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Venture capital hunts for post-crisis big hits

15 June 2020: Given the depth and breadth of the COVID-19 crisis, it is surprising that some big corporate finance deals have gone ahead; but they have.

In the past week or so, the Warner Music Group saw its Nasdaq initial public offering value the company at the best part of $13bn (the share price subsequently rose as well).

In pharmaceuticals, AstraZeneca (on one side of the Atlantic) was reported to be looking at a merger with Gilead Sciences (on the other), which would create a business with a combined value of about $240bn.

The pandemic continues to take a heavy toll across the world and it would be very premature to talk about an economic recovery soon, after all, government emergency measures are still the order of the day. By late May, the pay of more than 10 million employees and self-employed in the UK was being covered by the state. Around the world, quantitative easing, direct cash payments to businesses, loan guarantees, wage subsidies and additional social security have become commonplace.

But some new investment is still taking place – including in start-ups and scale-up companies. Our analysis of Beauhurst data found that the total value of UK seed and venture capital (VC) rounds in the first quarter of 2020 compared favourably with the benchmark of about £1.3bn set in the first quarters each of 2018 and 2019. The second quarter of this year – lockdown time in Britain – could still see about £1bn raised; this is big money, even if it’s markedly less than £1.3bn-1.4bn in the equivalent quarters of 2018 and 2019. (The volume of deals in Q2 could be roughly halved, to about 700 or 800.)

The top sectors for attracting venture capital

In the past week alone, VC deals have been announced for, variously, businesses in advanced electronic sensors, regenerative medicine, nutrition supplements, mobile phone contracts, and engineering apps.

The high-tech sectors in demand by the venture capital community include: biotech, medical applications and all things healthcare, as well as renewable energy, ‘clean’ technologies and applications that monitor and reduce energy use. Mobile communications appear in most deal statistics, while the UK is still a top global player when it comes to fintech investment.

‘Deep’ technologies that could change many aspects of our lives are hotbeds of R&D and VC: they include 3D chips, quantum computing, the Internet of Things, artificial intelligence (AI), big data, robotics, blockchain and cyber security. For example, many new machine learning applications are being developed for use in the accountancy profession – and even for M&A and private equity transactions.

But there are successful start-ups beyond high-tech too – albeit that many are in some way ‘digital’. Education products and services are popular with some VCs, while the creative industries continue to see big demand for new applications and new content – whether film, TV, video games or social media.

Neighbourhood and community projects that have a social purpose are another area that’s seeing a lot of genuine innovation. And there are many other types of business finance.

Sharing success beyond venture capital

There are also some important question marks about the present and future of VC. It’s widely assumed that VC investment is broadly beneficial for all economies, including ‘spill-over’ effects such as new technology, innovation and a more productive, skilled workforce. VC certainly makes some investors and entrepreneurs very rich. But we need more research about its effect on the rest of business, finance – and society.

VCs all over the world often benefit from direct government subsidies (including R&D funding and grants) as well as indirect subsidies (big tax breaks, highly educated staff, and regional and local start-up support). So when and how could VC’s success be shared – particularly in vital areas of development such as the life sciences?

The intensity and sophistication of VC investment is very uneven across the globe. London, is a very busy hub – but the US West Coast dwarfs the rest of the world as a venture capital market. 
Finally, the range of social and educational backgrounds of VCs tends to be very narrow – dominated by family wealth and elite institutions – as does those of many of the technologists and entrepreneurs they back. There could be more entrepreneurial opportunities for more people. ICAEW’s Corporate Finance Faculty is a long-standing supporter of programmes, such as FastForward, that aim to boost diversity among start-ups (and investors).