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On the Bounce

October 22nd 2021

As the pandemic took hold in the early parts of last year, many aspects of the business world changed shape.  Established businesses focussed on working out how they were going to survive or thrive.  Investors tilted their attention to their existing portfolio.  New deals fell away sharply as initially it simply became more difficult to make the right connections. 

Zoom, Teams, Webex and the like ameliorated some of the remote meeting issues and new deal investments did pick up as the year progressed.  The UK government recognised some of the cash stresses of early stage businesses and launched the Future Fund.  The Future Fund aimed to support UK-based companies with investments ranging from £125k to £5 million, subject to at least equal match funding from private investors.  Even so, overall 2020 in the UK was not such a good year for venture investment, with total funds invested down on 2019.

Move into this year and venture equity funding seems to have taken off.  The latest Equity Market Investment Update from Beauhurst states that the most recent quarter has seen by some distance the largest ever equity venture investment in the UK, at over £6bn.  The first two quarters each showed growth over Q4 ’20, but the jump into Q3 ’21 is dramatic.  If investors continue to invest at such rates then 2021 will be a bumper year, with investments exceeding £20bn for the first time.

Dig a bit deeper into the Beauhurst numbers and some interesting trends appear.  It remains the case the London dominates the investment space and fintech remains the largest most active sector.  But what’s startling is that the deal size and valuations have increased so notably – average deal size has grown by 50% in one quarter.  It's clear that there’s been a shift of focus to later stage (i.e. growth) companies.

Why is this?  Startup and seed investment volumes and values continue to grow.  Perhaps it’s because a few mega deals have distorted the figures – but only one deal (Revolut) was over £500m.

Maybe there’s another reason.  The UK has long bemoaned the fact that we’re good at having great ideas and getting them going, but poor at really making a big success of them.  Our later stage funding has been notoriously disjointed.

Perhaps this is changing.  Indeed, the UK government has closed the Future Fund and now set up Breakthrough.  This programme also makes equity co-investments with private sector investors in growth stage R&D-intensive British companies but the minimum total investment round size is £30m.  This places the focus firmly on firms that are “getting going”.

So it’s possible we’re seeing a maturing of the UK equity venture investment space and a realisation – across both the private and public sectors – that having a complete pathway creates the best journey to success.

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