Investment Trends in Q1 2012
The simple headline is that in Q1, £307m (up 39% from £221m in Q1 2011) was invested in 64 UK/Irish companies (42) by 99 investors (72). This is quite a startling set of numbers particularly when one considers that in Q4 last year when just £129m was invested in 48 deals. On closer inspection, it can be seen that the figures are distorted by 4 large Cleantech deals (see below) which attracted over £120m between them. It would be wrong to say that these are complete outliers but if they are discounted the general trends are much more consistent with those of recent quarters and reflective of our real life day-to-day experience that the market is quite tight at this time.
One especially positive trend was the bounce in the number of investors participating the market. As we have commented in previous notes, the number of active investors has been in decline since 2008, hitting an all time low of just 60 participating VCs in Q1 of 2009. With the return of some “Big Hitters” to the most active list in the last quarter and more new names coming into the market, we believe that there is some room for optimism. As a one off, we have added a third chart to the PAGEONE note to highlight this trend (NB the commentary that this requires us to omit has been set out below).
It is significant that the 3 biggest ventures deals in the UK in Q1 were in the Cleantech sector, but we believe that is particularly noteworthy that our research team could only identify 5 Cleantech deals during Q1. Adding this to the fact that there were only 31 Cleantech companies who received funds in 2011, it appears that we are now well past the peak of VC interest in the sector (which our data indicates was in 2010). The market for Cleantech venture investment in the UK and Ireland has now matured with remaining VCs now primarily directing more capital to a fewer number of later stage businesses. A few early stage Cleantech businesses will still get funds but these will be the exception rather than the rule.
Over the 5-6 years, there has been a general shift in the location of pure play software businesses which receive VC backing from London to the regions with Scotland, Ireland and the North coming up as most active. Whether this reflects a shift in the investment preferences of London VCs, the location of good software engineering departments in Universities, or a lower diversity of investment opportunities in the regions of the UK, is hard to say. But the stats in Q1 make clear reading: only 4 out of 15 software companies that were backed by VCs were London based. By contrast 59% of Internet/Mobile businesses that got funded were located in London.
We usually make a stab at what we “feel” will be the value and volume of investment for the whole year in the covering note to each PAGEONE report. 2011 was a particularly disappointing year with only £786m invested in 193 companies. Given the scale of the numbers we have just reported for Q1, it is tempting to extrapolate this into a recovery in the market and many people would like to this to be the case. Nevertheless experience says that Q1 is usually the busiest time of the year and that in certain years there is a catch up from a slow Q4 in the previous year. Until we see the data for Q2 our view is that trends shown in Q1 data are likely to be unrepresentative of the year and that we still need to listen to market sentiment that things are very hard to direct us on how the year will pan out. So we will be pleased if VCs deliver more than £800m to the UK and Ireland’s tech companies this year and do not feel that the volume of deals will exceed 200. Time will tell…
Looking more generally, we have summarised our analysis of the year in the attached PAGEONE report. This highlights a number of trends – including:
- In Q1, £307m was invested in 64 deals of over £0.5m by 99 investors;
- The busiest investors were Accel, Enterprise Ireland, IP Group, the Business Growth Fund and Index;
- 66% of deals involved more than one investor;
- Private investors participated in 23% of VC deals;
- US investors contributed to 7 deals, European investors 5 and Corporate investors 6;
- The 10 biggest deals (with disclosed values) consumed 61% of funds invested, included: Tamar Energy (£65m), Bluewater Bio (£23m), Intelligent Energy (£22m), Unruly Media (£16m), Farfetch (£12m), Hailo (£11m), Mainstream Renewable Power (£11m), GCI Telecom (£10m), Mythings (£10m), Bactest (£9m);
- There were two primary areas of investment focus – Cleantech £125m and Internet/Mobile Services £113m;
- Although Cleantech received more investment than any other sector, only 5 companies got funded: Tamar Energy (£65m), Bluewater Bio (£23m), Intelligent Energy (£22m), Mainstream Renewable Power (£11m) and Biomass Engineering (£5m);
- By contract, 29 Internet/Mobile Services received funds. The largest deals included: Unruly Media (£16m), Farfetch (£12m), Hailo (£11m), Mythings (£10m), Videoplaza (£8m) and StylistPick (£7m);
- 15 Software companies received £14m. Notably only 4 of these companies were based in London. The largest deals were Lineup Systems (£3m), Artesian Solutions (£2m), KnowledgeMill (£1.5m), Rainmaker (£1.3m) and Brainient (£1.2m);
- Using a “wide” definition of the sector, 5 Semi-Opto businesses took £14m. The largest deals were Decawave (£5m), Surrey NanoSystems (£4.5m), Seren Photonics (£1.8m), eoSemi (£1.5m) and Nines Photovoltaics (£0.6m);
- London again received the lion’s share of funds. 24 London companies received £188m. It is worth noting that 17 of these companies were Internet/Mobile service businesses.
- Outside of London, Ireland was very busy with 9 companies receiving £27m. VCs backed 8 businesses in the North to the tune of £14m. 5 tech companies were funded with £0.5m or more in both Scotland and the Midlands but otherwise the regions (including Cambridge and Oxford) were very quiet.