Want to know what trends are shaping the London VC and investor market?

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Funding London team

BLM met with the Funding London team to find out what trends are shaping the London VC and investor market. 

The previous year was particularly important for the London and UK VC market, pinpointing the transition from a pure exporter of great technologies and talent to the US investment market, to a player in the global ecosystem in the later stages of the funding journey, matching in effect the level and valuations of US VC investors.

The signal was given by the emergence of mega-deals like Improbable ($502 million), Farfetched (£313 million), Deliveroo ($385 million), Prodigy Finance ($240 million), Neyber (£100 million), Atom (£93 million), TrueSpeed (£75 million) and Funding Circle (£60 million).

This trend continued even in Q4 of 2017 with Truphone (£255 million), TransferWise (£211 million), OakNorth (£154 million), Orchard Therapeutics (£85 million) and Secret Escapes (£83 million).

The first 15 deals claiming more than 20% of the whole invested venture capital in the market, clearly differentiating the continent’s emerging VC ecosystem from that of the UK market.

Upcoming Trends

In 2018, we will witness an acceleration of growth capital in the market especially across European cities and mostly focused in London and the UK.

The competitive investor landscape for Series A & B companies will further push valuations upwards, closing the gap with the US ones, backed by the migration of capital to later stages, in start-ups with proven markets, decreased risk, and resonating with the appetite du jour for specific technologies.

This particular trend will persist and fuel more valuation growth, and more competition for deals, mainly due to the level of uninvested capital currently held by VC funds globally, recently by Pitchbook Venture Monitor around $90 billion and growing.

At a much earlier stage, a decline in micro-funds will leave those VCs distinctly positioned in the early stages with unmatched control and abundance of deal flow. Allocating substantial importance on the UK VC funds such as Downing Ventures, Start-Up Funding Club, Albion, Seedcamp, and catalyst initiatives like the London Co-Investment Fund, investing in budding tech and science start-up businesses, who are looking to raise the finance they need to take their business to the next level.

The London Co-Investment Fund is supported by £25 million from the Mayor of London and over £100 million from its 14 co-investment partners and has now over 100 portfolio companies.

Potentially, the lower end of the market can observe a moderation of valuations as more start-ups compete for early-stage VC funding, raising the bar for new entrants.

Some trends have been in the making for years, such as the migration of capital to later stages, while others are purely a short-term reaction to the perception of VC market risk or purely opportunistic.

There are two areas that could potentially change the dynamics of the VC ecosystem in 2018 – the growing impact of Corporate VC investment and the issue of a declining number of exits.

Corporate Venture Capital Investment Trends

Corporate VC investments have increased significantly over the last few years, closing in at approx. $7 billion (up from below $4.5 billion) in European Market and participating in 20% of all deals.

Unlike most VC funds the CVCs adopt a variety of strategies when investing, leveraging internal resources or portfolio investments, aligning such investments with development in their products or market positions. In some cases, these investments are akin to existing internal innovation processes, testing, implementing and rolling out new solutions throughout the organisation.

A new-found method to retain the proverbial ‘edge’, a much cheaper alternative compared to PE acquisitions, as it enables a quick value-add, early influence, and, at times, even exclusivity. A mechanism for continuously innovating at a fraction of the internal cost and have stakes in most competing solutions.

It is clear that many corporations will position themselves in the VC end of the investment market and increase their footprint, across the US and Europe, across Early and Late VC stages.

Exists, still an issue

Over the last two years, Exists have been declining across Europe and the US (Pitchbook Venture Monitor, 2017, US VC Exit Activity by Year, and KPMG Venture Pulse, Q4 2017).

The upward trend of valuations of the last few years from early to late VC stages meant that even if the number of exits reduced, the overall value of acquisitions has been increasing, especially between $100-500 million and $500 million plus brackets (Pitchbook Venture Monitor Report, 2017, US VC Exit Count by Exit Size).

The vast majority of all Exists are strategic acquisitions, leaving buyouts and IPOs as a secondary route for companies, although listings such as Blue Apron, Snap and Dropbox have performed better than expected by markets.

As corporates design new accelerators, incubators, and global VC arms, in effect, joining in at the start of the funding journey, it is clear that the incentives for acquisitions at higher price points will continue to diminish, and led by tech giants like Apple who already announced a $30bn to be invested.

There are many reasons why the M&A activity in the technology sector will never really stop, even if periods will experience fluctuations, and vertical focus shifts.

The synergies, efficiencies, market share growth, market penetration, diversification, increasing supply chain power, combined with still relatively low debt interest rates channelled through challenger banks will continue to provide great opportunities in the space.

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