The Investment Landscape for 2021 — Insights From Alacrity Global

Digital Transformation (DX) are just two words that could be used in describing the global tech industry of 2020. The past year brought about an unprecedented level of digitization and accelerated adoption of technologies across all business sectors. Companies providing solutions that supported, enhanced or enabled that digital transformation journey were able to achieve in some cases spectacular growth.

Technology investing in 2020 had some specific characteristics as well, including high revenue multiples for valuations, preferences for M&As and SPACS as exit vehicles, and increased private investment allocations. There was growth in terms of new funds, a preference for later-stage opportunities, a heavy focus on metrics during due diligence and management, and a focus on specific technology categories. Not surprisingly, more interest was shown in companies able to benefit from COVID-19 reactivity, in sectors including MedTech, EdTech, E-commerce, Logistics, Workflow Software, and Communications and Collaboration tools.

The number of deals closed in 2020 was lower compared to the year earlier, however the deal sizes were larger. For 2021 it is expected that these investment trends will continue, as there is much of the world-wide economy still to reach full digitization. The following are some additional points of view on what the 2021 investment landscape should be like …

Customer Focus

Customer Engagement strategies will be very important to valuations for investors, as 2021 is expected to see the start of the economic recovery process, beginning in the second half of the year or sooner. These strategies will be particularly important for early-stage companies. As noted, they received the least investment interest in 2020 and will need to demonstrate strong execution capabilities to gain attention in 2021. Unfortunately there is little indication that investor appetite for early-stage risk is going to change significantly this year.

Customer Retention strategies will follow in importance, particularly for B2B SaaS companies. Industry research suggests that strong revenue retention has a compounding effect on growth and it is established as the most important metric for ensuring medium to long-term business health. So it stands to reason that high customer churn rates will not be viewed favourably by investors. Additionally, the IT spending frenzies of 2020 can not be sustained, particularly as businesses begin to feel an easing of recent scramble-to-adopt motives. A return to more normal “need to have versus nice to have” purchasing rationales, based on tangible value, should be expected. Also, a focus can be expected on digital solutions that offer minimal friction when integrated with legacy systems, and painless/beneficial new-user onboarding.

Pay-for-Use Pricing Models (P4U) are an emerging trend for monetizing cloud software services. Compared to the established monthly or annual subscription models, it is felt that P4Us better reflect the value a customer gets based on what is consumed, where and when. The more consumption, the higher the value and therefore the cost, but when less usage is required, the costs are proportionally lower as well.


With many investment funds moving into a ‘hold position’ during 2020, the potential for a return to more activity is there for 2021, but it is dependent on a return to a more stable and healthy market to work within. PitchBook is a U.S. market research and data company that covers the global private capital markets, including venture capital, private equity and M&A transactions. According to their research, the amounts of U.S. venture capital and private equity funds available to be invested are now estimated to be at a record US$152.7B and US$550B respectively. European VC funds available grew by 14.8% in 2020, and private equity funds surpassed €294.0B.

One positive development in 2020 was an increase in investment from Corporate Venture Capital (CVC) groups in the U.S., Europe and Asia. This trend is expected to continue in 2021, but will be influenced by the Corporate ownership group in each case, ensuring investment alignment with the parent firm’s technology, geography, deal stage, deal size and ROI strategies.

Another development has been a shift of investment activity outside traditional technology hubs such as California to include more opportunities in ‘Tier 2’ centers such as Austin TX and others. PitchBook noted that this trend has been accelerating recently and projects that investment in the San Francisco Bay area could fall below 20% of the total U.S. deal count for the first time in 2021. This shift represents a gain for cities such as Boulder CO, Seattle WA and Salt Lake City UT. Factors driving the changes include operating costs, access to skilled resources and changing life-style preferences that were amplified during the pandemic — how and where people of all ages now want to live and work.

Technology Market Sectors

Industry sectors that experienced strong economic performance in 2020 included the Healthcare sector and almost all other industries that were ripe for the first-time or increased adoption of Digital Transformation technologies. This will not change in 2021, however as noted below, there are likely to be corresponding increases in the focus on Cybersecurity and 5G networking.

Healthcare will continue to be an attractive investment segment this year, for the same reasons as experienced in 2020. PitchBook reported that the Operations and Care Management segment experienced the largest infusion of VC funds in 2020, totalling US$5.3B across 184 deals. Continued industry drivers were cited to be government funding, adoption of new IoT and AI applications, cost optimization, care improvement and patient engagement applications (see portfolio company Cliniconex on page 9).

The adoption of new and increased Cybersecurity defences across all industry sectors is likely. Some of this is anticipated in order to play catch-up to the 2020 rush by IT to support a decentralized, working-from-home (WFH) labour force. However, unfortunately, according to the World Economic Forum, COVID-19 can also be linked to a 238% rise in global cyber attacks against the financial sector between February and April of 2020 alone. And in the U.S., attacks against hospitals and healthcare providers increased a distressing 50% between February and May of 2020. A sad reality indeed.

Many attackers now incorporate a form of ‘social engineering’ in their designs — ones that exploit unwitting staff members through email, social media and other “attack vectors” as they are called. Unprepared/unaware employees have become the single biggest security exposure for organizations. And it is worth noting that several Alacrity portfolio companies are experiencing considerable growth providing solutions to these and other such cybersecurity issues (e.g., HYAS, Hut6, ThinkRF).

Communications services are also expected to grow aggressively thanks to the higher capacity and reliability features of new 5G wireless networking technology that will support IoT, AI, video communications and other emerging applications. Not surprisingly, 2020 caused some communications infrastructure weaknesses to become more apparent. According to a Microsoft study approximately 150 million Americans continue to lack the quality broadband services that became fundamental in adapting to the pandemic. Competing remotely for work, education, e-commerce, gaming, streaming services, telemedicine and other functions remains very challenging in some network areas, and advances in 5G networks can alleviate many of these issues.

Digital Transformation technologies will continue to provide strong growth opportunities for B2B enterprise tech companies in 2021. Not all customers have completed this evolutionary journey. Many pushed ahead with rapid adoption of new technologies to meet immediate needs, and will now need additional implementation, integration and support services. The latest forecast by research firm Gartner suggests that worldwide IT spending will reach US$3.9T in 2021, and that CIOs will continue to prioritize spending on technologies and services that were deemed “mission-critical” during the first stages of the pandemic. In 2021, however, there will be a renewed focus on balancing costs while continuing to progress. The market for Enterprise Software is also expected to be strong (rebounding nearly 9.0%) as remote work environments are expanded and better integrated for the longer term. Analysts expect such trends to persist through 2024, with some businesses requiring five years or more to complete their digital transformation processes.

Final Thoughts

High levels of digitalization for internal processes will continue to be the strongest business driver in 2021, particularly as it relates to supply chain, customer and partner interactions and service delivery. Industry analysts expect ongoing growth in cloud computing and applications for core business functions, security and customer experience. Optimization will be a key objective throughout, generating ease-of-use and cost efficiencies. Companies able to exploit these market dynamics should have the greatest prospects for growth this year. Startups that do so in the right, sustainable sectors will still be able to attract investment. Time, vaccines and economic recovery will write the rest of the story …