At the recent Lazard T500 conference, the Venture and Growth Banking team brought together some of the most exciting private companies in Europe with leaders in growth equity and venture investing. This conference was created to feature a selection of promising investment opportunities in Europe, instigate hundreds of one-on-one meetings between investors and management teams, and facilitate over 100 small group teach-in sessions. We also hosted 25 panels open to all attendees with leading industry experts who debated key thematic trends such as energy transition, Web3 and Gen Z. In this report, we aim to capture the intellectual capital, industry developments and central themes shared throughout the event. The related companies who presented at the conference are referenced within each section.
The European venture and growth ecosystem continues to increase in size. In our view, quality is improving too. According to Pitchbook, in 2021 US$120bn of capital was deployed into venture capital, double the amount invested in 2020, and almost three times the level seen pre pandemic. Despite the challenging macroeconomic outlook, the 1Q22 run rate was ahead of 2021, reaching US$35bn.
However, CPI inflation has reached 7.4% in Europe and 8.3% in the US causing the Federal Reserve to enter both a hiking cycle and a period of balance-sheet reduction, to control aggregate demand. This has had a negative impact on the valuations of long-duration assets.
Acknowledging these risks, we believe that the long-term tailwinds for venture and growth investing are favorable. There are underlying structural drivers in the economy driven by digitization and scientific innovation. Much of the past decade has been the digitization of everything; the next decade is likely to be the optimization of everything; leveraging technology to make the supply chain more efficient and fairer.
The key discussion areas cover our six industry verticals (consumer, fintech, healthcare, infratech, SaaS, and deep tech), with the report broken down into ten key themes:
- Startups transforming Europe
- Tech accelerating energy transition
- Impact capital flowing into infratech
- Sustainability a key driver of consumer demand
- Gen Z moves into the metaverse
- AI transforming healthcare
- Finance replatforming and decentralising
- SaaS becoming narrower and deeper
- AI finally coming of age
- Inclusion is a driver of growth
Videos of all of the T500 panel sessions can be accessed here or by using the links at the foot of each section.
This document has been prepared by Lazard & Co., Limited ("Lazard") solely for information purposes and is based on publicly available information which has not been independently verified by Lazard. The information contained herein is preliminary and should not be relied upon for any purpose. No liability whatsoever is accepted, and neither Lazard nor any member of the Lazard Group (being Lazard Ltd and its direct and indirect subsidiary and associated undertakings) nor any of their respective directors, partners, officers, employees, representatives or other agents is, or will be, making any warranty, representation or undertaking (expressed or implied) concerning the accuracy or truthfulness of any of the information, ideas, forecasts, projections or of any of the views or opinions contained in this document or any other written or oral statement provided in connection herewith or for any errors, omissions or misstatements contained herein or for any reliance that any party may seek to place upon any such information. Nothing contained in this document constitutes, or should be relied upon as, (i) the giving of financial, investment or other advice or recommendations by, or the issuance of research by, Lazard, or (ii) a promise or representation as to any matter whether as to the past or the future. Lazard undertakes no obligation to provide the recipient with access to any additional information or to update or correct any information contained herein. Interested parties should conduct their own investigation and analysis of the companies and information referenced herein. You undertake to keep this document confidential and to not distribute it to any third party, or excerpt from or reproduce this document (in whole or in part), without the prior written consent of Lazard. Lazard, which is a regulated financial adviser, only acts for those entities whom it has identified as its client in a signed engagement letter and no-one else and will not be responsible to anyone other than such client for providing the protections afforded to clients of Lazard nor for providing advice. Recipients are recommended to seek their own financial and other advice and should entirely rely solely on their own judgment, review and analysis of this document. Lazard or another member of the Lazard Group may have acted in the past, or act currently or in the future as adviser to some of the companies referenced herein and may receive fees in connection with any such advisory engagements. By accepting this document, recipients agree to be bound by the terms and conditions set out above.
Section 1: Startups Transforming Europe
There are four main factors that appear to support VC investment in Europe in 2022.
VC investments have remained strong to-date…
First, progressively more European venture and growth capital has been deployed over recent years, with over €100bn (US $120bn) invested in 2021. The 2022 run rate (compared with those of 2021 and 2020) has remained robust, with over €35bn ($38bn) raised so far according to Pitchbook.
Europe raised 18% of global VC fundraising in 2021, up from only 11% in 2018. Notably in 1Q22, Europe’s contribution to the global amount exceeded 20% for the first time since 2011. The US still dominates, however, with over 50% of the total capital raised.
Using Lazard’s own data, European VC investments were up around 40% in the first quarter of 2022. This was buoyed by over 100% year-on-year growth in January and February, with March down 40%, but April notably rebounding to 15% growth.
…despite the debasement in public market valuations
Second, public market valuations are now more in-line with historical levels. This is most notable in Europe and Asia, and may provide an attractive entry point for long-term investors.
In the public markets, earnings growth has also been resilient despite the recent sell-off. On a forward price-earnings basis, the US now trades at around a 50% premium to Europe – the highest in 20 years.
Based on the Nasdaq 100 index, a good indicator for growth, revenue multiples have come down by around 25% since January.
The quantum and penetration of European unicorns continues to grow…
Third, the volume of unicorns has continued to rise. In 2021, there were over 90 unicorns in Europe, with the contribution to the global total approaching 30% in 2021. This trend reflects companies staying private for longer and growth in average deal size.
On the basis that companies are staying private for longer, public investment firms, including Tiger Global, are investing in less-liquid asset classes such as venture capital, in pursuit of alpha.
…as European investor volumes rise
Furthermore, European investor volumes grew to almost 3,000 in 2021, with over 250 investors participating in five or more deals.
The strength of European VC performance in recent years has also attracted overseas investors, particularly from the US. According to Atomico, 28% of European venture company funding rounds included US investor participation in 2021, up from 19% in 2019.
The two main risk factors are inflation and geopolitics…
However, we believe that the macroeconomic backdrop has become less supportive of long-duration assets, and the 2022 outlook appears increasingly challenging. There are two main risk factors.
First, rising inflation has pushed central banks into action. The Fed has entered a rate-hiking cycle and a period of balance-sheet reduction, with the US Treasuries forward curve pricing a further 200 basis points of hikes in 2022, which would take the federal-funds rate to 3%.
Inflation has reached levels not seen for the last 50 years, with the April US CPI print of 8.3% only marginally ahead of the eurozone at 7.4%.
While nominal yields continue to lag behind the CPI, US Treasury 10-year breakevens, a measure of inflation expectations in 10 years’ time, now exceeds 2.5%, among the highest levels since before 2000.
Additionally, nominal 10-year yields have reached 2.8% and have risen by around 100bps since the start of 2022, meaning that real yields have turned positive. This is likely to have an impact, as negative real rates are accommodating to long-duration asset valuations, such as technology in the public markets, or VC in the private markets.
The second factor is geopolitical risk, which potentially has a couple of general effects on the investing landscape. The first of these relates to risks linked to the inflationary backdrop. The crisis in Ukraine is causing global commodity prices to increase, creating a stagflationary event, where equities have fallen and government-bond yields have risen. This is unusual for a period of conflict when investors typically seek safe-haven assets.
The second effect is that of public market volatility. The VIX index, which is a measure of 30-day forward index volatility, has returned to elevated levels and represents a measure of uncertainty for investors. This uncertainty could potentially extend to private markets.
…but the T500 Panelists look through the macro challenges
However, even with these risk factors in mind, T500 panelists expressed the belief that the economic backdrop may not be as challenging as feared, citing robust deal pipelines, plentiful dry powder, and a better track record of scaling private businesses in Europe.
Furthermore, new business-formation data (based on the US Census) has seen sustained growth in the US above pre-Covid levels. Similar trends have been observed in Europe, which could mean that the supply of opportunities for venture and growth investment remains strong.
Section 2: Tech Accelerating Energy Transition
The energy transition is critical and urgent. The measures implemented over the next 100 months to decarbonize, will be key in meeting the 2030 UN sustainable development goals. Crucially, over the last 15 years, remarkable progress has been made, from a technological standpoint, and, on our analysis, the cost of producing renewable energy has come down significantly compared to the cost of certain fossil fuels, for example coal, which has remained broadly flat.
The Energy Transition faces demand and return challenges…
According to panelists at the event, the energy transition faces three main challenges:
- The first is achieving acceptable hurdle rates, with difficulties faced in both repurposing the energy complex into a dynamic grid system and ensuring flexibility in balancing demand with storage capabilities.
- There are currently no global standards to measure stakeholders’ carbon footprints. This means investors and companies alike must navigate the fragmented nature of ESG evaluation frameworks, creating challenges around the appraisal of progress and investment.
- There is a large delta between the demand (low) and the supply (high) of capital to power the energy transition, suggesting that attractive investment opportunities have been relatively scarce to date.
…but there is a structural supply of available capital…
Following our discussions at the T500, we believe that capital supply, increased regulation, and improved transparency on ESG may increase the demand for private capital in the energy transition. The supply of capital is likely to support the continued growth in private renewables investment. In 2021, invested capital in renewables increased by almost 100%, compared to 2020, and a funding surplus continues to exist. There is an estimated US$130tn of total assets to be pledged to net zero by 2050.
Of the top 10 VC deals over the last 12 months, Swedish EV-battery developer Northvolt led, by raising US$2.75bn in its latest Series E round.
In the long term, we anticipate that the gap between capital available and investable opportunities may narrow as a combination of venture and growth capital and infrastructure funding is deployed to finance the energy transition.
Growth infrastructure (10-20% IRR), for example, reflects investments in proven technology, where demand is growing, and the market opportunity is large, but the growth and terminal margin structure remain difficult to predict. .
…with regulatory tailwinds supportive
It is likely that policymakers will create incentives through regulation, to facilitate the energy transition. This could potentially have a profound impact on the time value of carbon, meaning that lowering your carbon footprint now could be incrementally cheaper than in the future. This could lower climate risk premia and the cost of equity capital.
The chart below shows high-carbon-intensive industries typically have a higher cost of equity.
Greater transparency may assist and underpin the energy transition as industries shift to open intelligence. Increased transparency will assist asset owners to make more informed business decisions within the context of certain quantifiable risk parameters.
T100 Focus – Electric Vehicles, E-Mobility, Climate Intelligence
At the conference, we discussed three broad verticals within the context of the energy transition: electric vehicles (EVs); e-mobility; and climate intelligence.
While there is undoubtedly a strong market trend towards EVs, some concerns exist around supply-chain resilience, production cost, and ‘last-mile’ transport. Some panelists expected EV penetration to reach 50% by 2028 in developed markets, up from around 10% in 2021. This increase would provide increased opportunities for investors.
Two components of the EV value chain were also discussed, including battery technology, (with reference to firms like Britishvolt, which develops low-carbon batteries to enable the electrification of EV fleets) and development of the EV infrastructure (with reference to companies such as Qwello, a developer of EV charging points). Additionally, Onto, an electric-car subscription service, may drive accessibility and adoption of EVs through a subscription rental model.
Looking at e-mobility, low utilization and increasing costs of ownership has resulted in car ownership (particularly non-EV vehicles) becoming increasingly less attractive in urban areas. E-bikes and shared mobility vehicles, including scooters, bikes, and cars are two potential resolutions, as urban populations shift to a more circular economy.
Bicycle sales saw rapid growth through Covid, with electric-bike market penetration growing. This has led to high growth rates in e-bike hardware, driven by companies like Cowboy. Dott, which operates a shared e-scooter and bike model and Virtuo, which provides on-demand, mobile-only cars, are providing greener, accessible, lower-cost alternatives to urban transport.
When it comes to climate intelligence, many public companies command a high climate-risk premium, especially those within heavy carbon industries. On a more granular level, pricing climate risk at the asset level remains a challenge, given the diverse range of risk profiles of assets across geographies and industry groups.
Companies which can quantify climate risk at the asset level and integrate quantifiable risks into decision-making (for themselves as well as investors) are seeking to future-proof their business models. Firms such as Cervest are developing on-demand climate intelligence to strengthen companies’ asset resilience.
Section 3: Impact Capital Flowing into Infratech
Another conference discussion centered on the challenges for the planet, but from a slightly different angle − the meteoric growth in space investment.
The US has dominated private space investment, contributing over 75% of total funding in the last 10 years. Europe and Asia have seen broadly equivalent levels of invested capital. In 2021 we saw record investment levels of around US$8bn, and panelists anticipated that space will be a trillion-dollar opportunity within the next decade.
Space investments are set to take off
The accessibility and viability of business models in space may have changed for two reasons. Increased satellite adoption is being driven by Elon Musk’s impact on the cost curve. For example, the price of sending 1kg into space has decreased from US$80k in the 1980s to US$1k today. Additionally, satellites are now smaller and cheaper, creating a new digital infrastructure with use cases ranging from climate change to telecommunications through to defense.
Also, as the number of satellites grows, this generates more service opportunities, with more data centers needed to support cloud computing and energy production (solar farms). This creates potential for additional companies with long-duration revenue streams to form and scale.
T100 Focus on Spacetech
At the T500, we hosted two companies, Isotropic Systems and Isar Aerospace, which are both seeking to leverage the growing market opportunity in spacetech.
Isotropic Systems aims to commercialize its multi-link antenna which simultaneously connects multiple satellites in multiple orbits, targeting the growing demand for broadband data globally.
Further up the value chain, Isar Aerospace deploys small and medium-sized satellites and satellite constellations into different orbits. Use cases include high-speed internet, autonomous driving, data storage, and smart farming.
Supply-chain challenges have caused cost-led inflation…
Supply-chain challenges have been well-documented recently as global demand recovers from the supply destruction caused by the pandemic.
Pre-Covid supply chains were mostly built on cost rather than resilience. This meant that most companies operated on low inventory days, ‘just-in-time’ delivery, and short working-capital cycles. This has created significant challenges over the last 18 to 24 months.
Combined with strong levels of demand, driven by monetary and fiscal stimulus and the release of above-trend savings rates, supply chains struggled to adapt. This exposed the vulnerabilities in global supply chains. As a result, freight rates exceeded US$10k per container in 2021, around eight times above 2019 levels.
…driving shifts in approach to supply-chain management
Panelists highlighted four main areas of supply-chain improvement, as follows:
- Improvement in demand and supply forecasting as well as integrating real-time intelligence into logistics management.
- Decentralizing supply chains and applying localization and diversification to prioritize resilience and convenience over cost.
- Implementation of greater sustainability practices.
- From an organizational perspective, supply chains previously reported to the chief financial officer or below, but now, reducing freight costs, improving working-capital management, and meeting customer demand have become key strategic priorities.
Our panelists suggested structurally higher freight rates might remain, but suggested consumers may be able to adjust to the impact of inflation and rising interest rates.
T100 Focus on Supply Chains
Both Paack and ZeroNorth aim to assist companies to navigate these logistical pressures. Paack offers to facilitate end-to-end fulfilment, using greater sustainability and efficiencies through to ’the last mile’. ZeroNorth aims to help shipping companies optimize and decarbonize their business models.
Capital deployed in the last mile of delivery slows
It would be difficult to ignore food and grocery delivery, given the high levels of invested private capital in recent years. Last year was the second strongest over the past decade for global fundraising in the sector, with year-on-year growth of around 50%. The 1Q22 run rate, however, was more subdued, likely impacted by the sector’s weaker public market performance.
We believe that there have been three stages in the growth of the food-delivery industry. First, the food industry transitioned to digital. As traditional at-home and out-of-home food spend shifted to online channels, traditional grocers and food-delivery companies scaled their online capabilities to meet growing demand. Then, rapid grocery delivery began ‘windowing’ delivery times. This meant goods could reach consumers within a specified time slot of one hour or less. Most recently, rapid-delivery players have looked to capture a greater portion of the food-delivery profit pool by vertically integrating and picking/packing private-label products.
T100 Focus on Food Delivery
At the T500, we hosted two companies which serve the online grocery market − Everli and Jiffy.
Everli employs an Instacart-like model, operating as a marketplace for online groceries. The company has three revenue streams: delivery fees; fees from the grocer; and advertising from FMCG companies. Jiffy focuses on rapid grocery delivery, using a dark-store model, with the aim of preserving gross margin and delivering to customers within 15 minutes.
Section 4: Sustainability a Key Driver of Consumer Demand
The consumer industry has seen structural shifts in the last 18 months. Growth in consumer spending has been strong and consumer preferences appear to have evolved.
The US saw double-digit growth in retail sales in 2021 – albeit supported by fiscal stimulus. Europe also experienced above-trend growth of around 6%.
Negative Real Incomes Impact Consumer Wallets
However, the consumer is now heading into an inflationary environment. Savings rates have fallen, higher inflation relative to wage growth has seen real incomes squeezed, and the marginal dollar may need to be increasingly allocated to rising energy and food prices.
Consumers are likely to start trading down, both within and between categories, and possibly reallocating some of their monthly budget away from ‘stay-at-home’ beneficiaries. Netflix’s recent 1Q22 subscriber ‘miss’ and weak 2Q guide underpins this view.
We believe that there are two types of companies which may be likely to benefit in this environment. These include businesses with structural tailwinds strong enough to sustain their growth trajectories, such as rental-based business models, or companies operating in the ‘circular economy’; and companies which may benefit from the spend reallocation, such as those in travel and live events, or more broadly those in the ‘experience economy.’ Companies like Exoticca and Holidu, who presented at the event, fall into the latter category.
ESG and social media are two of the main considerations for consumer brands
Four brand-value trends became apparent during the conference. First, the integration of ESG within a brand is now an expectation. Sustainability is central to product market fit, but its role as a differentiator has become less clear. ESG is now more equally considered by many, alongside price and quality. Second, the role of social media in capturing share of voice and share of ‘wallet’ has accelerated. In part, this is due to the growth in retail online penetration but also as brands and consumers are now engaging directly, via social media.
To give an example, the recent growth of Chinese fast-fashion brand Shein highlights the impact of using TikTok, other social-media platforms, and data analytics. Shein uses AI to front-run consumer trends, reduce lead times and charge at a lower price point. The firm has captured more than 25% of the US fast-fashion market to date.
Third, the construction of a brand ecosystem is also key. This means creating a connected experience to help drive user engagement before monetizing customer traffic, capturing a share of wallet and growing customer lifetime value. For example, firms often use hardware sales as a funnel to more durable subscription revenues.
Fourth, IDFA (identifier for advertisers) changes have altered the marketing landscape for SMEs. Marketing budgets have begun deconsolidating away from Facebook and moving to TikTok and other apps. Marketing spend has also shifted upper funnel, away from performance, and toward brand marketing.
Looking ahead, T500 panelists suggested the following points are central to growing brand reach:
a) Brands with a unique value proposition, best-in-class customer service and leading ESG credentials will be most disruptive;
b) Companies with stronger value-driven brands will outperform incumbents and create longer-term relationships with the customer; and
c) As previously highlighted, the rise in interest rates and higher energy costs will erode real incomes, supporting the growth of rental business models over asset ownership.
T100 Focus on Consumer
The consumer companies which presented at the T500 included Colvin which aims to disintermediate the flower-market supply chain; Oddbox which reduces food waste and aims to provide a customer-friendly, fruit and vegetable delivery service; and Everli which seeks to take the cost-plus Instacart model to mainland Europe.
A number of other firms presented which were also looking to capture the rental market. For example, Onto, the electronic-car subscription platform, applies ESG to the heart of its offering. Virtuo and Grover may also be positioning to take a share in the car and electronics rental markets, respectively.
Section 5: Gen Z moves into the Metaverse
It is impossible nowadays to discuss the global consumer without mentioning the metaverse. The T500 hosted Ben Evans, a former A16Z partner, to provide a brief on the latest developments.
Web1 to Web2 to Web3
We can split the evolution of the internet into its three stages:
Web 1.0 – when individuals and companies published their own content.
Web 2.0 − where user-generated content was held via centralized networks, with the value accruing to large-cap, US tech companies such as Facebook or Alphabet.
Web 3.0 − where software is built upon a blockchain, with the economics shared among users. Importantly, the rules and algorithms underpinning Web3 technologies can be viewed and accessed via open source, within a trustless and permissionless network. Early use cases include decentralized finance and non-fungible tokens (NFTs).
What is the metaverse?
In simple terms, the metaverse is a virtual platform which combines experience, community and commerce, renewing the concepts of identity and ownership and acting as a crossover between real and virtual worlds. Use cases include gaming, music, social and finance. However, we have identified some issues and complications in this area.
Augmented and Virtual Reality as an enabler
Augmented and virtual reality (AR/VR) is the likely enabler of experiences in the metaverse. In 2021, almost 250 million iPhones were sold, but only 10 million VR headsets. Increased demand for AR/VR devices is likely to be a function of user engagement in the metaverse.
Roblox provides a framework for metaverse economics
To date, a high proportion of virtual experiences have been developed on gaming platforms, an early iteration of the metaverse.
Roblox was an early example of the tokenization model which may be replicated in future metaverse economics. Roblox economics works as follows:
- Creators and developers build and publish 3D experiences and items.
- Creators are incentivized and rewarded for bringing users to the platform, largely based on the quality of their content.
- Users purchase created items and experiences with Robux (the virtual currency used within Roblox). Robux can then be converted into fiat currencies. Roblox charges a spread on conversion.
In 2021, over 500 creators earned more than $100k, 74 earned more than $1m, and seven earned more than $10m. In short, the economics accrued disproportionately to the most valuable creators.
Investing in the metaverse has grown substantially
So, how do we invest in the metaverse? History suggests adoption rates can be slow for new technologies. For example, in 1995 it wasn’t clear how the internet would work.
While adoption may have been tempered, investment in the metaverse exploded in 2021, with around US$1.3bn invested globally. This year may eclipse 2021, with US$850m already deployed in the first quarter.
Of the capital raised within the metaverse over the last 12 months, there have been two transactions greater than $100m, with the US and China dominating the top 10 deals.
NFT trading volumes have followed a similar trajectory, with strong growth since mid-2021.
Trends To Watch: Gen Z and the Crossover Economy
Panelists expressed the view that two trends are key to maximizing opportunity in the metaverse, including driving adoption rates and engagement with Gen Z. This is important, as the penetration of Gen Z within the adult population is set to scale from around 10% pre Covid to 30% by 2030. Panelists were bullish on Gen Z adoption, given that they have grown up on Roblox/Fortnite, and trading crypto and NFTs.
Also, brands which can transition between digital and physical and manage a seamless customer experience are best placed to take market share. This is known as the crossover economy. Certain brands are already assessing the risks and challenges of this model, such as filing patents for virtual goods and addressing privacy challenges.
T100 Focus on the Metaverse
Of the companies which presented at the T500 conference, two offered pure-play metaverse exposure. Both Hiber, which provides a platform to help connect virtual worlds and Blast, the e-sports production company, have been early movers in the space.
Section 6: AI Transforming Healthcare
Digital health saw an injection of capital in 2021 with $US22bn raised, representing an 80% increase year on year and a figure almost three times higher than pre-Covid.
Investment levels have somewhat normalized in 1Q22, with a sequential slowdown to around US$4.6bn. However, the consensus view at the conference was that the healthcare sector’s rapid digital adoption would continue.
There are a number of identified tailwinds, though, such as higher smartphone penetration; possible suboptimal access to adequate care; and incumbent health systems facing persistent pressure, often operating with significant backlogs.
Applications of AI in digital health
Another key point arising relates to AI and machine learning as industry enablers. We believe that four trends are apparent from our analysis and discussion with panelists, as follows:
- The integration of AI and increased application of data is helping generate greater personalization, allowing new entrants to operate at scale, develop advanced insights and provide a more specialized care offering.
- Data analytics have created digital health applications which are increasingly preventive, rather than reactive, to emerging health challenges. Virus genome sequencing through the pandemic is a working example.
- There has been considerable growth in consumer-facing telemedicine, diagnostic, and treatment platforms. Digital tools now increasingly augment rather than replace in-person care, creating a proliferation of hybrid models.
- Unit economics are increasingly attractive, with long-duration revenue and the ability to leverage a lower fixed-cost footprint with higher patient throughput. For example, one panelist highlighted that his firm’s patients have virtual appointments around five times per year, in comparison with around twice per year for an in-person GP appointment.
However, the panelists also outlined key risks. Despite patients’ consent to sharing their personal data, governments and regulators often view health data as protected IP, and cross-border data sharing is often restricted. This contrasts with adjacent industries such as fintech, with open finance. There are expectations for a more disciplined fundraising environment as we emerge from the high-beta investment cycle through the pandemic, to a more alpha-driven bifurcated landscape where capital accrues to the highest-quality businesses.
T100 Focus on Digital Heath
Four types of business models in particular have attracted capital in this sector. Including hybridization, where mobile applications supplement in-person care to deliver a more personalized health offering. For instance, Ada Health offers a digital health assessment before patients connect to physicians.
Those with improved data insights and greater patient segmentation, which should help facilitate more specialized care from healthcare professionals, have also attracted capital. Oviva, for example, offers support for those living with or at risk of Type 2 diabetes.
In a tight labor market and the focus on employee welfare at a cyclical high, companies may look to improve employee wellness through a library of guided programs. This suggests an attractive demand picture for B2B SaaS models for firms like Koa Health, which engages with enterprise clients to provide mental-health care for employees.
Another business model which has attracted capital is that of data aggregation which aims to clean unstructured data and provide real-time patient insight. Use cases for structured data include screening possible pharmaceutical markets, repurposing drug use, improving patient segmentation, and exploring opportunities for precision medicine. Lifebit, for example, allows biomedical data custodians to provide federated access to researchers around the globe.
Section 7: Finance Replatforming and Decentralizing
Fintech as an asset class transformed after the global financial crisis, as incumbents had to navigate increased capital requirements, a low interest-rate environment, and inflated cost bases.
Investments in fintech start-ups worldwide grew 11x, rising from US$4bn in 2012 to around US$125bn in 2021. In 1Q22, a further US$35bn has been raised globally.
FNZ, which presented at the conference, raised US$1.4bn in February 2022.
The fintech funding environment appears to remain robust, despite broader market challenges. Disruptors continue to scale, but the recent rise in interest rates has benefited net interest margins and return on equity for incumbents within the sector.
Fintech enters a third phase led by blockchain technologies
Panelists broke down the evolution of fintech into three phases:
- In phase one, early disruptors caused an unbundling of financial services. Private capital investments initially focused on digital payments (eg Paypal, Square, and Klarna) and money transfers (eg TransferWise and XE), with growth accelerating due to higher penetration of smartphones and improved mobile applications.
- In phase two, disruptive companies from the first phase faced regulation and adoption hurdles. This led to a second phase of re-bundling, where greater partnerships between incumbents and disruptors grew. Platform disruptors emerged, providing innovative efficient solutions to the incumbents.
- Panelists now believe we have entered a third phase in fintech, based on the application of distributed technologies, with regulatory tailwinds and the growing adoption of emerging blockchain technologies providing a supportive backdrop.
Four overriding themes were discussed across our fintech panels, including decentralized finance, replatforming finance, supply-chain financing, and insurtech.
De-centralized finance creates greater trust
One of the areas we looked at was the convergence of DeFi (decentralized finance) and CeFi (centralized finance); and more specifically the evolution from traditional finance (TradFi) to more centralized intermediaries, and most recently to DeFi. DeFi offers an open alternative to the current financial system, creating products to lend, borrow, invest, and trade.
Within DeFi, decentralized applications are built on blockchain infrastructure, and enabled by smart contracts. Smart contracts are based on open-source protocols which execute on the blockchain under a predetermined set of rules. Blockchain, is the distributed ledger technology which underpins cryptocurrencies.
A number of tailwinds have emerged, impacting on adoption:
- Governments and institutions appear increasingly well-informed about the benefits and scope of new technologies;
- Gen Z is expected to become more active in the market, helping build trust; and
- Current inflationary dynamics, driven by fiscal measures, growth in money supply and supply-chain disruptions, have supported the shift to cryptocurrency. According to Fed data, M2 money supply in the US is currently 40% above pre-pandemic levels.
Our panels also highlighted the challenges of price volatility and slow transaction times, which impede the broader use of cryptocurrencies despite their now being worth around US$1.3tn globally, according to Binance-owned Coinmarket.
Stablecoins, such as Tether or USDC, aim to address these issues, with the respective coin pegged to the value of an underlying asset. This has catalyzed certain central banks to explore launching a digital currency, akin to traditional currency.
T100 Focus on Decentralized Finance
Companies in this sector who attended the T500 conference included Bux, a European commission-free neobroker for retail investors and Nuri, a German neobank and wealth- management app which treats crypto as a tangible asset class.
Replatforming legacy-based banking systems
The replatforming of modern finance was also central to our discussions. This is an area which has benefited from legacy and mainframe-based systems, which has caused incumbents to outsource and potentially de-risk, assisting these incumbents to focus on the customer proposition.
Replatforming finance has attracted considerable levels of capital, most likely as a result of the growing demand for these platforms, their scalable model, and the underlying long-duration economics.
T100 Focus on Replatforming Finance
Firms like FNZ provide a platform-as-a-service which helps automate and personalize, while seeking to enable wealth managers to maintain client trust and focus on growth. Wealth managers’ trust of these services would be based on their brand strength, regulation, and well-capitalized companies offering the service.
Smart Pensions provides an integrated pensions platform, targeting the underserved SME market. 10X provides a digital-banking platform, helping incumbents migrate their technological infrastructure to the cloud; while Fabrick uses API-based solutions to deliver an open banking platform to existing financial institutions. Modulr enables businesses to embed payments into their platform and automate payment flows.
Supply-chain financing could face cyclical challenges
Throughout the pandemic, optimizing liquidity and working-capital requirements became ongoing challenges for SMEs. With demand rising, supply chains were disrupted and working-capital cycles lengthened. Many in sectors with traditionally less attractive cash-flow cycles, such as retail/ecommerce, relied increasingly on short-term financing to bridge liquidity gaps.
Our panelists highlighted two opportunities within supply-chain financing:
- Extension of liquidity to SMEs and supply-chain financing companies which use real-time data to underwrite short-term loans to SMEs.
- Developing real-time data insight, including the use of API aggregators which allow SMEs to extract data insights from their accounting and banking platforms.
Low interest rates and accommodative monetary and fiscal policies have driven an extended period of expansion in the credit cycle. Looking ahead, there may be increased focus on the quality of lenders’ underwriting capabilities. As interest rates rise and real incomes are squeezed, SME default rates may possibly increase as we enter a period of credit contraction.
T100 Focus on Supply-Chain Financing
Companies from this sector who attended the T500 included Codat (which aims to helps SMEs aggregate accounting and banking platforms, and improve data insights), and Previse and Wayflyer, which both provide supply-chain financing for SMEs, with the latter focusing on ecommerce. Other related companies included Uncapped, who provide revenue-based financing to early-stage businesses.
Application of data analytics and personalization in Insurtech
In 2021, VC investments in insurtech almost doubled, compared to 2020. Fundraising reached around US$6bn in the US, US$3bn in Europe, and US$2bn in Asia.
The panelists’ view was that insurtechs have disrupted incumbents using technology as an enabler, which has reduced friction points and helped employ greater personalization in the customer proposition. Strong NPS (net promoter scores) in comparison with the broader industry appear to underpin progress.
Common themes discussed included the application of data analytics to segment its customer base, pricing risk more effectively, and helping improve customers’ understanding of associated risks. As a result, insurtech companies have reported lower loss and expense ratios, and more robust unit economics.
Another key point of discussion was the use of managing general agents (MGAs), and the growing use of embedded insurance. When debating the use of an MGA over a full-stack insurer, our panelists outlined the benefits of lower capital intensity compared with shared economics. As MGAs avoid the higher regulatory demands of a full-stack business, they may be attractive to new companies, facilitating a greater customer focus. Embedded insurance, where the insurance product is bundled into another transaction, typically on purchase, is helping reduce friction.
T100 Focus on Insurtech
Insurtech companies which presented at the T500 included Ottonova, Flock, Clark and Manypets. Ottonova operates as a full-stack health insurer, Flock specializes in B2B car insurance, Clark acts as a digital insurance broker, and ManyPets has transitioned from traditional pet insurance into a pet-health subscription business.
Section 8: SaaS becoming Narrower and Deeper
SaaS businesses have experienced significant returns in the last 10 years. The industry return profile has been asymmetrically skewed to the upside, delivering leading risk-adjusted returns.
Despite the recent weakness in public markets, the long-run return profile of the sector has been positive. For example, the aggregate market value of the top 10 SaaS firms globally has scaled by 5x in 10 years, compared with nearer 3x for the broader S&P 500.
SaaS fundraising has been strong…
This performance in the public markets has also been reflected in recent fundraising, with US$160bn of venture capital raised in 2021. Capital deployment was 130% higher in 2021 than it was in 2020, with 60% of fundraising concentrated in the US. The current 1Q22 run rate was ahead of 2021.
Segmenting the data further, SaaS contributed around 23% of total VC fundraising in 2021, up from around 18% in 2020.
…with the migration to the cloud still nascent
The migration to cloud-based applications is still in its infancy, with only 20 to 25% of IT processes and 10 to 15% of IT spending currently allocated to the cloud, according to our T500 panelists. Research firm Gartner expects global spending on cloud services to continue to rise, reaching US$482bn in 2022, or 20% growth year on year.
We hosted a number of emerging SaaS businesses at the conference. While the use cases were diverse, they shared a number of common characteristics, including the following:
- A well-defined product market fit and a large addressable market opportunity.
- Strong unit economics, typically with a combination of growth in ARR greater than 100%, high gross margins and often positive EBITDA. This provides a favorable financial algorithm for investors.
- A marginal preference for large enterprise over SMEs as larger enterprise customers often have deeper IT budgets, with a lower propensity to churn. However, this may be offset by greater complexity.