There is no doubt that many venture capitalists (VCs) have shifted away from start-ups towards bigger deals with more mature companies. But a counter trend may be emerging in which some have begun to focus on seed funding at the very early stage.
An abundance of capital has flowed into later stage companies, partly because ‘mega rounds’ have displaced IPOs in many cases. But some VCs have bucked this trend and are looking at seed funding deals, and well-prepared start-ups may be able to access this funding.
Simon Menashy, a partner at VC firm MMC Ventures explains: “VC fund sizes have increased but they’ve also had to compete with other kinds of money coming into the market, including more corporates playing in the start-up world and private equity funds ‘dipping down’. Some of this money is smart and here to stay, while others are momentum investing and will be out of the market next time the cycle turns.
“As VCs that traditionally invested at Series A encounter more competition, many are investing earlier, backing companies at seed stage, with the ability to provide follow-on capital once the company has achieved some more milestones.”
And there are certainly some ‘hot’ sectors, particularly in tech. These include artificial intelligence, health and biotech, while more VCs are also waking up to the potential in manufacturing and other industrial sectors, where take-up of software-as-a-service (SaaS) and data science is only just getting going.
But Patrick Imbach, Head of KPMG Tech Growth in the UK says the most significant VC investment trend at the moment is not a sector story, but a ‘size-of-deal’ story, with most backing more established businesses.
Patrick explains: “While the value invested by VCs in the UK has remained high, the number of deals, particularly in earlier-stage fund raises, has actually come down. But this is not unique to the UK, it’s a global phenomenon, and a longer-term trend.” According to KPMG’s Venture Pulse report, the number of sub-$50 million deals in Europe made up only 12% of the total number of VC deals in 2018. In 2010, they made up 65%.
Despite this Patrick agrees that some sectors, such as fintech, are attracting VC interest across both large and small deals. He says: “It’s a very active sector. We have the digital banks, payments platforms and lenders attracting large investments, while there is a good mix of smaller fintech companies across most areas of financial services attracting smaller rounds."
Patrick continues: “Biotech is also attracting a lot of VC interest. As soon as R&D to find new drugs and therapies is relatively advanced or new treatments start to get traction, these ventures attract ‘big-ticket’ investment rounds. I would expect biotech to remain a strong sector.”
He agrees that AI is the single most important technology attracting VC investment at the moment: “We are seeing AI powered businesses coming to the fore in nearly all industry sectors.”
Beauhurst, a research company, tracks equity investments into early stage UK businesses – by VCs, crowdfunding platforms, angel networks, government agencies, corporates and universities – and has found small deal flow to be robust, but with particularly strong activity by non-VC investors.
The research splits investment activity by stage of company: seed (the very early days), venture, growth, and established (slightly older, more mature firms with a greater track record of turnover or profit). Beahurst found the value of seed stage investments (where around 50% of deals are below £500,000) grew by about 15% to £800 million in 2018.
Non-VC funders played a big role in smaller deals. The top four investors in 2018, measured by number of deals, were crowdfunding platforms Crowdcube (168) and Seedrs (158), followed by government agencies Scottish Enterprise (94) and Development Bank of Wales (69). Over 90% of the deals made by these four investors were into seed and venture stage rounds. Crowdfunding investment grew by 25% in 2018 over 2017.
The funding landscape is changing for start-ups but there is still plenty of money out there if your business is well run and offers strong potential.
Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.