Q3 2015 PAGEONE report

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Q3 2015 PAGEONE report

Investment Trends in Q3 2015

The third quarter of 2015 was a very active period for investors in UK/Irish technology businesses – £638m was invested in 131 deals of over £0.5m by 115 investors.   Comparing this to the market’s performance in Q3 last year, investment is up 74% and the number of companies being backed rose by 49%.  This brings the totals for the first three quarters of the year to £1.92bn invested in 365 deals – up 58% and 42% respectively.

View Q3 2015 PAGEONE report >

The biggest single contributor to the growth in Q3 was the £175m invested in Edinburgh based FanDuel.  This monster deal is the biggest single funding that Ascendant has recorded since its started monitoring the UK and Irish venture markets in 1997 – by a long way.  The next largest deals we have on our data are Funding Circle (£102m, Apr 15), Tamar Energy (£100m, Feb 12) and Truphone (£75m, Feb 13).  In this 6th round of finance, FanDuel raised money from international and strategic investors – KKR, Google Capital, Time Warner Investments, Turner Sports, NFL and NBA team owners as well as existing investors.  The management team should be applauded not just for building an outstanding business but also attracting investors of this scale who are largely absent from the UK and only a few reside in Europe.  So perhaps the answer to raising larger amounts of capital is to go West – i.e. to US VCs.  But is this actually true? See below.

July was record month, 58 companies were financed with more than £500k.  The last time we got close to this was in November 2000 – the peak of the market during the “internet bubble”.  The market calmed during August and September but there are still many drivers pushing it higher.  The proliferation of incubators and growth of Govt backed co-investment or direct investment, EIS/SEIS, crowdfunding, new VC funds (some with untested fund managers), new entrant strategic/trade investors are all clear trends accelerating the number of tech companies being formed and claiming their share of the funds available.  As we have said many times Ascendant does not believe that we are in any danger of the market collapsing for now – the fundamentals are still in the safe zone – but this is evidence that more and more money is pouring into small deals (with a value less than £2m) which is not being matched by the number of transactions between £2m and £5m.  This is NOT a funding gap – money is still easily available (if you know where to look) between £2m and £5m – but it is an indicator of a growing disconnect between the investment interests of Seed investors and Series A investors.  Many of the former have lost sight of the simple reality of asset allocation/portfolio balancing that Series A investors must perform – if a portfolio already has a good exposure to a certain subsector, another similar investment is unlikely to be added.  Given the finite number of Series A investors and the sector commitments they have already made, we do expect there to be a number of casualties, especially in London over the next 24 months.

Ascendant is frequently asked to advise UK/Irish tech businesses on how to go about raising finance in the UK.  The FanDuel story highlighted above seems so attractive that many companies want to imitate it. But is this actually true that it is easy for UK/Irish companies to get backing from US VCs?  The table below highlights the percentage of deals with US participation at different size ranges.

Ascendant_Q3_2015

Whilst we know that the overall number of companies backed and funds invested by US investors is rising, it can also be observed from the table that US investors have participated a lower percentage of deals in the year to date than last year (and previous from our data) – i.e. UK/Irish companies are financed from an increasingly wide range of sources other than the US.  Clearly, if the company is raising more than £20m, there is likely to be “bona fide” interest from the US.  Below this, there needs to a number of special factors to get a US investor to back a UK based business.    Ascendant can identify these from our research and network of US VC contacts, and advise on appropriate US fund raising strategies.

Finally, as always we like to speculate what the key figures will be for the whole of 2015.  On the basis of some extraordinary performance in the year to date, we have increased our last forecast to around 470 companies will receive £2.3bn – a very significant increase on 2014.  There have been a few interesting deals announced already in Q4 (e.g. Brandwatch, Uniplaces and Lovecrafts) – let’s hope that the year ends on high note.

Looking more generally, we have summarized our analysis of the quarter in the PAGEONE report.   This highlights a number of trends – including:

• In Q3 2015, £638m was invested in 131 deals of over £0.5m by 115 investors
• In year to date, £1,922m has been invested in 365 deals
• The busiest investors were Crowdcube, London Co-Investment Fund, Scottish Investment Bank, Parkwalk, Syndicate Room, London Business Angels, Mercia Technology
• 70% of deals were less than £2m in value, these received 10% of money invested
• 66% of deals involved more than one investor
• Crowdfunding platforms financed 18% of deals
• Private investors participated in 47% of deals, US investors in 5%, European investors in 6% and Corporate Investors in 16%
• There have been three primary areas of investment focus – Internet Services,
• 74 Internet Service companies raised £465m
• 29 Software companies raised £52m
• 6 Cleantech raised £71m
• The 10 biggest deals (with disclosed values) received 69%% of funds invested, were: FanDuel (£175m), Deliveroo (£45m), Secret Escapes (£38m), Made.com (£38m), AMCS (£32m), First Light Fusion (£23m), Geniac (£22m), MyOptique (£20m), Crowdmix (£17m), Darktrace (£15m)
• The most active regions were London and Scotland which were responsible for 56% and 11% of deals respectively
• London based companies received 48% of the funds invested in the UK and Ireland.
• 74 London tech companies received investment, 9 Edinburgh, 6 in Cambridge, and 6 in Dublin. All other cities or towns had 4 deals or less deals.

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