Q4 2014 PAGEONE report

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Q4 2014 PAGEONE report

Investment Trends in 2014
2014 was a record year of investment in private technology businesses. The market grew 57% in value and 31% in volume with £1.46bn being invested in 343 deals of over £0.5m. The first 3 quarters were very strong – all showing substantial growth in value and volume over the comparable periods in 2013. In Q4, £269m was invested in 86 deals which was still up in volume but down in terms of value when compared to the last quarter in the previous year.

View 2014 PAGEONE report >

As we said in our last research note, 2014’s remarkable growth has been driven by investment in internet/mobile service companies. In the year so far, £865m was received by 183 companies in the internet services sector. The sector now takes almost 60% of investment in the whole tech sector. In 2013, just 91 internet service businesses received £259m – so there has been major positive shift in investor commitments/confidence in these opportunities.

With benefit of the full year data, we have analysed internet service sector investments in more detail. A common perception is that the sector is characterized by a number of “me-too” deals. Whilst there are some areas in which companies with very similar approaches to the same market opportunity are being funded, there is great diversity in the subsectors that investors are backing. We have identified 10 sectors in which at least 5 businesses have received funding in the last 12 months. Outside of these, there were an additional 79 deals which could not be grouped or categorized – which supports our diversity hypothesis. Fintech is the biggest subsector with 38 companies receiving £410m last year. To put this in perspective, the whole of the UK tech investment amounted to just £429m in 2003 so the Fintech subsector is clearly now a key area of investment. Next largest was Fashion taking £80m in 15 deals, followed by Retail which accumulated £51m in 13 deals. Together Travel, Property, Education, Jobs, Health and Eat/Dine raised a further £98m. However, deal sizes do vary considerably between the subsectors – e.g. the average Fintech deal was £10.8m but in Edtech it was just £1.2m. This clearly reflects both the scale of the respective opportunities and investor appetite.

It is also important to highlight the super-performance of London compared to other regions of the UK and Ireland. Back in 2007, about 28% of deals in done in the UK were London based companies. In 2014, that figure had risen to 53%. When the value of investment is analysed, this imbalance is more pronounced with 63% of funds going to businesses within the M25. We know that many of the regions have initiatives to counter this phenomenon but there is clearly work to be done to ensure that companies outside of London have access not just to capital but all the infrastructure that goes with it.

At the end of Q3, we forecast that around 350 companies would receive £1.6bn during 2014. We were close but a little optimistic on both volume and value. As mentioned above, investors committed much less capital than in Q4 than we expected. This decrease was surprising given trends in the first 3 quarters but also when viewed against tech VC activity in the US where tech investment in Q4 was the highest (£6.7bn) seen since 2001. It be a sign that the market is having a pause after a very busy period or simply that some deals due for completion ran out of time before the Xmas period. There have been a few large deals done in the first few weeks of 2015 – e.g. Transferwise (£38m), WeTransfer (£25m), MUBI (£10m) and generally a steady flow but not an obvious overspill from last year. So we may be seeing a return to market norms on deal sizes and frequency distributions i.e. 50% of deals are less than £2m and 10% are greater £10m. It is very early to predict how 2015 will pan out, but our best guess right now for the year is around 350 companies will receive £1.4bn.

Whilst looking at US tech investment we took the opportunity to compare our data with the equivalent US stats. Over the last 10 years, the US has been investing annually 14 times as much as the UK and Ireland. Given that the GDP of the US is just under 6 times that of the combined GDP of the UK and Ireland, it is easy to see why there are more “Unicorns” in the US (see below). In passing, when looking at the data, we have spotted that US investment rates are reasonably correlated to UK/Irish deals. To be clear, we do understand that this is only a simple statistical rather than structural relationship. In fact, oddly the UK data seems to be “loosely” predictive of US trends so if that continues we could see a drop off in US investment in Q1. Watch this space!

Finally, in the last few weeks there has been quite a bit of chatter about Unicorns (http://fortune.com/2015/01/22/the-age-of-unicorns/) – ie venture backed businesses with $1bn (£650m) valuations. Fortune magazine has its list (http://fortune.com/unicorns). Atomico published some data (http://www.atomico.com/explore-d3). The number of UK based or founded businesses on these lists is small, 2 and 4 respectively. Looking over the same period as Atomico, our list would definitely extend to success stories like Just-Eat (IPO April 14 mkt cap: £1.5bn) and Ocado (IPO July 10 mkt cap: £937m) but they are quite a few others who are “quiet” Unicorns or close to “getting their horns”. In 2014, a few of these raised substantial amounts of capital – Powa Technology and, of course, Scotland’s Skyscanner and Fanduel. With the historic capital raising/valuation precedents of Wonga and Monetise, Fintech businesses like Borro and Tradeshift who both raised significant amounts last year should see few financial constraints for growth.

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

  • In 2014, £1.46b was invested in 343 deals of over £0.5m by 311 investors
  • In Q4, £269m was invested in 86 deals of over £0.5m by 107 investors
  • During the year the market grew 57% in value and 31% in volume
  • The busiest investors were MMC, Scottish Investment Bank, Balderton, Index, Octopus, Parkwalk, Accel, IP Group and BGF
  • 66% of deals involved more than one investor
  • Private investors participated in 31% of deals, US investors in 10%, European investors in 7% and Corporate Investors in 11%
  • 183 Internet Services companies raised £865m
  • 68 Software companies raised £263m
  • 26 Cleantech companies raised £130m
  • 66 companies who could not be simply categorised, together raised over £185m
  • The 10 biggest deals were: Borro (£67m), Powa Tech (£51m), Tradeshift (£45m), Fanduel (£42m), Farfetch (£39m), Intelligent Energy (£39m), Funding Circle (£38m), New Voice Media (£29m), Alfresco (£27m) and eCommera (£25m)
  • The most active regions were London and Ireland which were responsible for 53% and 11% of deals respectively
  • London’s share of the VC money was up from 2013 low to 62% of the funds invested in the UK and Ireland
  • On a city-by-city basis, 178 London tech companies received VC, 21 in Dublin, 19 in Edinburgh and 10 in Cambridge. All other cities or towns had 5 deals or less deals

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