With every player in the market trying to anticipate and prepare for the road ahead, flows of equity investment into private UK business have taken a hit over the past few weeks. Of course, it’s still early days and we’ll have to wait some time for the whole picture to come into focus. Unannounced fundraisings are still taking place, but there’s a delay in the availability of this data, as we wait for the filings to arrive at Companies House.
In this post, we’ve looked at the initial figures for Q1 2020, and more specifically at the last two weeks, to see what’s happening now and what may come next.
- Over the course of Q1 2020 just 344 announced equity deals have been made into private UK companies. This is the lowest figure since Q3 2014 (322), and marks a 32% decrease from Q4 2019 (507).
- Only 95 deals were announced in March 2020, which totalled £595m, compared to 174 in March 2019, which totalled £1.46b.
- In the past week a meagre 14 rounds were announced. This is the lowest number of deals in a week outside of a Christmas period since August 2014.
The factors at play
The impact of COVID-19 on investment patterns is nuanced, and there are a number of differing behaviours which are factoring in to the emerging trends.
An increased demand for equity investment
Many of the UK’s high-growth businesses are yet to generate any revenue, and as such rely on equity investment to fund operations. With the loss of customer footfall, the closure of properties and major disruption to normal operations, their existing runway is (in many cases) not enough to get through this pandemic. Companies that were expecting more cash in the near future may now be without, as they fail to hit the milestones necessary to receive further tranches of capital agreed in previous funding rounds.
And whilst other businesses are able to draw on government support, startups have been left in the lurch. Many are unable to qualify for government support mechanisms such as the Coronavirus Business Interruption Loan Scheme (CBILS), which requires a business to “have a borrowing proposal which the lender would consider viable, were it not for the COVID-19 pandemic”. This means equity finance is in more demand than ever before.
A change in investor behaviour
More focus on existing portfolios
Almost all investors are likely to be investing less money across fewer deals for a number of reasons. Firstly, all funds – no matter the size or type – will be focusing on their current portfolio, and prioritising capital to these businesses.
Delays and withdrawals from open deals
Open deals may take longer to close, especially those which are yet to go through, or are currently going through, the due diligence process. Due diligence can take months to complete under normal circumstances, and is incredibly difficult to carry out in a remote work set up. On top of this, some funds have policies in place that will further delay the process, such as requiring a physical meeting with founders before they are willing to put pen to paper. Many deals will be delayed, paused or dropped because of this.
There have also been reports that a disappointingly high number of VCs have been withdrawing from late stage deals, even after signing term sheets and sending letters of intent. Law firm SeedLegals has estimated that an astonishing 30% of terms sheets have been revoked in the past two weeks.
Reduced capacity or lack of interest in new deals
Many funds are still very much open to new opportunities and will be encouraged to invest whilst business is cheap, but they’ll have a reduced capacity for this and we can expect new deals to take longer to close. Meanwhile, some investors will be closing the door on new opportunities entirely and adopting a “wait and see” approach.
Mapping the different approaches of funds is difficult. Some, such as Playfair Capital and Angular Ventures have announced that they are continuing to assess new deals, but others are keeping their cards close to their chests. The proof is in the data, which we’ll start to see no sooner than 6 month’s time (the average time it takes to complete an investment).
The road ahead
Drawing on previous data and anecdotes from across the ecosystem, we anticipate the following trends over the coming months.
Overall number of deals completed will plummet
Investors will no doubt take a more guarded approach to risk than before, resulting in a decrease in the number of new rounds completed with seed stage funding taking the hardest hit. On top of increased risk aversion, investment processes have been significantly disrupted, causing many deals to be delayed, paused or dropped during these next few months.
Overall amount invested will decline
Although some companies will continue to secure large amounts of funding (such as Cazoo, which closed a £100m equity round last week), we expect to see a slow down in the number of megadeals completed. Because these funding rounds have become so large, just one or two deals can make a massive impact on the overall investment figures.
A larger proportion of deals will be follow-on rounds
In a continuation of a trend we’ve been seeing over the past couple of years, we’ll see investors double-down on their existing investments, and put up more capital for their struggling portfolio companies in order to help keep them above water.
There'll be a renewed focus on venture stage funding
Venture stage businesses have proven that they have a viable product or service, but are still in a risky position in normal times, let alone a pandemic. We anticipate that early stage funders that are continuing to make new investments will focus on these businesses, rather than the riskiest seed stage businesses.
It seems an understatement to warn that there’s a lot at stake here. Along with the stagnation and loss of businesses which would otherwise have flourished were it not for the pandemic, the entrepreneurial spirit that has been so carefully nurtured across the UK is also under threat.
As Stephen Welton, CEO of BGF recently put it, “we shouldn’t lose sight of the psychological element of all of this. If you’ve been working for ten or twenty years to build up a business and literally overnight it’s destroyed, it’s really hard for people to pick themselves up again and say, ‘Well, I’ll do the next ten years just to get back to where I’ve just come from’”.
As such, investment into the UK’s high-growth companies must continue. Over the coming months we hope to see all types of investors, as well the Government, be brave in their steps to save this important segment of the UK’s economy.
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