Venture Capital VC trends SPACs ESG Cannabis

Published: Feb 16, 2022
Topics: SPACs
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By Rachael Stout

Venture capital (VC) often follows general industry and market trends and this article will highlight a handful of areas gaining traction, as of early 2022.

Gaming

During COVID-19, there was a massive uptick in the gaming industry which led to more venture investment in this space. New platforms were rolled out, there was an increase in cloud gaming services and, finally, a new generation of gaming consoles hit the retail stores. To illustrate some statistics, in 2021, the games market generated revenue of over $180 billion. The global gaming market is expected to generate revenues of $218.8 billion by the end of 2024. ¹Venture-backed companies in the gaming space have raised $9 billion in funding.² Investments in private gaming companies reached a record $13 billion in over 700 deals in 2021. ³VC investment in gaming has also changed, with a shift from investment in individual studios to companies that deal with gaming infrastructure.⁴ 2021 was a record year for deals in video gaming with $85 billion of value across 1,159 announced or closed deals. The first five weeks of 2022 have already surpassed all of 2021. There are more than 100 game-focused venture capital funds that have been pouring money into gaming studios.⁵ Conversely, in 2022 we have seen consolidation within the gaming community with both Microsoft and Sony purchasing large studios.

Artificial Intelligence

Artificial Intelligence (AI) continues to be at the forefront of innovation and thus is a continued focus for VC firms. Machine learning is expected to have the largest market share within the AI space due to cross-sector utility. One sector that drove AI innovation during the pandemic was the health care sector. For deployment, VCs are interested in investing in the service piece as companies are taking technology that exists and adapting it to fit a specific application.

North America is expected to occupy the largest share of the AI market, which is partially due to the rising number of startups and VC firms backing them in the U.S.

To share some statistics, the global AI market size has risen at 35.6% compounded annual growth rate (CAGR) from 2020 to 2021. Startups across the world invest a majority of their income into AI services and cloud computing in order to stay a step ahead of highly competitive startup markets.⁶ According to Pitchbook's 2022 emerging technology outlook, VC funding in 2022 is expected to focus on data preparation AI platforms. Data preparation startups achieved high valuation growth in 2021 which could lead to mega deals in 2022, and there is a belief that there is a large pipeline of companies poised to raise large rounds.⁷

Cryptocurrency and Web 3.0

VC firms have started to eye cryptocurrency and Web 3.0 after watching the industry evolve -- and now they have become substantial funders, given the ‘cheap’ price and ability to generate higher returns than other types of investments. This growth is true both at the VC fund and VC fund of fund level.

Startups in the Web 3.0 and blockchain space were powered by a record $33 billion in VC funding last year — exceeding flows from all prior years combined. Venture capitalists allocated to cryptocurrency and blockchain startups at the fastest pace ever, logging more than 2,000 total deals, more than double the deals in 2020 and surpassing the all-time high for venture capital crypto deals in 2018, which saw just under 1,700.⁸

Cannabis

Given the robust growth the cannabis industry is experiencing, VC investment is rising sharply. Approximately $5.3 billion in venture capital has been deployed into 544 cannabis-related companies globally since 2014.⁹ The global market is projected to climb from around $22 billion in 2020 to nearly $100 billion by 2026, with a CAGR of 28%.¹⁰ During the first five months of 2021, 132 funding events for cannabis companies were raised, averaging $15 million each. The intensity of financing has accelerated throughout this year, however. In the last five months of 2021, cannabis companies grew, on average, $28 million over 73 funding events, an increase of 86%.¹¹

Currently, 18 states and the District of Columbia have legalized marijuana for recreational use, and 37 states allow medical marijuana. Some VCs are investing directly in cannabis companies while others are more risk averse and are investing in the infrastructure and support system for the industry while it is still illegal at the federal level.

The Cannabis Administration and Opportunity Act was introduced in July 2021 to remove marijuana from the federal list of controlled substances. This, along with the proposed SAFE Banking Act, which would allow banks to do business with cannabis companies, could change the work that financial institutions will do with marijuana companies. The outcome of the proposed legislation discussed above is still uncertain but this is the most proactive proposal for cannabis the U.S. has seen to date.

Special Purpose Acquisition Companies (SPACs)

VC firms are forming SPACs for numerous reasons, mainly to raise capital quickly and to take their portfolio companies public. By forming a SPAC to acquire a portfolio company, the sponsor or VC firm would get a percentage of the value since they serve as the SPAC management team. The VC firm acts as the investment bank for the target company and by managing the SPAC, the VC firm can generate impressive returns and has little risk. To put some numbers to the popularity of the SPACs in the VC space, according to the Pitchbook-NVCA Venture Monitor, 26 of the top 30 exits by size in Q2 2021 came in the form of public listings; in the first half of 2021 there were 123 public listings, and 34 of them were SPACs. “SPAC formation peaked in the first quarter of 2021 with 317 IPOs, which means a large share of the market is approaching its first birthday. SPACs typically have two years to execute a deal or return the money to shareholders, so there will be an intense pressure to get deals done throughout 2022.”¹²

Environmental, Social, and Governance (ESG) and Impact Investing

VC firms are integrating ESG for several reasons, the most prominent of which is investor demand. Over the last 18 months, there has been a large increase in the number of investors who are looking to support funds that want to drive positive change. It is expected that LPs will demand that all venture funds begin to measure and report on ESG criteria. It is predicted that over time ESG will not be considered an add-on but a core value that investors are looking at when considering where to invest. Secondly, there is evidence showing that by incorporating ESG policies into work practices, VCs become more attractive to early-stage investment companies. By incorporating ESG guidelines early on, VCs can help the portfolio company mitigate risks and identify new opportunities before there are problems that have a negative impact on the company and the investment. VC firms have seen how important ESG is becoming. According to the Venture Capital Human Capital Survey (3rd edition 2021), 50% of firms have either a staff person or a team with the responsibility of promoting diversity and inclusion compared to just 34% in 2018. Additionally, the same survey states that more VC firms are seeing interest from LPs and portfolio companies for their diversity, equity and inclusion (“DEI”) information.¹³

Conclusion

VC firms over the last year plus have been capitalizing on market and industry trends on the premise that their investments in them will drive returns.

*To learn more on these abovementioned industries, please visit EisnerAmper’ Knowledge Center.

¹The Games Market and Beyond in 2021: The Year in Numbers | Newzoo

²https://venturebeat.com/2022/02/04/drake-star-partners-game-deals-could-nearly-double-to-150b-in-2022/

³Gaming companies raised a record $71B in 844 deals so far this year (venturebeat.com)

⁴It’s Game On For Gaming Startups – Crunchbase News

⁵https://venturebeat.com/2022/02/04/drake-star-partners-game-deals-could-nearly-double-to-150b-in-2022/

⁶Global Artificial Intelligence Market Size 2021 Rise at (globenewswire.com)

⁷Q4 2021 PitchBook Analyst Note: 2022 Emerging Technology Outlook | PitchBook

8Crypto startups draw record VC money, may lead to more IPOs in 2022 (yahoo.com)

⁹Cannabis Startups Navigate Regulations, Lack Of Capital To Plant Industry Seeds – Crunchbase News

¹⁰The Non-Smoking Future of Legal Marijuana (yahoo.com)

¹¹Cannabis investment jumps 82% the second half of 2021, 165% over 2020 levels | TechCrunch

¹²What to watch for in the 2022 IPO market | PitchBook
¹³VC Human Capital Survey - National Venture Capital Association - NVCA