Trends Deep Dive (Part 1) - Tech Acceleration

Hi, readers! It’s been a while. We are sorry for neglecting you a bit as we were busy investing in future unicorns. 🦄

As the ScaleX team, we regularly conduct internal research in order to be updated with the global trends and find out where the VC world and startup ecosystem is heading. In this series of articles, we will describe the trends that emerged as a result of our research.

In the first section, we'll share with you how CV-19 has accelerated the adoption of technology across all aspects of everyday life.

CV-19 has accelerated the adoption of technology and transformed the way of doing business dramatically.

Throughout history, crisis-like events have always acted as a catalyst for innovation. Shifting context pushed our society to build better, faster, and cheaper solutions for existing problems.

During the pandemic, consumers had to use online channels more than ever and businesses had to respond in return. According to McKinsey Global Survey, there was a rapid shift towards interacting with customers via digital channels. CV-19 pushed companies three years ahead in the way they communicate with their customers; the share of digital customer interactions reached almost 60% globally. In addition, the share of digital products or services reached 55% globally - 7 years of a leap with the pandemic. 

CV-19 has also accelerated technology across all aspects of everyday life. There is a significant technology adoption gap between the pre-pandemic era and the post-pandemic era regarding daily habits. Remote education, grocery delivery, telehealth, or digital fitness are some areas that have a meteoric rise in adoption and many of those trends are here to stay.   

Some of the changes are structural, and remote working leads the way. Before CV-19, the best location to establish a company used to be San Francisco with more than 40% votes according to startup founders and only 6% were adopting remote working practices. However, San Francisco lost popularity in 2021 - 28% of the startup founders still think San Francisco is a good idea, but more than 42% believe that adopting remote working practices is even a better choice to establish a company going forward.

In chaotic and uncertain times, the safety raft has shifted from cash to invest in the hope for the future.

From a theoretical point of view, cash is one of the safest resorts during a crisis. Yet, the backdrop of continuous money printing shifted investors to technology. For instance, big tech stocks have been experiencing great success since the beginning of the pandemic, largely escaping the fallout from CV-19, despite an unsteady year for the rest of the market. The main reason behind this rally is that investors are observing a shift to a digital-first world which creates a surge in demand for technology services.

In 2021, tech companies have provided 1.7x returns compared to legacy industries so far. Although we know that they've always done very well in the market, and been outperforming the broader S&P, this time the magnitude of divergence is higher. We expect this trend to continue in the coming period.

A similar trend is visible in private markets as well. Looking at the alphabet rounds, valuations increased dramatically with the increasing appetite. At this point, we should say that although our conviction and enthusiasm for the growth prospects of the tech sector remain high, we also observe some lofty valuations in some segments such as high growth software and certain commerce-related areas, due to a combination of low-interest rates and pandemic conditions. 

Exit values also go up along with the high valuations. Multiples of public software-as-a-service companies increased - almost tripled over the last five years. The reason behind this trend could be the strong stock market that is improving the exit opportunities for private companies. We see more large public acquirers with stronger balance sheets that can make more aggressive offers.

Explosive demand for SPACs in 2020 also signals what the future holds. Out of 450 IPOs in 2020, 250 of them were SPACs, and more to come in 2021 with 150 SPACs until now. Even though tech seems to be the safest place to invest with CV-19, high demand in SPACs is heating up the markets - leading to increased competition - thanks to huge capital flow.  

This was the first part of our series. In this article, we discussed the shift in the world of technology and how favorable it is to invest in tech companies. Of course, we didn't forget to mention the flying valuations due to their opportuneness.

In our next blog post, we will talk about what's happening in the VC world and some of the major trends we're seeing.

Stay tuned! ⚡


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