The previous year was particularly important for the London and the UK venture capital (VC) market, pinpointing the transition from a pure exporter of great technologies and talent to the US investment market, to a player in the global ecosystem in the later stages of the funding journey, matching in effect the level and valuations of US VC investors.
The signal was given by the emergence of mega-deals like Improbable, Farfetched and Deliveroo. The first 15 deals claimed more than 20% of the whole invested venture capital in the market, clearly differentiating the continent’s emerging VC ecosystem from that of the UK market.
In 2018, we will witness an acceleration of growth capital in the market, especially across European cities and mostly focused in London and the UK.
The competitive investor landscape for Series A and B companies will further push valuations upwards, closing the gap with the US, and backed by the migration of capital to later-stage start-ups with proven markets and decreased risk, and resonating with the appetite du jour for specific technologies. This particular trend will persist and fuel more valuation growth and more competition for deals, mainly due to the level of uninvested capital currently held by VC funds globally, recently estimated by Pitchbook Venture Monitor at around $90 billion and growing.
At a much earlier stage, a decline in micro-funds will leave those VCs distinctly positioned in the early stages with unmatched control and abundance of deal flow. Allocating substantial importance on the UK VC funds such as Downing Ventures, Start-Up Funding Club, Albion, Seedcamp, and catalyst initiatives like the London Co-Investment Fund, investing in budding tech and science start-up businesses, which are looking to raise the finance they need to take their business to the next level.
Potentially, the lower end of the VC market can observe a moderation of valuations as more start-ups compete for early-stage VC funding, raising the bar for new entrants.
Some trends have been in the making for years, such as the migration of capital to later stages, while others are purely a short-term reaction to the perception of VC market risk or purely opportunistic.
There are two areas that could potentially change the dynamics of the VC ecosystem in 2018: the growing impact of corporate venture capital (CVC) investment and the issue of a declining number of exits.
Corporate venture capital investment trends
Corporate VC investments have increased significantly over the last few years, closing in at approximately $7bn (up from below $4.5bn) in European markets and participating in 20% of all deals.
Unlike most VC funds, the CVCs adopt a variety of strategies when investing, leveraging internal resources or portfolio investments, aligning such investments with development in their products or market positions. In some cases, these investments are akin to existing internal innovation processes, testing, implementing and rolling out new solutions throughout the organisation.
A newfound method to retain the proverbial ‘edge’, a much cheaper alternative compared to PE acquisitions, as it enables a quick value-add, early influence, and, at times, even exclusivity. A mechanism for continuously innovating at a fraction of the internal cost and have stakes in most competing solutions.
It is clear that many corporations will position themselves in the VC end of the investment market and increase their footprint, across the US and Europe, across early and late VC stages.
Exits still an issue
Over the last two years, exits have been declining across Europe and the US (Pitchbook Venture Monitor, 2017, US VC exit activity by year, and KPMG Venture Pulse, Q4 2017).
The upward trend of valuations of the last few years from early to late VC stages meant that even if the number of exits reduced, the overall value of acquisitions has been increasing, especially between the $100–500m and >$500m brackets (Pitchbook Venture Monitor Report, 2017, US VC exit count by exit size).
The vast majority of all exits are strategic acquisitions, leaving buyouts and IPOs as a secondary route for companies – although listings such as Blue Apron, Snap and Dropbox have performed better than expected by markets.
As corporates design new accelerators, incubators and global VC arms, in effect joining at the start of the funding journey, led by tech giants like Apple, which already announced $30bn to be invested, it is clear that the incentives for acquisitions at higher price points will continue to diminish.
There are many reasons why the M&A activity in the technology sector will never really stop, even if there are periods of fluctuation and vertical shifts in focus. The synergies, efficiencies, market share growth, market penetration, diversification and increasing supply chain power, combined with still relatively low debt interest rates channelled through challenger banks will continue to provide great opportunities in the space.
Flavia Richardson, Funding London