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Squeezing The Truth Out Of British Venture Capital Funding; Deals Down, Funding Up, VCs Asleep At The Wheel?

Stocks and Loans may break my bones but stats will never hurt me?

Torture them for long enough, and stats will confess anything.

At least that’s how the saying goes, but it’s a cynical soul who still decries “lies, damn and statistics”, in the face of today’s data driven analytical world.

Do the stats really lie? Or is it the case that, seven out of ten times, they always tell the truth?

In the world of Venture Capital investing, there’s no doubt that figures are often bandied about that bear little or no relation to reality, or used to support arguments that hold no water.

Almost every pitch you hear these days will tell you the estimated size of the market they are operating in and almost every time, the claims that are made are so outrageous they would make Mark Zuckerberg blush.

That is why it is so essential that we let the right people crunch the numbers, feed the data in, and achieve something more meaningful than simply “garbage in, garbage out”.

Beauhurst, an Oxford based startup, are just such an agency. The team have been gathering data about investment into fast growth startups across the UK for more than five years, and their database and analytics platform, which companies can access as a “subscription as a service model”, contains details of nearly 8,000 early stage start-ups or scale ups, and 20,000 recent UK deals involving more than 1,900 active investors.

Their latest report, simply titled “The Deal”, provides comprehensive analysis of deals involving high growth startups and their investors in Q1 2016, and makes an interesting counterpoint to data providers like GP Bullhound or government sponsored agencies like London & Partners.

We are used to hearing good news about London’s tech scene, and there is nothing to suggest that London is anything other than a leading global hub when it comes to early stage investment, particularly into disruptive tech startups.

Beauhurt’s data does show, however, that funding has been harder to come by in Q1 2016 than in the previous quarter, and the corresponding quarter from last year.

It seems the number of deals is falling, but the size is, correspondingly, increasingly. Are the two phenomena related. Let’s look at the evidence.

In the software sector, for example, the number of deals fell 44% year on year, to 285v in total, which is also down 30% from the previous quarter.

The total amount invested, however, was greater – a record, in fact; £20.4m; although this might imply that larger “scale-up” companies, were coming to the fore and demanding greater sums to fuel larger scale growth, in fact investment in seed stage companies increased 119% quarter on quarter, 129% year on year.

So far so counter-intuitive; more predictably, Private Equity and Venture Capital investment account for the most investments, although notably, Seedrs, the Crowdfunding platform, completed more deals than any other entity. An impressive achievement given the relative immaturity of the crowdfunding sector and the occasionally adverse coverage it receives in the press when some of its more speculative, less well-regulated investment plays fail.

According to Beauhurt’s report analysis, fans of early stage growth investment ought to be a little concerned – deal numbers are falling, no question, and although deal sizes have increased, this figure has to an extent been propped up by high profile, one-off deals such as SkyScanner, which raised £128m by itself.

Beauhurst’s analysts propose that investors may be becoming less risk averse, preferring to invest larger sums in safer deals, perhaps due to lingering concerns of the possible impact of a Brexit.

It seems the same is true of crowdfunding campaigns – where the money is flowing into larger, safer deals. The total amount invested in Q1 2016 was close to £1.2bn.

To back that up, in Q1 2016 far more money was invested into growth stage companies, £726m, as compared to seed stage, £155m, and VC, £237m. It seems that, when compared to previous quarters, it’s at the venture stage that the biggest drop in funding has occurred. Perhaps the new series of HBO’s “Silicon Valley” can’t come soon enough?

To return to more predicatble trends, tech and IP based businesses attracted the most money and the highest number of deals, followed by Business and Professional deals, Industrials, and Leisure and Entertainment. That said, the number of tech deals were still down considerably querter on quarter and year on year.

It’s a head scratcher. Perhaps we can reassure ourselves by observing that London was home more deals to anywhere else in the UK, nearly 150, followed  by Cambridge with 16, Edinburgh, Manchester, Birmingham and Leeds. No sign of Oxford, despite the plethora of VC and investment funds with the name of the City in their titles, or Glasgow, home of Skyscanner.

Crowdfunding sites Seedrs, as mentioned earlier, and Crowdcube completed significantly more deals than anyone else, followed by the Business Growth Fund.

There is a great deal more in the Beauhurst report for analysts, businesses, recruiters and journalists to pore over and opine on – so we will preoccupy ourselves with just one question – are VCs slacking off, or is there a shortage of investable deals?

The startup scene is supposed to be usurped by the “scale-up” scene, according to the powers that be, so perhaps we should not be too concerned – after all, many companies that might once have raised from VCs are taking to crowdfunding sites more and more, who are on something of a PR crusade. We think that VCs, once they have closed their eyes, taken a deep breath, and counted to ten, will soon be back in the deal-room. Croqwdfunders still have a lot to prove, not least to the regulators, if they ever manage to catch up.

 

 

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