The Venture Capital Market – a Year in Review and Trends to Anticipate

Alex Sleigh, Investment Director at Newable shares his thoughts on trends from last year, what to expect for 2019 and how the upcoming year will impact businesses at the heart of the economy.

EBAN Member Newable Private Investing (NPI), part of Newable, connects innovating, fast growing technology companies to equity finance. NPI arranged 16 deals in 2018, investing £3.5m alongside £14m of co-investment.

A review of 2018

The 2018 global venture capital market was characterised by the rise of the “supergiant venture round” (companies raising rounds of +£75m) such as the $3BN investment into WeWork or the $250m investment into Revolut.
This trend has trickled down to the early stage investment market with average investment round sizes being higher than ever before (albeit compared to 2017 less rounds taking place). For example, in 2018 the average round size that NPI participated in was circa £1m versus £600k in 2017.

Impact on businesses

Companies that raise funding tend to be properly capitalised and better placed to ride out any macro uncertainties. We think this is a positive development as it means that fast growth businesses have more of a “cash runway”. Entrepreneurs can therefore spend more time building their business and less time trying to arrange additional slugs of funding from investors.
Funding rounds are more than ever, typically syndicated with groups of investors co-investing alongside each other. In 2018, NPI co-invested alongside a number of VCs and corporates such as Oliver Wyman and Octopus Investments. This is very good news for emerging companies. A diverse set of investors is a strong signal that the business has potential. It means that entrepreneurs can tap into a range of expertise and contacts. And, of course, the co-investors represent a ready source of additional investment down the road.

Challenges faced by businesses

There are a number of  challenges the companies we support face . Access to talent is one, as it is more competitive than ever to source the right talent especially in the digital/software space. Entrepreneurs have to adopt an agile and flexible approach to recruitment. For example, the use of option packages may be a way to woo talent.
GDPR has meant that the “spray and pray” approach to marketing to prospective customers is no longer viable. Companies need to adopt more innovative and targeted approaches to marketing driven by technology and metrics. Cognism and Cyance are good examples of the new wave of marketing technology businesses.
Access to funding is still an issue for many businesses, the UK has a significant funding gap at the pre Series A stage. Newable is aiming to address this by providing funding to companies that have the potential to raise a Series A round shortly thereafter.

Opportunities

Alongside equity funding, there are plenty of opportunities for deep technology companies to tap into Innovate UK grant funding. Other agencies such as the European Space Agency (ESA) can also provide such funding. Working alongside our grant funding partner PNO, NPI helped companies to win +£4m of grants.
The November 2017 budget refined the rules for EIS qualifying investments. The intention was to focus early stage investment into what are called Knowledge Intensive Companies (KICs). The result has been a significant reduction in “asset backed” EIS investment schemes.  Investors and their intermediaries now have a much better understanding that EIS investing is not about “capital preservation”. We will see a number of high quality EIS Funds getting significantly more attention in 2019. HMRC’s current consultation on a new EIS approved fund structure has the potential to make a big positive impact on the early stage market.
On a personal note, I am excited to see a number of our portfolio companies start to really mature. In particular, look out for Astrid & Miyu (e-commerce), Blu Wireless Technologies (semi-conductors), City Pantry (catering) and Rezatec (earth observation).