Investment Trends in Q4 2015
Explosive growth in Tech Venture Investment
2015 was an outstanding year for venture investment in UK/Irish technology companies. More companies received venture backing than the previous market peak in 2000 – the year the Internet bubble expanded (and burst). In Q4, £670m was invested in 171 deals (of over £0.5m). This brought the total for the year to £2,591m invested in 534 deals by 421 investors – up 76% in value and 53% in volume. Although the market did not exceed the total amount of money invested (£3.5bn) in 2000, it did fund more companies (in a stable/structured/supportable way) than achieved at the peak of the madness of the internet bubble.
As we mentioned in our Q3 report, the biggest deal of 2015 was the £175m invested in Edinburgh based FanDuel in July. This monster deal is the largest 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) although we should mention that Deliveroo raised £111m last year (in 2 installments). With the demise of many Unicorns in the US in the last 12 months, these larger deals may get harder to pull off in the UK in 2016 – although there have been a few big transactions in the first few weeks of 2016 (see below).
Rise of the Angels
One particular trend that has leapt out from our analysis is the massive rise in angel participation in tech financings. In 2015, private investors invested in 46% of all tech deals in the UK and Ireland. This is significantly up from 32% in 2014 and massively increased from 19% in 2007. The biggest single driver for this has been the growth of Crowdfunding in the last 2 years. The Private Investors drawn to these platforms have boosted angel participation and allowed a much wider group of investors to access investment in private tech companies. Whilst the average deal size for Crowdfundings of tech businesses is relatively low c.£1.2m (whole market average is £4.9m), 11% of deals closed in 2016 were financed by the “Crowd” and this is what has lifted angel participation to these super high levels bypassing the “closed clubs” of the angel syndicates that have dominated the UK for so long. However, we should start that there is still little evidence of VCs coming into follow-on rounds for Crowdfunded businesses but it is early days for these platforms and already companies have returned to the platforms for second rounds of funding. We will be looking at this area closely in the coming quarters as there was a slight drop off in tech deals being Crowdfunded in Q4 last year which could be compounded by the changes in the tax regime to allow the platforms to offer Crowdfunded debt-securities as eligible ISA investments. The combination of these could make Crowdfunding less attractive to tech companies (but more interesting to non-tech businesses).
Fintech – the facts beyond the hype
Nearly every week in the papers, twitter, Linkedin, etc we hear that Fintech is the “big thing” and the UK is leading the world in this area. So we have looked at our data to try to get to the truth behind the hype. We define a fintech business as one which sells technology to financial services companies or financial services via technology to businesses and consumers. This is a lot narrower, than the definition used by other parties and hence our numbers are lower than many quoted by various organisations. The headline numbers are in 2015, 71 UK/Irish Fintech businesses received £544m of venture/growth capital from 99 investors. This means that Fintech companies represents 21% and 19% of the value and volume of whole tech market – a significant part but far from the dominant position it is credited with. Investment in Fintech has grown in the last few years and financings in the sector are significantly up in 2015 – the number of deals increased by 87% and value by 29%. This is quite different from the tech market as a whole which saw volume grow by 53% and value by 76%. Effectively this means that there is now a lot of small deals being done – 68% of Fintech financings raised less than £2m. Not surprisingly, this is reflected in the investors who are backing these companies – primarily small VCs and European investors. Private investors are backing Fintech but at much lower levels than in the market as a whole. Many key Series A investors have already committed to specific companies in the sector and therefore their presence in new deals is low or sporadic. Slightly more worrying, is the fact that major financial institutions are almost invisible as investors in the sector – the only majors to participate in 2015 were Baillie Gifford, Goldman Sachs, BBVA, BlackRock and CommerzVentures. Another concern is concentration of deals in London. With the exception of Dublin in Ireland, there is very little Fintech activity in other parts of the UK despite there being many active financial centres throughout the country. So the picture is mixed but worth watching in 2016.
Prospects for 2016
Finally, as always we like to speculate what the key figures will be for 2016. Given the underlying turmoil in the investor base and extraordinary market performance last year, this is not so easy. There is plenty of new money – e.g. Lakestar, BGF, Octopus, Index, Cocoon Networks, Open Ocean, Propel, UCL Technology Fund and LocalGlobe, etc.- to name but a few. Anecdotally the market has been quieter in the first couple of months of year but we are more persuaded that it will be driven by the new capital that needs to be deployed, new investment managers who will want to prove that they can originate and close deals in a competitive market, and an endless number of entrepreneurs “gasping” for cash!. We know from our own incoming emails that there are plenty of companies who want money but the “signal to noise” ratio is weak. So our best guess is that 2016 will see around 600 companies receive £3bn – a increase on 2015 but a slower rate of growth. There have been a few interesting deals announced already in Q1 – e.g. Skyscanner (£127m), Anaplan (£63m), Student.com (£42m), Blippar (£38m), World Remit (£31m), New Voice Media (£29m), City Mapper (£28m) and Qubit (£28m) – let’s hope that this year is another boom story.
Looking more generally, we have summarized our analysis of 2015 and the last quarter in the PAGEONE report. This highlights a number of trends – including:
• In 2015, £2,591m was invested in 534 deals by 421 investors
• This is more companies than were financed at the last peak of the market in 2000
• The busiest investors were the Scottish Investment Bank, London Co-Investment Fund, Crowdcube, Parkwalk, MMC, Octopus, Enterprise Ireland and Index Ventures
• 70% of deals were less than £2m in value, these received 11% of money invested
• Private investors participated in 46% of deals and Crowdfunding platforms financed 11%
• US investors participated in 8% of deals, European investors in 10% and Corporate Investors in 14%
• 277 Internet Services companies received £1,623m
• 135 Software companies received £430m
• 32 Cleantech companies received £272m
• The 10 biggest deals received 29% of funds invested, were: FanDuel (£175m), Funding Circle (£102m), Atom Bank (£84m), Deliveroo (£66m + £45m), World Remit (£65m), Farfetch (£58m), Fenergo (£48m), Wahanda (£47m) and Secret Escapes (£38m)
• London and Scotland were responsible for 59% and 11% of deals respectively
• London took 61% of the funds invested in the UK and Ireland
• On a city by city basis, 207 London tech companies received investment, 25 in Edinburgh, 22 in Dublin, 10 in Cambridge, 7 in Glasgow and 6 in Oxford. All other cities or towns had 5 deals or less deals.