interest rates, could mark the end of more than a decade of incredibly cheap cash. The impact on entrepreneurs raising investment is unlikely to be felt immediately since funds have considerable dry powder. However, keep an eye on the time taken to close new funds and their ultimate size to get a health check on the future direction of the industry.
The Squeezed Middle
Typically a reference to middle-income families struggling to get by, this applies equally to the middle of the capital structure where Series A funds operate. With more funds than ever chasing after companies that have early revenues and strong signs of product-market fit, the upwards pricing pressure this year looks set to continue. This will be painful for investors, but continue to be a great market for entrepreneurs.
When it comes to sectors that look set for a strong 2022, here are the top six areas that investors will be keenly watching as the impact of the pandemic continues to be felt.
Future of Work
Remote and then hybrid work enforced by the pandemic is just the start of the fundamental shifts that are taking place in this sector. The rise of globally distributed teams and the technology required to underpin them will be a key driver of growth in this space next year. So too will be the move away from traditional full-time employment to the freelancer model, enabling people to have more control over their work lives. The freelancer market looks set to grow with a double-digit CAGR over at least the next five years, giving rise to huge opportunities to build the optimized infrastructure for the freelancer economy and ancillary services.
EdTech has been a market that many entrepreneurs and investors have struggled with over the years, despite a handful of big wins. The challenge has always been answering the question: who pays? Most schools and educational institutions do not have the financial resources to pay for lots of tech solutions. However, against the backdrop of the fiercest battle for talent in decades, education is having a second coming. Whether it’s solutions for upskilling and retaining existing employees or continuing education for freelancers, entrepreneurs are finding ways to make education pay again.
The COP26 conference in Glasgow showed us that politicians are kind of willing, but not able. Step in the world’s climate tech entrepreneurs to build companies that can make real change and help us meet the world’s ambitious ‘net zero’ targets. Couple this with the investment community looking more closely at ESG policies and you have the ideal mix for more investment dollars flowing to ClimateTech companies next year. The launch of a dedicated ranking of investors in the sustainable energy transition – the Climate 50 – this year is more evidence of the gathering momentum.
The supportive trends precipitated by the pandemic for health tech entrepreneurs look set to continue into 2022 as national health services continue their focus on pandemic prevention and treatment. Similar to the world of work, the way health services are provided has been forever impacted by the pandemic. Startups that focus on areas such as remote patient management for chronic diseases or are working to remove the frictions for research and drug discovery are particularly well-positioned to benefit from more funding and less inertia from their potential buyers.
The use of technology to reduce the reliance on humans or to replace them entirely continues to benefit from dual tailwinds. First, we are at a point where technology can reliably replicate a meaningful range of human activities. We are still decades away from AGI (Artificial General Intelligence), but business and industrial processes are now capable of being reliably performed by machines. Second, the labor shortages experienced this year as the global economy rebounded from the pandemic look set to persist. Where once there were arguments that automation would result in job losses, companies now need technology solutions simply to keep their businesses running.
The post-pandemic recovery has shown us what a mess the world’s supply chains are in. This opens up enormous potential for entrepreneurs, who can leverage cutting-edge technology to solve problems that bigger, slower-moving corporates struggle to. Whether it’s the implementation of new transportation technologies or the actionable insights generated from real-time big data analysis, there will be significant budgets available for startups who can get the world’s goods moving again.