BLM Market Report: UK equity investments - Business Leader News

BLM Market Report: UK equity investments

With investment in the UK’s high-growth companies falling in the first half of 2018, we examine what the future looks like for start-ups and scale-ups in the UK.

Many of the UK’s most promising young businesses rely on equity investment to finance their ambition and growth plans. Whether from angel investors, institutions and funds, crowdfunding platforms or other sources, equity is a form of financing that – for the right sort of business – can allow rapid expansion, relatively patient growth, and everything in between.

Given the few public metrics and data sources of performance of these businesses, measuring the volume of equity investment across all such companies is a valuable indicator of the overall health of the growing company landscape.

Cash invested means a growing UK economy

More cash invested into fast-growing businesses doesn’t just mean more opportunity to grow, it means the UK is successfully creating and fostering a greater number of promising businesses. But, of course, when we see negative trends, the inverse can also be true.

Fall in equity investment

So far this year, we’ve seen a fall in the number and value of equity investments received by high-growth businesses. At the same time, the size of the average deal and the average valuation of the company receiving it have both risen.

New investors and new types of investors are partly responsible for driving these changes. But new companies and emerging sectors are also having an impact. These changes in the market will have significant effects on the funding landscape for growing companies.

Individual investment

The number of individual investments into these businesses fell 11%; from 878 in the second half of 2017 to 782 in the first half of 2018. This drop was felt most acutely at the seed-stage – the businesses that are just starting out and may not even have revenue yet. For these businesses numbers fell by 14%.

This represents one of the biggest half-on-half drops in deal numbers since 2011 (at seed or otherwise). So, while it would be tempting to put the dip down to the natural volatility we would expect to see in the numbers, we can’t help but worry what the effect on the pipeline of later stage opportunities will be.

More noticeable and arguably more significant was the fall in the amount being invested. A fall of over 37% saw a total of £3.27bn invested in the first half of this year. This number is still high compared with historical levels and only just lower than the £3.31bn invested in the first half of 2017.

Nonetheless, it means that there is a strong chance that 2018 might see a fall from the record reached in 2017. The drop here is felt most strongly at the growth stage and we’ve seen a significant fall in the number of ‘megadeals’ (investments of more than £50m). There were 23 of these deals in the latter half of 2017 but there have been only 11 between January and June this year. So why the drop?

How is foreign investment holding up?

The amount that investors headquartered abroad are ploughing into these businesses reached record-levels in 2017. In H2/17 foreign investors were involved in £3.8bn worth of deals, in H1/18 that fell to £2.1bn.

However, foreign investors have always been more likely to be involved in these large investments. It is tricky, therefore, to determine the direction of the causality.

Is the appetite for UK companies amongst foreign investors dwindling and so fewer megadeals are being done, or does the lack of megadeals mean there are simply fewer opportunities for foreign investors to get involved with?

Whatever the direction of travel, one thing is certain; foreign investors, particularly Asian and North American venture capital funds (and indeed, limited partners from the Middle East), are continuing to fill the gap when it comes to high-risk/high-reward investments.

The UK’s VC scene is growing each year, but still lacks the scope of Silicon Valley, where a battery of funds can invest very large sums as a matter of routine.

What type of companies are receiving investment?

If we look at what kinds of companies are receiving investment, we can start to shed more light on what’s causing the drop in our figures. The number of deals into both Fintech and AI – erstwhile darlings of the UK tech scene – have fallen sharply.

This is not to say that either sector is no longer ‘hot’; the two biggest deals of the half were into Fintech companies. But investments into blockchain and VR have climbed to record levels for each.

Now, blockchain and VR are more nascent sectors – within the UK ecosystem at least. 72% of companies in these sectors are at the seed stage, whereas only 46% of Fintech and AI companies are. Blockchain and VR companies are therefore less likely to be raising megadeals. Similarly, being smaller and less well-known, they’re attracting less attention from foreign investors – for now.

This dip in investment could be a cyclical shift in the sectoral base of the pipeline of growing and ambitious companies. So, we might see a recovery in investment volumes as these companies mature.