Predictions for early-stage investment in 2021

Funding | Reports | Technology

By Chantelle Arneaud, Envestors

With 2020 behind us, Envestors offer some predictions on what the early-stage investment space can expect in 2021

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2020 was undoubtedly a year of challenges for the early-stage investment market. However, as every entrepreneur knows, challenges bring opportunity. And while there was plenty to bemoan, the year ushered in a number of much-needed changes that will ultimately benefit every player in the industry – growth businesses, investors and all of the organisations that serve them.

With the UK’s vaccination programme underway, 2021 will undoubtedly be a better year than its predecessor, however, the realities of a nationwide rollout mean the return to normal will be a slow one.

Here are our predications for what the market can expect in the coming year.

Capital raising – more difficult times ahead

While the UK began Covid-19 vaccinations with a lot of fanfare on 8th December 2020, the reality is that life as normal is still a long way off. No one knows when vaccinations will be complete and how this impact life. That means continued uncertainty. And investors do not like uncertainty.

2021 will continue to be a difficult time for start-ups to raise equity finance. But it will undoubtedly be better than 2020.

In 2020 we saw a decrease in number of equity fundraises, 5,371 compared to 6,797. There was also a drop in the overall amount invested, £15.4b compared to £18.4b in 2019. Throughout the year, investment into early-staged businesses ebbed and flowed with the waves of uncertainty, falling and rising alongside the number of Covid cases. Investors propped up existing investments and favoured more mature, and less risky businesses while seed stage companies saw little of the available pool of investment.

The first half of 2021 is unlikely to be any different. While we usually see a spike at the close of the tax year with investors looking to capitalise on the SEIS and EIS tax schemes, this is likely to be more of a hump than a peak. According to Mark Brownridge, Director General of the EIS Association, “Around a quarter of all money invested through the EIS scheme is raised via Financial Planners and wealth managers and this is where we saw the biggest dent in 2020.” Without renewed certainty this will likely repeat this year. Further, Mark counsels, “When you look at the last recession, in 2008, it took a year to get back to normal. Investors don’t like uncertainty and there is still too much of it.

Certainty is not a switch and will take time to recover and we predict an increase investment activity by the third calendar quarter of 2021.

Digital fundraising platforms becoming the norm

The early-stage investment space has been slow to adopt digital believing that raising capital is all about relationships and therefore couldn’t benefit from online tools. 2020 quashed that idea.

With in-person meetings difficult at the best of time, networks needed a mechanism to facilitate investment. Digital platforms which provide always-on access to information for due diligence, investor-founder Q&A, and analytics that make clear which deals are generating the most interest, are quickly becoming can’t-live-without tools for investment networks.

SetSquared, the world’s largest incubator explains, “While we have already supported over 3,500 entrepreneurs since 2002, raising finance is critical for growth and while we had an informal network of investors, we weren’t in a position to really bring investors and entrepreneurs together.  We knew that in order to move forward with our vision we would have to go digital.” explained Jake Ronay, Former Investment and Corporate Partnerships Lead at SETsquared.

These digital platforms offer benefits for all parties:

  • Fundraising companies can track investor interest, control who sees their confidential documentation and streamline the due diligence process for potential investors
  • Investors can filter deals based on interests, track companies and ask founders questions online and conduct due diligence at their leisure
  • Investment networks can promote deals, track which deals are generating the most interest and close investment online

Adoption of digital investment platforms will continue to grow throughout 2021, becoming the norm by the close of the year.

Stronger regional super networks

Between 2001 and the second quarter of 2020, 49% of all equity deals and 59% of all invested funds went into companies located within London. While there have been efforts to address the imbalance and ensure that businesses across the UK have access to funding and support services, not enough headway has been made. In 2021 we are going to see a new, more effective approach.

Every region across the UK has its unique set of local players dedicated to supporting growth businesses. What is common from region to region is that these players are all disconnected. This makes it incredibly difficult for businesses to navigate the array of organisations —from accelerators, to angel investment clubs to workspace providers to LEPs. It also represents a duplication of effort and therefore inefficiencies.

Towards the end of 2020, with the increased difficultly faced by early-stage businesses, we started to see a shift towards local players teaming up – understanding they shared a common goal – and working together to support those local businesses.

A notable example is the recently launched Birmingham Tech. This non-profit organisation is aimed at connecting the start-up ecosystem in the West Midlands. Founder Yiannis Maos explains, “I started off with a focus on creating Birmingham Tech Week, but quickly realised that there was a much bigger job to be done in fostering collaboration across the tech ecosystem.”

Through its platform, Birmingham Tech seeks to provide a single access point for all entrepreneur services, programmes, and support across the West Midlands. Yiannis admits this approach was met with some initial scepticism, “A lot of people felt the concept had been tried before and that it wouldn’t work. But eighteen months later, as it started to come together, minds quickly changed and many who initially viewed the idea with pessimism are fully behind us and supporting our initiatives. While Birmingham Tech only launched a little more than a month ago Yiannis estimates they have 70% of the community on-boarded including the West Midlands Combined Authority, Bruntwood SciTech and Aston University.

With 2021 promising continued challenges for early-stage businesses, we can expect to see more regional super networks launching throughout the year.

Increasing deal sharing

As a concept sharing deals between distinct networks is not new. However, it was slow to gain traction as many investment networks were reticent to open up their investor base to partner deals. The challenges in raising capital throughout 2020 caused a rethink and as we closed out the year, there was a shift in attitudes toward the concept.

A good example is the UKBAA’s Dealshare. Previously only accessible by members, the association opened its doors to the broader industry. We also saw a collaboration between DSW Ventures and NorthInvest to help companies in the Northern Powerhouse, with DWS’s David Smith saying, “With the economy feeling the impact of the pandemic, it is more important than ever that funders work together to create a supportive start-up ecosystem.”

As networks recognise the benefits of collaboration, we can expect to see deal sharing become commonplace in 2021.

Companies up their game

Every investor knows the value of investment readiness, but companies that do are few and far between.

It is natural for an entrepreneur, who has poured blood, sweat and tears into a business, to think it’s the greatest thing in the world – and then to assume it will be obvious to investors. But winning investment is as much art as science and passion alone won’t cut it. Being investment ready means much more than having a wizzy pitch deck. It requires the articulation of a proposition that credibly tells an investor how they will get their money back. And that is all in the detail – from the valuation to the sales forecast to market size.

With the continued difficultly predicted in raising capital in 2021 entrepreneurs will start to put more emphasis on getting investment ready to increase their chances of securing capital investment.

So, while it’s easy to condemn 2020 as a terrible year, it introduced a number of positive changes that will benefit the early-stage investment space. 2021 will not be without its challenges, but as we progress through the year we will ultimately, as an industry, find ourselves in a much improved situation.

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