Investment Trends in Q1 2014
The simple headline is that in the first quarter of 2014, £538m (vs £287m in Q1 2013) was invested in 85 deals (59) of over £0.5m by 108 investors (82). This extraordinary level of investment has not been experienced in the UK and Ireland since Q1 2001 – just after the peak of the market in November 2000. As much as it is great news that the market is booming, it should be noted that nearly all the growth was from investors backing London based digital media businesses. With few exceptions the rest of the market and the country missed out in this growth.
So are we in a bubble? There are signs that support such a thesis – runaway growth in transaction volumes, proliferation of incubators/accelerators, booming private investment, increasing number of VC professionals investing for their own account, many sub-sectors becoming cluttered with me-too competitors – I could go on. However we do not think that the market is overheated – at least not yet. Ascendant tracks a number of indicators to help us identify areas of interest. One of these is levels of syndication. In normal conditions, around 65% of UK/Irish tech investments are syndicated (ie have more than one investor). When syndication starts to drop below this it is usually an indicator of malaise – investors being overconfident, greedy or hasty and doing more deals on their own or being unable to find another investor to join them in the transaction. Before the last crash syndication levels dropped briefly to just under 50%. In Q1 syndication sat at 61% which is not something we would worry about too much but we will be watching this closely for the rest of the year. Secondly the key fundamentals are very different from 2000. The UK Government has put into place a number of tax based investment support schemes which have attracted private investors to the tech market. We believe and are told by the folks in Horse Guards Road that these will be with us for a good long while. Thirdly, the structure of the UK market has improved over the last 5 years. There is support of deals at all sizes and stages of development. For example in Q1, 50% of all deals were less than £3m compared to just £1.5m in Q1 2013. This supports the view that money is available to good companies as they grow and need to finance expansion. So we may well be in a golden period right now but we will continue to watch for overheating.
The Q1 stats show that the value of investments is up 87%. Nearly all of this has come from a boom in internet/wireless services investing up from £51m to £340m. 51 digital media/services business were funded in Q1 vs 16 in Q1 2013. So investors are not just financing a greater number of businesses but also committing more capital to them. Reassuringly, we can identify no particular subsector getting more attention than others – fintech, fashtech, edtech, eattech, etc all collected investors’ money. Not surprisingly the vast majority of these businesses are based in London which experienced a huge inflow of capital in Q1 – £395m – equal 73% of all funds invested in the UK and Ireland. All other regions were static at best or more commonly down on last year. Fund raising outside of the M25 can be a challenging business.
In our last quarterly review we commented on a very strong Q4 in 2013. This growth was surpassed in Q1 and we are now experiencing investment levels not seen for 13/14 years. As discussed above we see no particular reason for this to drop off in the near or medium term. There are more investors participating in the market, at both the private and institutional ends, which suggests a very good year for companies seeking investment. Given the usual seasonal investment patterns, our best guess for 2014 is that around 300 companies will receive £1.5bn. It is too early to say what the run rate is for Q2 but there have been some notable transactions already. So let’s hope that the good pace of activity is maintained.
Looking more generally, we have summarized our analysis of the quarter in the attached PAGEONE report. This highlights a number of trends – including:
- In Q1 2014, £538m was invested in 85 deals of over £0.5m by 108 investors
- The busiest investors were Balderton, MMC, Accel, Albion Ventures, Business Growth Fund, Episode 1, Frog Capital, Index and Passion Capital • 61% of deals involved more than one investor • 50% of deals involved investment of less than £3m
- Private investors participated in 27% of VC deals, US investors in 9%, Euro investors in 5% and Corporate Investors in 13%
- The 10 biggest deals received 57% of funds invested, included: Borro (£67m), mPowa (£45m), Tradeshift (£45m), Intelligent Energy (£39m), eCommera (£25m), WorldRemit (£24m), AMCS (£19m), Hailo (£16m), Zopa (£15m) and Shazam (£12m)
- There were three primary areas of investment focus –Internet/Wireless Services (£340m), Software (£83m) and Cleantech (£79m).
- 51 Internet/Wireless Services companies received VC backing. The largest Internet/Wireless Services deals were: Borro (£67m), mPowal (£45m), Tradeshift (£45m), WorldRemit (£35m), Zopa (£15m), FTBpro (£11m) and Brandtone (£11m).
- In the Software sector, 16 companies received investment. eCommera (£25m), Shazam (£12m), Nexmo (£11m) and Bizzby (£6m) received the biggest VC cheques.
- Just 8 Cleantech companies raised capital with the biggest deals being: Intelligent Energy (£39m), AMCS (£19m), 3Sun (£9m), Iceotope (£6m) and Bowman Power (£3m)
- London completely dominated all other regions taking 74% of the value and 65% of the volume of tech investment
- All other regions failed to reach even 10% of value or volume