The Society Magazine – Decrypting Tomorrow #5
The rise of Venture Capital as an asset class

by Gaia Giorgio Fedi
September 14, 2022

The figures indicate unprecedented interest in the sector, which experienced a record 2021, even in Italy. This is due to a number of favourable structural factors, coupled with a growing interest on the part of a wider audience of investors

If there is a lesson to be drawn from the extraordinary Silicon Valley boom since the 1970s, it is that an innovation ecosystem needs an intertwining of cultural and economic factors, and common ground between investors, entrepreneurs, academia and institutions in order to thrive. From this perspective, the rise of Venture Capital as a true asset class is nothing but good news: now that VC investments in innovative startups are no longer considered a niche for a few “brave capitals,” but also a form of portfolio diversification for a broader audience of investors, one of the conditions that allows innovative ideas to progress and be transformed into successful entrepreneurial realities is being met. In fact, a sort of “democratisation” of investments in private markets (not only Venture Capital – it must be said – but also Private Equity, Private Debt, infrastructure, etc.) is currently underway. First, the trend started with a growing exposure to private markets in the portfolios of institutional investors, in search of returns that were hard to come by in the zero-interest-rate environment of the most recent recent years; then, it expanded to the portfolios of private individuals. In parallel with increased investor demand and lower financing costs, the need for funds by an increasing number of innovative entities has also grown, thanks to the powerful secular trend of the digitisation of the economy, which has completely overhauled lifestyles and business models.

It is no coincidence that 2021 was a record year for Venture Capital, with investments doubling globally. Even in Italy, where the sector had suffered from a certain dwarfism until a few years ago, last year was exceptional, with investments exceeding one billion euro for the first time. This is also thanks to greater acknowledgement on the part of the institutions, which in recent years have created a more favourable context for the innovation ecosystem, both with regulatory interventions and with investments and initiatives by public entities.

One can see the results: in Italy, even the first quarter of 2022 – which elsewhere has seen a slowdown due to the uncertainties linked to the conflict in Ukraine – has shown further progress in Venture Capital, with a total of 54 funding rounds, and €420 million invested, up 35% on the €311 million of the first three months of the previous year, according to data from the first Observatory on Venture Capital in Italy, carried out by Cross Border Growth Capital in collaboration with Italian Tech Alliance.

Italy has woken

The figures achieved are “A significant threshold to start ‘playing’ in the same league as the rest of the European countries with a more developed startup ecosystem,” Maria Ameli, Banca Generali’s Head of Equity Private Markets, remarks. With 334 deals, 2021 closed with startup investments of €1.243 billion, up 118 percent from €569 million in 2020. And rounds with investment over 20 million euros more than doubled from the previous year. “Admittedly, Italian figures are still far from European best practices such as Germany, which in 2021 recorded triple-digit growth in total Venture Capital investments, rising from €4.5 billion to €16.2 billion. However, we see encouraging signs for a further phase of growth and maturity of the system,” Mrs. Ameli adds.

The bottom line, the expert continues, is that the growth of investments in innovation through startups is taking place in many European economies at a higher rate than in Italy, thanks to a wider availability of resources, not only from public sources, and a more widespread system of infrastructures and services.

Now, however, something is moving in Italy as well. “Several initiatives, also related to the PNRR (the Italian National Recovery and Resilience Plan), pursue objectives that can enable Venture Capital to reach a new level. The Italian market showed a significant increase in the number of pre-seed/seed stage deals, from 53 in 2020 to 233 deals in 2021. The increase in late-stage Venture Capital and Growth Equity rounds is also notable, far exceeding the historical average and testifying to a significant maturation of startups,” Mrs. Ameli argues, adding that “Our country is faced with the urgent need to promote youth entrepreneurship, which is the only way to include new generations in the economic and working world by generating new value.”

For that matter, the international context also looks encouraging: suffice to think of the many triple-digit transactions seen in recent years in the United States and Europe. “Personally, I do think these should be a further stimulus for growth in Italy as well,” Mrs. Ameli says.

Investors’ interest

As mentioned earlier, an ecosystem by definition is an environment in which there is a unity of views and interests. Therefore, in parallel with the growth in investment and increased institutional support, Venture Capital is also gaining increasing interest from investors who in the past would not have approached this asset class.

“Venture Capital represents a highly attractive form of investment,” Gianluca La Calce, Head of Marketing and Offering Development at Fideuram Intesa Sanpaolo Private Banking, comments. “The focus on companies, often of an innovative nature, at a stage of development that is still early or, at least, not yet mature, has a strong appeal for the investor, together with the expectation of being able to participate in the phase of maximum growth and return. The same reasons that make the asset class attractive are those that invite, clearly, caution due to the higher risk inherent in the investment,” Mr. La Calce adds.

Experts point out that forms of investment such as Venture Capital represent a win-win situation: both for the development of more mature markets, with more investors having access to alternative formulas and a greater diversification of sources of return; and for more resources to be allocated to promising and innovative companies, and the virtuous circle effect that is created when an increasing number of companies succeed. Indeed, if a number of innovative realities succeed in the marketplace, a valuable network of expertise is created, and founders will be pushed to create new companies or make capital and expertise available to new startups, and other potential founders will be enticed to try their hand. At the same time, established companies will be able to access disruptive innovations and ideas by investing in emerging realities, often in a more efficient way and time than in solutions developed “in house.”

From the investor’s point of view, as Mr. La Calce explains, there are two interesting aspects. “The first is that of representing a complement, in terms of a driver of value generation, to forms of investment that target in the private market companies at a more advanced stage of development; the second reason is of a commercial nature, precisely because of the intrinsic attractiveness in the eyes of an investor sensitive to the idea of participating, without losing the benefits of diversification, in entrepreneurial initiatives up to an early stage.”

Certainly, Venture Capital is nonetheless a type of investment with a quite different risk factor than exposure to traditional instruments in listed markets. Therefore, Mr. La Calce adds, “By all means the target investor must already have a good level of investment experience in private markets and must be aware of the inherent risks in the asset class. These investments are mostly aimed at professional investors or, in any case, investors with significant wealth and assisted by skilled advisors.”

For financial investors, both professional and retail, Mrs. Ameli emphasises that – in addition to the advantage of being exposed to instruments decorrelated to the markets (and thus avoiding volatility in phases of turbulence) and taking advantage of the illiquidity premium to intercept higher average returns – investing in Venture Capital also offers “A ‘moral’ benefit that is of increasing interest to more and more people, and which is given by the fact of actively contributing to the relaunch of the Italian economic fabric after a moment of severe crisis such as the one generated by the pandemic.”

To this end, Banca Generali “Has created a container – called BG4Real – which acts as an intermediary between private savings and the real economy, and which has allowed us to support the growth path of some interesting innovative scale-ups, both Italian and foreign ones.” In addition, we should not underestimate the advantages for so-called industrial investors, i.e. mature and consolidated companies that focus on startups to “Pursue, above all, strategic objectives of presiding over and developing new technologies and/or new business models, accessing new skills, ideas and technologies outside the company perimeter.” This is a trend that has been strongly accelerated by the pandemic, Mrs. Ameli remarks.

Finally, Mr. La Calce recalls that “A characteristic of private markets is the extensive dispersion of results between different managers, but also the persistence of results; therefore, it is very important to have the possibility to invest with the best managers. This is a particularly relevant issue in VC, where there are big differences if you operate in the early stage or in the growth one, and where there are markets, such as the American one, which are mature and with excellent players and markets, and others with a different stage of development.”

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