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Opinion: All That Glitters Is Not Gold: State Of Tech & VC, Part 1 of 4

Billiard Ball - Post 1

2021 was an extraordinary year for tech, with record financings, record valuations, and record IPOs [1]. 2021 was also my first full year leading RBCx’s venture strategy, and it was an equally extraordinary year for us.

We deployed an unprecedented amount of capital through fund investments and new credit to venture capital and growth equity funds, and we launched several new financial products specifically designed for the industry.

Beyond software and digital technology, we sought to finance other segments of the innovation economy that we believe offer compelling opportunities for outsized impact and transformation. Together with our colleagues in RBC Capital Markets we invested in venture capital funds focused on healthcare and life sciences [1] [2], and as climate instability continues taking centre stage in the coming years, RBC will continue to cement its commitment to clean technologies and sustainability.

Suffice to say, it’s been a transformational period for the technology sector in Canada and around the world. In this 4-part series I will share my perspectives on the state of the market today, and where I believe we’re headed.

 

State of the Market in 2022

From my perspective, there are three distinct – and largely independent – phenomena propelling the present boom cycle: (1) a maturing Canadian ecosystem, (2) the proliferation of the crossover investment strategy in the United States, and (3) transient macroeconomic abnormalities.

In Part 2 of the series I’ll discuss Canada’s Fund of Funds ecosystem, and the outsized role played by the federal and provincial governments within it. I’ll expand on why I believe this is a risk to a scaling innovation-based economy, but also why government involvement remains a necessary evil in the short-term.

In Part 3 I’ll discuss how the expansion of crossover investing in the U.S. is inadvertently creating valuation inflation and instability in early-stage portfolios. I’ll explain how I expect LPs to respond, and how emerging trends in venture capital might evolve in 2022 – namely the recent contractions in capital deployment cycles, hurdle rate erosion, and the rise of opportunity funds.

Finally, in Part 4 I’ll explore why macroeconomic conditions have propelled valuations upward, and how private tech markets might respond to rising inflation and rate increases. Additionally, I’ll explain why the innovation economy – in theory – will be especially susceptible to macroeconomic fluctuations.

I’ll briefly touch on these three themes below but stay tuned for deep dives on each individual theme in the coming weeks.

 

This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.

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