The rise of crowdfunding and corporate venture capital has radically changed the funding landscape for start-ups over the past five years. The well-trodden path of raising money from friends and family first, followed by angel investment and then institutional investment is now just one option for entrepreneurs, not the default.
But what is the state-of-play of the main sources of capital and what sectors are they interested in?
In 2017, crowdfunding was on track to fund over 300 businesses in the UK with around £200m of equity capital1.
Tom Horbye, Campaigns Manager of Seedrs2, reflects on how crowdfunding has changed, saying: “Five years ago we were typically looking at seed rounds of £100,000-£150,000, but we are now continually seeing much more later-stage £1m+ raises, often a combination of crowdfunding and institutional investment.”
B2C businesses are particularly well suited to crowdfunding, making up 70% of Seedrs’ investments. They benefit from the publicity of the campaign as well as from investors becoming customers and actively promoting the business. Food and beverage and fintech businesses are the most active sectors but Tom highlights growing investor interest in newer technologies such as artificial intelligence (AI), machine learning and blockchain.
Although angels have taken a back seat to crowdfunding in terms of publicity, they are still the second largest source of early stage capital for entrepreneurs (after venture capital), investing over £1bn3 annually.
But the angel ecosystem has changed dramatically, according to Rod Beer of the UK Business Angels Association (UKBAA), marked by the rise of many smaller, independent angel groups. Around 70 are now listed on the UKBAA website whereas previously a handful of larger networks dominated.
Recent research4 shows that the most popular sectors for angel investors are healthcare and digital health; pharma and biotech; fintech; software as a service (SAAS) and e-commerce. Rod also points to growing interest in the ‘real world applications' of artificial intelligence, blockchain, robotics and big data.
Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) funds
Operated under formal fund management structures, these funds source capital from high net worth individuals who want to add early stage investments to their portfolios.
HMRC rules steer these investments towards ‘knowledge intensive companies’ with high research and development spend and that can demonstrate a focus on innovation and intellectual property. Sector bias is therefore toward life sciences and technology with renewables also featuring prominently.
Venture capital (VC)
This is the largest source of capital for early stage businesses, investing around £3bn in 20175. VCs are looking for the next ‘unicorn’ (a business valued at over £1bn) and are not afraid to take on a portfolio of risky investments to find it. They make their money from a small handful of winners with very high returns6. VC investment typically follows earlier rounds by angels or crowdfunding.
Nearly all of their investments have a technology bias with software and biotech/medical particularly strong, making up 38% and 33% of deals in 20167. In 2017, fintech was the largest sector in the UK, attracting over £1.3bn. Artificial intelligence was also prominent, attracting almost £500m, double that of 20165.
Corporate venture capital (CVC)
Law firm Womble Bond Dickinson has identified 2,400 corporate investments in start-ups and SMEs over the past four years, totaling £23bn8. Stephen Pierce, Partner and Head of Corporate says: “Acquiring innovation from new and nimble start-ups has become a powerful approach for leaders who want to stay ahead of disruption.” Entrepreneurs benefit from the operating skills of these larger organisations and frequently get to tap into an existing client base.
Financial services firms making fintech investments dominate deal numbers, making up almost 60% of investments, followed by insurance, manufacturing, and energy.
The funding landscape for technology entrepreneurs has never been as diverse.
1 Beauhurst Reports – The Deal Q1-Q3 2017 projected proportionately.
2 Seedrs and Crowdcube make up 80%+ of the market ; Beauhurst Report – The Deal, Equity Investment in the UK, Year 2016.
4 IFF Research, British Business Bank and UKBAA.
5 London and Partners, Pitchbook.
6 A study of over 20,000 VC investments by US Venture Firm Correlation Partners showed that 65% of investments either fail or return less than the original investment. Only 4% of deals return greater than ten times the original investment.
7 British Venture Capital and Private Equity Association (BVCA).
8 Womble Bond Dickenson: Close encounters - The power of collaborative innovation, 2017. Numbers quoted refer to minority stake investments only, not acquisitions.