What trends are shaping the London Venture Capital and investor markets?

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

2017 was particularly important for the 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.

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

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

The first 15 deals claimed 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 are witnessing an acceleration of growth capital in the market especially across European cities but particularly in London and
the UK.

The competitive investor landscape for Series A & B companies will further push valuations upwards, closing the gap on the US.

This particular trend will persist and fuel more valuation growth, and also more competition for deals, which is mainly due to the level of uninvested capital currently held by VC funds globally.

At a much earlier stage, a decline in micro-funds will leave VCs positioned in the early stages with unmatched control and an abundance of deal flow.

What could change the dynamics?

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

Corporate VC investments have increased significantly over the last few years, closing in at approx. $7bn (up from below $4.5bn) in European markets 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 and 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.

This type of investment has been touted as a new-found method to retain the proverbial ‘edge’ and a much cheaper alternative compared to PE acquisitions. This is because it enables a quick value-add, early influence, and, at times, even exclusivity.

Exits, still an issue

Over the last two years though, exits 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 $100-500m and $500m plus brackets (Pitchbook Venture Monitor Report, 2017, US VC Exit Count by Exit Size).