Investment Trends in Q3 2010
The simple headline is 49 UK/Irish companies (down 6% over Q2 09) received £134m (down 40%) from 73 investors (down 15%). Adding these to the H1 numbers gives £477m invested in 160 deals of £0.5m or more by 186 investors in the first nine months of the year. Although the activity in the last quarter seems disappointing, it is important to remember that Q3 2009 was an unusually high quarter and for the year to date the market is ahead in both value (1.5%) and volume (14%).
There however 2 significant trends that we would like to draw to your attention. Firstly, the absence of large deals. The following table speaks for itself:
Biggest Deal Money Raised (£m)
Q1 08 Spinvox 50
Q2 08 Icera 20
Q3 08 Plastic Logic 25
Q4 08 Arts Alliance Media 39
Q1 09 Viagogo 11
Q2 09 Wonga 19
Q3 09 Ocado 30
Q4 09 O3B Networks 43
Q1 10 Oxford Nanopore 17
Q2 10 Icera 31
Q3 10 Mirics Semi 8.5
In the last quarter, investors have not committed significant sums to any tech company. Bigger deals were being done in Q1 09 when, arguably the UK was in the depths of a recession. One can suggest a number of reasons for this but Ascendant’s view is that during the quarter, there was a sharp reduction in the number of investors committing to new deals. For example, the largest deal in Q3 – Mirics – was funded by its existing shareholders with no new external capital. Anecdotally, many investors will complain of their peers’ unwillingness to consider anything new and have for some time been putting aside additional funds to support their portfolio companies because of concerns about the “next round”. These “woes” are often overstated but we may now be seeing firm evidence of this – particularly when the second significant trend of this quarter is considered. This was the drop in syndication levels to just over 50% – down from 73% in Q3 last year. Whilst this may just be a single blip/aberration in the data, it is important to note that Ascendant’s records of this data have not gone below 50% since 2000 – which was quite a memorable year for many investors. We record a deal as syndicated if it has two or more investors so for syndication to reach these level, many investors are doing solo deals. There are only 3 main reasons for doing solo deals: no more money is needed (so no follow on financing risk), the deal is “so good” that the investor wants to do it all, or no one else will invest. Looking at the actual deals done in the quarter each of these reasons has been a factor in certain cases but we suspect the latter has weighed heavily in many situations. We will be paying very close attention to syndication levels in the next few months as it often heralds fundamental changes in market conditions.
Despite these concerns, we remain optimistic as the volumes of deals completed are being sustained, new funds have been announced, and old friends are back (e.g. Balderton, Advent, etc.). So we think an investment target of £600m-£650m for 2010 is still reasonable. Let’s hope we exceed this.
Looking more generally, we have summarized our analysis of Q3 in the attached PAGEONE report. This highlights a number of trends – including:
- In the third quarter of 2010, £133m was invested in 49 companies by 73 investors;
- So far this year, 160 companies have received £477m;
- The busiest investors were Octopus, Advent, Balderton, Accel, Atlas, Atomico, Finance Wales and IP Group;
- Levels of syndication dropped very significantly to just over 50% of deals;
- Private investors participation in VC deals bounced back to 27% after a drop in Q2 to 20%
- The 10 biggest deals received 51% of funds invested, included: Mirics Semi (£8.5m), Cloudmade (£8.0m), eWise (£7.9m), SRL Global (£7.7m), Notonthehighstreet (£7.5m), Elonics (£6.2m), Flirtomatic (£6.0m), Ubiquisys (£6.0m), Mywardrobe (£5.4m), and Blade Dynamics (£5.0m);
- In the four primary areas of investment – Internet/Wireless Services led the pack taking £51m, followed by Cleantech (£25m), Software (£20m) and Semi/Opto (£15m);
- The InternetWireless Service sector was very active in this quarter with 15 companies receiving investment. The biggest deals were: Cloudmade (£8m), eWise (£7.9m), Notonthehighstreet (£7.5m), Flirtomatic (£6m) and Mywardrobe (£5.4m);
- At 12, the volume of completed Cleantech deals was high but was relatively low with only Blade Dynamics (£5m) getting into the top ten deals. Other Cleantech deals included: Eight19 (£4.6m), Monsal (£4m) and Voltea (£3m);
- VCs invested in just 8 software companies during Q3 – mirroring the slow rate of investment in Q2. The largest Software deals were: SRL Global (£7.7m) and Opencloud (£5m) – all other deals were less than £3m;
- Only 2 Semi/Opto companies received venture capital in Q3 vs 6 in Q2. Nevertheless, these two, Mirics (£8.5m) and Elonics (£6.2m), were amongst the largest deals in the quarter;
- London was significantly ahead of all other regions taking respectively 36% and 37% of the value invested and volume of deals done;
- Cambridge and the Thames Valley came next – each receiving about £12m; and
- All the other key regions – Scotland, Ireland, the North, the SW and the Midlands all received around £8m-£9m.
One other area that might interest you is that we are currently undertaking a major study of the successes and failures of UK/Irish Companies in raising finance from US investors. We already have considerable data and experience in this domain and will use this as the basis of the work to establish what companies have successfully raised US VC, how they achieved this, what were costs involved, was it worth it, which US VCs favor UK/Irish companies, etc. This study is likely to be available early in the New Year and whilst not a free publication, our marketing gurus tell me that we will be offering early bird rates. Drop me a line if you would be interested in this.