Ascendant has just completed its review of venture investment in private technology companies in the UK and Ireland during Q3. It is clear that Covid19 continued to have an impact on investment activity during the summer and early autumn, but investors have still been comitting funds to both new businesses and existing portfolio companies. The aggragted data shows that in Q3, £1.85bn was invested in 241 deals of over £0.5m by 327 investors. The value of investment (£m) declined again this quarter but there was a modest uplift vs Q2 in the number of deals completed. Compared to the equivalent period in 2019 the data show declines of 27% and 3% in value and volume. The PAGEONE report which summarises the findings is available at https://ascendant.co.uk/pageone-q3-2020.
Some of the key points of the report include:
- In Q3 2020, £1.85bn was invested in 241 deals (of over £0.5m);
- Respectively 96, 58 and 87 deals were completed in July, August and September (see chart below);
- The year to date, £6.2bn has been invested in 751 deals;
- The busiest investors in Q3 were Crowdcube, The Future Fund, Seedrs, BGF, Enterprise Ireland, Mercia, Parkwalk and Seedcamp;
- 68% of deals involved more than one investor;
- 43%% of deals were less than £2m in value, these received 6% of money invested;
- Private investors participated in 32% of deals whilst Crowdfunding platforms financed 13% of deals
- US investors participated in 16% of deals, European investors in 17% and Corporate Investors in 13%
- In the 3 primary areas of investment focus – Internet Services (£941m, 117 companies), Software (£525m, 64 companies) and Hardware (£388m, 60 companies).
- The 10 biggest deals were: Karma Kitchen (£252m), Snyk (£154m), Zzoomm (£100m), Moonbug (£93m), Connexin (£80m), Quantexa (£52m), ComplyAdvantage (£40m), Ppro Group (£38m), Moneybox (£37m) and Habito (£35m).
- Fintech and Medtech/Digital Health remain the market’s darlings; and
- Geographically, all regions had high levels of activity, but companies based inside the M25 took 78% of the funds invested in the UK and Ireland.
Month by Month
The chart below shows that this level of monthly investment activity tracked by Ascendant in the year to date vs 2019:
The data shows that whilst there has been a general trend downwards since the Covid pandemic took hold, after adjusting for seasonal fluctuations (i.e. summer slowdown) the scale of reduction is modest and far less than feared. There is also some anecdotal evidence of increased number of non-disclosed internal rounds (some with Future Fund support) but it is possible to identify these or even guess at their extent at this time. So, our data is likely to underestimate the volume of transactions by a few deals and the value of investment by a very small percentage, but we are confident that these are unlikely to materially change the broad picture. It is a pity the UK Govt did not include a provision in the Future Fund’s investment terms which required immediate disclosure by Companies that they have completed an investment round which included investment by the Future Fund. We would have thought that the UK Govt would prefer to get as much press coverage of the support they have provided as possible. I am sure they had a few other things on their minds at the time when they were putting the structure together…
Ascendant tracks the investment activities of different types of investors to highlight how different groups favour different sectors, deal sizes and co-investors. In times of turmoil, these groups react differently depending on a number of factors including the flexibility of their investment mandate, maturity of fund, perception of risk, etc. Along with the time it takes for most investors to make an investment (from first contact to transfer of funds), this tends to lead to gradual and lagged changes in behaviour. The last 6 months has allowed us to look at this hypothesis and it appears that there has been some “inertia” but with some variation depending on investor type.
There were proportional decreases in the levels of participation of trade and us investors Q3 deals but not materially so. Unusually there was an increase in investment activity by European based investors in Q3. This was also modest but is noteworthy as it happened in Q3 when Europe is usually less active. The type of investor which seems to have reacted most to the arrival of Covid19 were private investors as can be seen in the charts below.
Private investors are perhaps the most agile of all investors – able to switch on/off without the complications that delay the reaction/responses of certain types of funds and investing organisations. The news of the spreading pandemic in the early part of 2020, clearly reduced private investors’ appetite to invest in tech companies both directly and via crowdfunding platforms in Q1. However, interest and commitments have bounced back to pre-Covid levels since. The planned merger between Crowdcube and Seedrs will create a significant player in the UK Venture market could have a further positive effect on this part of the market. In passing, on the basis of Ascendant’s data (UK/Irish Tech deals over £500k), the combination will finance c.8-9% of all UK/Irish deals (but only 1.5% of value) – no small feat in a period of 10 years when the market has grown by a CAGR of c.18%.
Regional Ups and Downs
In Q1, investment activity in London was sustained as most of the regions stumbled or faltered even if only slightly. However, since then there has been a varied Covid response amongst investors across the regions. Deals in the North have increased in both Q2 and Q3 returning to close to 2019 levels. Scotland has stabilised around 18/19 tech deals (over £500k) per quarter – again very similar to 2019 levels. Ireland has not fared so well experiencing a substantial drop to levels of activity not seen for 4-5 years. Cambridge, the Midlands and London did see a major drop in Q2 but have all bounced back – if not fully back to 2019 levels of investment. So, the regional picture is mixed with only Ireland seemed to have a bit of a setback so far, but it is still quite early in the pandemic to draw any firm conclusions.
Favoured Friends… Fintech and Medtech/Digital Health remain the venture market’s favourite sectors. In Q3 2020, Fintech companies were 25% of all deals completed in the UK and Ireland taking 30% of all money invested. During the same period 13% of transactions were investments in Medtech/Digital Health Companies which took 8% of investors’ money. The chart below highlights the trends over the last 5 quarters and the slight slackening in demand for fintech versus and gradual but consistent rise of investor interest in Medtech/Dig Health during 2020.
Ascendant believes that the radical changes in delivery of healthcare triggered by the pandemic, not just in the UK, are creating significant opportunities in the health market and more and more investors are actively considering adding Medtech/dig health assets to their portfolio. The data and our direct experience confirm this. Nevertheless, Fintech is still top of the (sector) charts for many investors by some margin.
As stated above and shown in the chart, the market did slow but that is hardly surprisingly given the pandemic that we are all managing our way through. Many of us thought it would have been a lot worse but based on these figures and depending on how Q3 goes it seems unlikely that there will be the existential crisis that caused a few folks in the venture industry to lobby the Govt for a hand-out. It is also worth noting that many of the Future Fund deals which started in May are not included in the data (as we track equity financings rather than debt issuance) – so if these were included there really would not be much of a decline at all.
Capital Commitment – Deal size trends in 2020 The final area we wanted to examine is how the investor appetite for certain deal sizes have changed during 2020. The chart below looks at the distribution of completed transactions since the start of 2019.
The chart is complicated – to keep it manageable we have not included sub-£1m deals but it is worth briefly mentioning that these have halved since Q4 2019 indicating that the market has moved away from deals that sit between £500k and £1m although they still persist in certain sectors and regions. Not surprisingly, most deals in the UK and Ireland are less than £10m. The data shows that the investors who play in £2m-£5m sector were the ones who stepped back most in Q2 – halving the number deals completed. This size bracket bounced back in Q3 so perhaps we are now back to “more normal” market structure. Typically, about 15% of the UK/Irish market comprises of a value of greater than £10m. This has stayed more or less consistent during the stresses and strains of 2020. However, there has been a drift from deals in the £10m-£20m range and the mega deals of over £50m to transactions sized between £20m and £50m. There are a number of potential reasons other than simple caution driving this phenomena including some businesses experiencing extraordinary growth during the reset of many working practices and systems due to the impact of Covid19 – “flight to evidenced quality” and investors doubling down on successful portfolio companies at the expense of new deals – “easier to complete in a virtual/remote transaction environment”. The uplift in the volume of deals in the £20m-£50m range is consistent with the comments above re still strong participation of European and US investors in the market. But for those of you lamenting the demise of mega deals (>£50m), you will be pleased to know that they are back. In October, fintech MoloFinance raised £266m and Alex Chesterman’s Cazoo picked up £240m. So maybe, some investors are starting to get their mojo back…
Outlook for 2020…
As this note was being composed, UK premier Boris Johnson was announcing a 2nd lock down in England which could be seen as a set-back for many investors and companies seeking finance. However, investors have now had more 6 months to adjust their processes and Ascendant knows from its own direct experience that there is an appetite to identify new opportunities and do new deals. With the 2 mega deals mentioned above, a quick and dirty exercise by Ascendant identified deals with a combined value of over £900m in October. Therefore, we estimate the total amount likely to be invested in 2020 will exceed £8bn in just under 1,000 companies – both down on the figures of 2019 but only by a relatively small amount. If that turns out to be the case, everyone in the market should be congratulated. None of us would ever be mistaken for frontline key workers but to maintain this level of activity in these conditions is worthy of applause.
If you have any queries on this do not hesitate to contact Stuart McKnight via firstname.lastname@example.org.