The European tech ecosystem is now worth more than $800 billion, with almost 50 percent of that value created in the last year, according to a report published in July by investment and advisory firm, GP Bullhoun—no mean feat in the midst of a pandemic.
But to be honest, news of yet another spike in tech sector investment doesn’t really come as a surprise. Over the past few years or so, we’ve all become accustomed to a narrative of ever-increasing sums being directed towards Europe’s innovation economy by VCs and angels. But it has been a narrative with a degree of nuance. These days we hear a lot more about “mega-deals” as both local and global investors focus on later-stage funding sounds. Seed finance has been healthy too, but there are continuing doubts about the availability of capital for businesses sitting in the middle reaches of the funding escalator.
So when I spoke to Manish Madhvani—a cofounder of GP Bullhound—I was keen to talk about the investment across the tech ecosystem as a whole. Are we now in a situation in which a new risk-averse mood is driving investors towards relatively well-established bigger companies or is money flooding in across the whole sector?
There is—it has to be said—a lot of excitement about unicorns at the moment. Here in the U.K.—where I’m based—local startup support agency, Tech Nation has been diligently highlighting the burgeoning numbers of billion-dollar businesses. The GP Bullhound report extends this narrative across Europe. Titled, Titans of Tech, the study notes that 52 companies have ascended to unicorn status over the past 12 months. Overall, the U.K. leads the way with Israel, Germany, and Sweden also performing well.
“And we are moving beyond the unicorns,” says Madhvani. “We are now seeing more $10 billion companies—the decacorns.” These include the likes of digital bank Revolut, shopping app, Klarna and payments business, Checkout.com.
But what lies behind the increased value of the sector as a whole? Madhvani cites a number of factors, not least increasing global appeal. “The best European companies were valued at lower multiples,” he says. “But what we’ve seen is U.S. funds becoming more comfortable with Europe. This has led to a huge rise in capital pushing up valuations.”
In addition, he notes increased willingness of public equity funds to increase the supply of capital.
Are All Boats Rising?
But what if you don’t enjoy the profile and trading record of a Revolut or Klarna. Is the incoming tide of investment helping all the boats in the harbor to rise?
Madhvani says the ecosystem has changed. “A few years ago, there was a lot of funding at the small end but it was difficult to get scale-up capital until the metrics of the business were proven,” he says.
That is changing. Success stories have sucked in capital at later stage funding rounds and Madvhani says this is also benefiting businesses further down the ladder. “There is a plentiful supply of capital and there is also a trickle-down effect,” he says. “Early-stage VCs have sold their shares and are now reinvesting.”
There is also more knowledge in the system. The success stories of European tech have created a generation of managers and executives who know what it means to scale up and can pass their skills and expertise on.”
Trends on the Market
The unicorn data to some extent points to the success stories of the tech boom – or at the very least to those segments where VCs are happy to invest large sums. Among Europe’s new $1 billion tech companies, GP Bullhound says 66 are in enterprise software, 31 in Fintech, 30 in marketplaces, and 15 in e-commerce.
Looking to the future, Madhvani says GP Bullhound sees marketplaces and e-commerce continuing to be “super hot” but new trends are emerging, not least because of the pandemic.
“There is a huge interest in healthcare and what we’re also seeing is a blurring of the line between health and education,” he says.
Entertainment and gaming are also on the rise as is collaboration software. In one way and another, these are all sectors that have been given a boost by the stay-at-home, work-at-home world we currently live in. Will it last? Madhvani thinks so and is particularly bullish about collaboration software.
Fintech remains something of a poster child for tech and Madhvani sees real opportunities for the market leaders, due to the data they process. “The winners in this sector can cross-sell health products, banking, insurance, and travel services,” he says.” They have so much data and we are moving into a period of instant decision making.”
Valuations don’t necessarily correlate exactly with the success of individual companies in the longer term, but higher valuations do mean that Europe’s tech companies are increasingly able to gain access to the funds they need. It’s not a uniform picture, though, some businesses do struggle around Series A and B. And certain sectors attract more funding than others.
Have a large amount of cash to invest? Here's how deploying it all at once compares with doing so over time – CNBC
If you have a big wad of cash to invest, you may wonder whether you should put all of it to work immediately or spread out over time.
Regardless of what the markets are doing, you’re more likely to end up with a higher balance down the road by making a lump-sum investment instead of deploying the money at set intervals (known as dollar-cost averaging), a study from Northwestern Mutual Wealth Management shows.
That outperformance holds true regardless of the mix of stocks and bonds you invest in.
“If you look at the probability that you’ll end up with a higher cumulative value, the study shows it’s overwhelmingly when you use a lump-sum investment [approach] versus dollar-cost averaging,” said Matt Stucky, senior portfolio manager of equities at Northwestern Mutual Wealth Management.
The study looked at rolling 10-year returns on $1 million starting in 1950, comparing results between an immediate lump-sum investment and dollar-cost averaging (which, in the study, assumes that $1 million is invested evenly over 12 months and then held for the remaining nine years).
Assuming a 100% stock portfolio, the return on lump-sum investing outperformed dollar-cost averaging 75% of the time, the study shows. For a portfolio composed of 60% stocks and 40% bonds, the outperformance rate was 80%. And a 100% fixed income portfolio outperformed dollar-cost averaging 90% of the time.
The average outperformance of lump-sum investing for the all-equity portfolio was 15.23%. For a 60-40 allocation, it was 10.68%, and for 100% fixed income, 4.3%.
Even when markets are hitting new highs, the data suggests that a better outcome down the road still means putting your money to work all at once, Stucky said. And, compared with investing the lump sum, choosing dollar-cost averaging instead can resemble market timing no matter how the markets are performing.
“There are a lot of other periods in history when the market has felt high,” Stucky said. “But market-timing is a very challenging strategy to implement successfully, whether by retail investors or professional investors.”
However, he said, dollar-cost averaging is not a bad strategy — generally speaking, 401(k) plan account holders are doing just that through their paycheck contributions throughout the year.
Additionally, before putting all your money in, say, stocks, all at once, you may want to be familiar with your risk tolerance. That’s basically a combination of how well you can sleep at night during periods of market volatility and how long until you need the money. Your portfolio construction — i.e., its mix of stocks and bonds — should reflect that risk tolerance, regardless of when you put your money to work.
“From our perspective, we’re looking at 10-year time horizons in the study … and market volatility during that time is going to be a constant, especially with a 100% equity portfolio,” Stucky said. “It’s better if we have expectations going into a strategy than afterwards discover our risk tolerance is very different.”
New rules for investing in China: Lessons from Beijing’s education crackdown – CNBC
BEIJING — As overseas investors reel from Beijing’s regulatory crackdown, the rapid fallout in an industry like after-school tutoring can be a guide to what went wrong, and where future opportunities lie in China.
Before China cracked down on tutoring schools this summer, major investment firms like SoftBank were pouring billions of dollars into Chinese education companies, many of which were publicly traded in the U.S. or on their way to listing there.
The strategy was one of burning cash to fund exponential user growth, with hopes of profit in the future. For the strategy to work, investors aimed for a “winner takes all” approach that they’d used with other Chinese start-ups such as coffee chain Luckin Coffee and ride-hailing company Didi.
Didi essentially paid Chinese consumers to take cheap rides through its app, beating out Uber to dominate about 90% of the mainland market, and went on to raise more than $4 billion in a New York IPO on June 30.
But it soon became clear that investment strategy might no longer work. Just days after Didi’s IPO, Chinese authorities ordered app stores to remove Didi’s app and began investigations into data security — effectively shutting down the business’s growth prospects in the near term.
By late July, the education sector was clearly Beijing’s next target.
Crackdown on after-school tutoring
In harsher-than-expected measures, regulators ordered tutoring companies in kindergarten to 12th grade academic subjects to restructure as non-profits, cut operating hours and remove foreign investment. Shares of industry leaders such as Tal Education, New Oriental Education & Technology Group and Gaotu Techedu plunged on that news. They have lost more than 75% each over the last three months.
Chinese tutoring start-ups that investment funds had placed their bets on months before suddenly lost their path to a public listing.
In October 2020, online tutoring start-up Yuanfudao said it raised a total of $2.2 billion from Tencent, Hillhouse Capital, Temasek and many other investors — for a valuation of $15.5 billion.
Two months later, competitor Zuoyebang raised $1.6 billion from investors including SoftBank’s Vision Fund 1, Sequoia China, Tiger Global and Alibaba.
“They were hoping to create another oligopoly like Didi” with market pricing power, said an investor and co-founder of one of the largest U.S.-listed Chinese education companies, according to a CNBC translation of his Mandarin-language interview. He requested anonymity because of the sensitivity of the matter.
However, the education industry already had several major market players, he pointed out, and “it turned out that no business could really beat the other before the crackdown.”
Building a dominant market leader in after-school tutoring was a lucrative prospect. The opportunity was enormous given China’s population of 1.4 billion people and a culture in which parents prize their children’s education.
Early industry players like New Oriental got their start with physically leased locations and in-person classrooms. But the coronavirus pandemic in 2020 accelerated the tutoring industry’s shift online, and the cash-burning fights of China’s internet world was in full play.
Chinese after-school tutoring companies began to spend heavily last year on advertising to attract new students.
U.S.-listed Gaotu spent more than 50 million yuan ($7.75 million) in one week this past winter for ads on short-video platform Kuaishou, a person familiar with the matter told CNBC.
“In China, Kuaishou is a smaller platform than [ByteDance’s] Douyin/TikTok, so the total spend on traffic by all of K to 12 education companies would be much more than that,” the source said in Mandarin, according to a CNBC translation.
Gaotu did not respond to a request for comment. In its earnings report for the first three months of the year, the company said its selling and marketing expenses of 2.29 billion yuan were three times more than a year ago.
Tal Education disclosed that its spending in the same category surged by 172% from a year ago to 660.5 million yuan for the three months that ended Feb. 28.
Both companies reported a net loss in the quarter, as did another industry player, OneSmart International Education Group, which disclosed a 47% year-on-year surge in selling and marketing expenses to 288.8 million yuan.
OneSmart listed in the U.S. in 2018 in an IPO underwritten by Morgan Stanley, Deutsche Bank and UBS. Later that year, the education company acquired Juren, one of the oldest businesses in China’s tutoring industry.
But the new after-school regulations struck a fatal blow to the 27-year-old company. About a month after the new rules were released, Juren collapsed, just one day before public schools opened on Sept. 1.
OneSmart could be delisted from the New York Stock Exchange since its shares have remained below $1 since July.
Other U.S.-listed Chinese stocks are also struggling. New Oriental did not report a net loss for the quarter ended Feb. 28, but disclosed it spent $156.1 million on selling and marketing in that time, 32% more than a year ago.
The surge in advertising spend to grow student enrollment came as investors piled into the industry, and increased competition sent customer acquisition costs soaring.
With new capital, start-ups Zuoyebang and Yuanfudao, along with Tal Education, reportedly went on to sponsor state broadcaster CCTV’s annual Spring Festival Gala in February. That’s the market equivalent in China of buying a U.S. Super Bowl ad, which costs of about $5.5 million for a 30 second spot.
But regulators were watching. In the months before the harsh crackdown, Chinese authorities fined 15 education companies a total of 36.5 million yuan, primarily for false advertising.
Then in July, harsher regulations on after-school tutoring essentially banned advertising, prohibited public offerings of shares, and investment from foreign capital.
‘Common prosperity’ in China
The new policy marks Beijing’s latest effort to restrict the education industry’s sprawling growth and its burden on parents — a concern for authorities trying to boost births in the face of a rapidly aging population and shrinking workforce.
Investors need to recognize that tackling the population problem, slowing economic growth and tensions with the U.S., have become top concerns for the Chinese government, said Ming Liao, founding partner of Beijing-based Prospect Avenue Capital, which manages $500 million in assets.
“The landscape has significantly changed,” he said, noting that investors now need to consider national policies far more than just industry developments.
In addition to the crackdown on internet companies and after-school tutoring centers, authorities have ordered online video game companies to restrict children to playing three hours a week.
Speeches by President Xi Jinping have emphasized the goal is “common prosperity,” or moderate wealth for all, rather than some.
Education is just one of the so-called three mountains that Chinese authorities are tackling. The other two are real estate and health care, all areas in which hundreds of millions of people in the country have complained of excessively high costs.
In the last 20 years, corporate profits have largely gone to property developers and companies based on internet platforms, Liao said.
In light of new policy priorities, he said, it’s important for investors to distinguish between internet-based businesses and those developing more tangible kinds of technology like hardware — even if both kinds of companies are loosely referred to as “tech” businesses in English.
With the U.S. now under President Joe Biden and bent on competing with China, Beijing is increasing investing in an ambitious multi-year plan to build up its domestic technology ranging from semiconductors to quantum computing.
The “China market can still offer attractive investment returns for global investors, and the challenge lies in identifying the potential future winners amid China’s rebalancing,” Bank of America Securities analysts wrote in a Sept. 10 report.
They pointed to a shift over the last two decades in the largest Chinese companies by market capitalization — from telecommunications, to banks, to internet stocks. Going forward, they expect greater regulation on internet and property industries, “while advanced manufacturing, technology, and green energy related sectors will be promoted.”
The bank listed a few contenders for “future winners.”
- Sportswear: Anta
- Health care: Wuxi Bio
- Electric vehicles and and EV battery: BYD
- Lithium in new materials: Ganfeng
- Renewable energy: Long Yuan
- Tech hardware: Flat Glass
“Certain industrials sectors that we currently do not cover could also have promising opportunities,” the analysts said.
Future of investing in China
For Chinese after-school tutoring companies that once attracted billions of dollars, they’re now trying to survive by building up courses in non-academic areas like art or adult education. Those in the industry say it’s an uncertain path that has a market only a fraction of what the companies used to operate in.
SoftBank is waiting for clarity on the regulatory front before resuming “active investment in China,” its Chief Executive Masayoshi Son said in an earnings call on Aug. 10.
“We don’t have any doubt about future potential of China … In one year or two years under the new rules and under the new orders, I think things will be much clearer,” Son said, according to a FactSet transcript.
When contacted by CNBC last week about its investment plans for China, Softbank pointed to how it led investment rounds in the last few weeks in Agile Robots, a Chinese-German industrial robotics company, and Ekuaibao, a Beijing-based enterprise reimbursement software company.
“Our commitment to China is unchanged. We continue to invest in this dynamic market and help entrepreneurs drive a wave of innovation,” SoftBank said in a statement.
But when it comes to bets on the education industry, some investors have decided to look elsewhere in Asia.
In June, Bangalore-based online education company Byju became the most valuable start-up in India after raising $350 million from UBS, Zoom founder Eric Yuan, Blackstone and others. Byju is valued at $16.5 billion, according to CB Insights.
Canadian dollar notches biggest gain in a month as stocks rally
The Canadian dollar strengthened to a one-week high against its U.S. counterpart on Thursday as investor sentiment picked up and domestic data showed that retail sales fell less than expected in July.
World stock markets rallied and the safe-haven U.S. dollar retreated from one-month highs as worries about contagion from property developer China Evergrande eased and investors digested the Federal Reserve’s plans for reining in the stimulus.
Canada is a major exporter of commodities, including oil, so the loonie tends to be particularly sensitive to investor appetite for risk.
“The assumption here is that (Fed interest) rate hikes are still a long way out and so equities markets can still perform with accommodative financial conditions,” said Mazen Issa, senior FX strategist at TD Securities in New York.
“Consequently, currencies that have a higher beta to the equity market, like the CAD, can do alright.”
U.S. crude oil futures settled 1.5% higher at $73.30 a barrel, while the Canadian dollar was trading up 0.9% at 1.2653 to the greenback, or 79.03 U.S. cents.
It was the currency’s biggest advance since Aug. 23. It touched its strongest level since last Thursday at 1.2628.
Canadian retail sales dipped 0.6% in July, compared with expectations for a decline of 1.2%, while a preliminary estimate showed sales rebounding 2.1% in August.
Canadian government bond yields were higher across a steeper curve, tracking the move in U.S. Treasuries.
The 10-year touched its highest level since July 14 at 1.335% before dipping to 1.330%, up 11.6 basis points on the day.
(Reporting by Fergal Smith; Editing by Nick Zieminski and Peter Cooney)
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