Seedrs Extends Lead In Crowdfunding Sector As The UK’s Top Investor by Beauhurst
Beauhurst tracks every single equity fundraising secured by UK private companies. Here are the headlines so far this year for investment in startups and high-growth businesses.
Overview – The equity investment slump continues in the first half of 2016.
The picture is somewhat bleak for equity investment in the UK’s high-growth businesses. Deal numbers and investment amounts are both significantly down in the last six months compared to the previous period. The quarterly picture is more acute, with deal numbers falling 10% and investment falling by 29% in the second quarter of 2016. What role has Brexit and the EU Referendum played? We cannot prove causation, but the uncertainty around the vote and future relationship with Europe will almost certainly have resulted in deals being delayed, or abandoned altogether. We explore the role that the Brexit vote has had to play in this decline in later in this report.
Underlining the gloomy outlook, this is the first half that we’ve seen crowdfunding figures fall and private equity numbers are at their lowest level since the first half of 2013.
The decline in investment has been felt by companies at all of our measurable seed, venture and growth stages. The decline has been most acute at the venture stage, where deals fell by 38%. Investment amounts, however, fell only at the venture stage, which saw a decline of 45%, whereas investment amounts increased at the seed and growth stages, due to fewer, high-value rounds. The seed-stage witnessed an increase of 42% compared with the previous half, and the growth-stage saw a 5% increase.
Every sector saw a fall in deal numbers in H1/16, but the biggest loser by percentage was retail, falling 43%. Technology companies saw the biggest decline in deals in raw terms (-126).
Within technology – making up the majority of the high-growth companies tracked by Beauhurst – software had the starkest fall, with a 20% difference in the number of deals compared to the previous period.
The story is slightly different when examining the amount of money going into each sector. In technology, historically the sector attracting the most equity investment, the total amount of cash fell, but nonetheless H1/16 was the second highest half on record. In software, despite the massive fall in deal numbers, the total amount invested was at a record high (up 82% on the previous half). Life sciences on the other hand saw total investment fall by 49%. Software’s uptick can be explained by the maturing of a number of companies that are bolstering figures with large growth-stage investments (such as Skyscanner). Life Science’s fall was to be expected as the second half of 2015 was an anomalously valuable half for the sector.
Examining the geographical data, investment has plummeted in London, with deal numbers falling by 28%, a steeper fall than the UK as a whole. Interestingly, a few clusters outside of London have defied the national trend, as Cambridge, Manchester, and Oxford all saw growth on the previous half. Their modest growth, however, is not enough to counteract the impact of the decline in deals.
Overall investment in H1/16 reflects that the money is still there, but fewer investments are being made, and so the average deal size is growing. Deals larger than £10m were the only investment bracket to see an increase in numbers, and deals worth less than £250k declined most sharply (-29%). This belies an aversion to risk on the part of almost all investor classes: larger companies (needing more money) are less of a risk, even if the return on investment is less. Whether this aversion was precipitated solely by Brexit or by something deeper is hard to say. Let’s hope that with a new Prime Minister, the UK will be able to show that it is not only “open for business” to the world, but also capable of nurturing ambitious companies with the funding they need from seed-stage through to exit.
The year of uncertainty – The EU referendum causes trouble for startups and scaleups.
The EU referendum result will have far-reaching consequences for people across the UK, and certainly for entrepreneurs.
The vote, on 23 June, took many by surprise, and put in place uncertainty over not just the UK’s political role with the rest of Europe, but also the future of many British businesses and their operations within the UK.
This uncertainty was reflected in our data on investment in startups and high-growth businesses throughout the year. While it is difficult to establish clear correlation, the notable decline in equity fundraisings in the run up to the referendum could well have been caused by a wait-and-see approach from entrepreneurs and investors alike. As we await prolonged and fairly largescale political and economic changes around Europe, we believe it is likely that investments across the UK will continue to fall in the second half of 2016.
High-growth businesses themselves made their opinions clear: an Aston University survey showed that three quarters of them hoped to remain, and almost 9 out of 10 tech startups were overwhelmingly opposed to a leave vote.
A likely impact is the loss of a significant pot of EU money from the European Investment Fund (EIF), totalling £2.3bn in commitments as of December 2015. The EIF provides SME finance across Europe through debt and equity, and supports 144 UK venture capital and private equity funds, such as Amadeus and Draper Esprit. The EIF has stated there will be no immediate change, but we doubt
the EU will continue to fund the UK post-Brexit – though SMEs can certainly hope.
Brexit will also impact the future of research and innovation funding. Losing access to current and future European funding initiatives, namely, Horizon 2020, could be a huge blow to universities and businesses alike in every sector, particularly life sciences and medical technology.
EU cash might not be the only thing high-growth businesses could lose out on. A recent study by European Startup Monitor showed that 44.8% of the UK’s startup employees come from EU countries, a sure sign of the shortage of tech talent in the UK. Ending, or restricting, free movement could have a serious impact on access to skills, productivity and innovation. Although it’s highly unlikely current employees will be forced to leave, businesses could have trouble attracting new talent. We hope skilled people will always be welcome, but visa requirements may make the UK a less attractive destination for new comers.
Brexit could also have some positive impact on startups and scaleups. One silver lining could be saying goodbye to EU State Aid rules. These limit the amount of help a country can give businesses in an effort to maintain competition across the EU, and affect VCTs and Innovate UK grants, among other schemes. Leaving the EU might see the UK able to provide more support to high-growth businesses in the future and leap ahead of other members.
These are just a few possible changes that might affect startups and scaleups. It remains to be seen how trade will look with the