Startups of yesteryear revisited

| Beauhurst

We track some of the UK’s fastest-growing businesses here at Beauhurst, many of which use equity investment to help them grow – particularly at an early stage. To try and get a better idea of how successful (or otherwise) businesses that raise investment are, we’ve looked at those that raised in 2011, and plot their successes and failures in the following years.

Six years have passed since the last of these companies raised equity at the end of December 2011. In this period, 1,545 companies raised money, giving us a fairly good sample for the success and failure rates of equity-backed companies over a six year period. It allows us to ask the question — if a UK company raises equity funding in a given year, what are the chances the investors will see a return on their investment within a six year period?

The successes

An impressive 18% of these companies have gone on to complete a successful exit. Of these, 25 (2% of the total that received investment) have gone on to complete an IPO. Just under half of these operate in the life science industry. As we mentioned in our last post, drug development processes are extremely capital intensive, so it makes sense these companies should look to public markets for funding, as opposed to venture capitalists or angel networks.

Here are the top IPOs from the cohort, by amount raised:

Company Amount Raised (IPO)
Just Eat
£360m
Circassia
£200m
Adaptiummune
$191m (£123m)
NuCana
$114m (£85.1m)
Horizon Discovery
£68.6m

16% of the total number of startups have since been acquired. These include household names such as Addison Lee, Shazam, DeepMind and Skyscanner. Acquirers include American tech giants such as Apple and Google, alongside private equity firms such as The Carlyle Group. The largest acquisition to date is still Skyscanner, and by quite a long way, at £1.4b.

Company Acquisition Amount
Skyscanner
£1.4b
DeepMind
£400m
Shazam
£300m
Addison Lee
£300m
Swiftkey
$250m (£173m)

The average amount of money raised by the companies which had either IPO’d or been acquired was £13.4m. Their average pre-money valuation at exit was £27m. Interestingly, the remaining companies that have not died, but are yet to exit, have a slightly higher average pre-money valuation. This could be due to the increasing tendency for companies to look to private funding to fuel late-stage growth before they consider exiting.

The failures

Of the 2011 cohort, 15% are now dead. A further 4% have entered “zombie stage”, suggesting that they are undergoing noticeable difficulties. So together, 19% of the initial companies have failed in some regard. An additional 10% have failed to grow beyond seed-stage.

The following 10 companies raised the most capital before going under:

These companies were split between the life science and environmental technology sectors, indicating the risk these sectors represent to investors. Indeed, cleantech companies seem to be particularly risky – 28% of those which received investment in 2011 have now failed outright. 

At the other end of the spectrum, just 5% of financial firms which raised equity in the same period died, whilst 21% have exited. This makes sense in the country which has become the fintech capital of Europe.

Enigma Diagnostics raised £82.4m in equity finance, and £2.45m through grants, before it entered liquidation in March 2017. Its remaining IP assets were sold the following month. This company had developed “MiniLab Platforms”. These were essentially small, portable diagnostic kits, which could be used to test for a range of diseases in under an hour. These tests could be carried out locally on-site, cutting out the lengthy off-site analysis process.

Their main backer included Shanghai Debay Capital, a China-based VC firm which invested $50m into the company in 2014. Other significant shareholders at the time of death were Porton Capital, a Cayman Island registered entity referred to as P-Ksa Spv Inc, and Ploughshare Innovations. Some controversy currently exists over the involvement of Porton Capital (also registered in the Cayman Islands). 

Enigma’s turnover peaked at £14m in 2012. However, even in that year the company did not manage to turn a profit, and revenues slumped to mere thousands in the following years. 

Startups of yesteryear

So, it’s a mixed bag for our cohort of yesteryear startups. Over a quarter have gone on to fail or stagnate, representing nearly £700m in lost capital. However, 18% have gone on to successfully exit, either through IPOs (2%) or acquisitions (16%). This is a considerable amount, especially when you take into account the oft-quoted statistic that 90% of startups fail. This suggests that raising equity either bestows some advantage upon startups, or that startups that pass the due diligence processes of investors are more likely to succeed than those that do not. However, it is by no means a golden ticket. 

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