Like other sectors of the economy, the pandemic “really shook everybody” in the venture capital industry and “a lot of the fundraising and investing stopped,” says Dr Keith Arundale.
Venture capital firms were focusing on their existing portfolios, making sure that they were adequately financed, and not so much looking at new deals unless they had already started the due diligence.
But firms got used to the virtual working world of Zoom and Microsoft Teams. Despite venture capital being a relationship business, they adapted, even doing the due diligence virtually – although a physical meeting at least once at the start is a prerequisite, he cautions.
“Things really picked up in the second half of 2020 and it ended up actually being a very good year for venture capital,” Arundale says. “According to Invest Europe, €15.5bn (£13.2bn) was raised in Europe in 2020, which was only a 7% fall from the previous year, and on the investment side €12bn was invested, which is actually a growth of 7% from the year before, with more than 5,000 companies receiving investment, 97% of which were SMEs.”
These investments were, however, quite sector biased and have always been, with half the total amount invested going to infocomms and technology and almost a quarter to biotech and healthcare.
“That would indicate that fundraising is good, investing is good and there’s actually now a lot of money out there for investing in venture capital,” Arundale says. “If you look at private equity as a whole, which includes venture capital, in fact there’s more than $1.7trn (£1.2trn) of money waiting to be invested.”
A lot of SMEs have been negatively impacted by the pandemic and are much more dependent on external finance. In previous years, the very small SMEs would mostly be funded through personal finance, be it friends and family or personal credit cards and overdrafts. “The worst affected sectors now have quite substantial debts and cashflow problems are probably the number one issue facing SMEs, particularly if they are in hospitality or transport.”
Government support during the pandemic has helped but now SMEs will have to pay back the loans, which may become a challenge, Arundale says.
The other big issue SMEs will face is the end of the furlough scheme, which has been extended to September, and there is uncertainty on possible redundancies starting from July when companies have to start contributing to the scheme.
“The latest Bank of England forecast is that unemployment could rise to 5.5%,” he says. “There are some opportunities here in that some of them may want to start up their own SMEs, but where are they going to get the financing for that? That is a worry.”
Venture capitalists are interested in growth businesses, so SMEs that are going to remain SMEs will not get the funding they need through that avenue. “So we have to distinguish SMEs and high-growth businesses. There is a wall of money out there for buyouts and acquisitions but that is for the high-growth types of businesses.”
Once the government support measures are wound down, Arundale believes the success of SMEs will be sector dependent. Hospitality should start to flourish again, but if new lockdown measures come into place it will create more serious problems.
“Some areas could be permanently affected, like the City of London,” he says. “With increased working from home, this is going to have an impact on local businesses such as takeaway food, shops, barbers and hairdressers – all the businesses that depend on a heavy footfall of people working in the City.”
The transport sector has been helped by government support but he questions whether in future people are going to travel as much as they used to. That is going to impact the SMEs that support that sector.
Impact of Brexit
The pandemic has overshadowed another difficulty – Brexit. Although Arundale sees the main challenge of Brexit through the lens of UK tax competitiveness, he points to recent reports that if the proposed capital gains tax reform was to pass, companies could look to set up elsewhere and investors to invest elsewhere.
“The big impact of Brexit for private equity and venture capital is on the fundraising side, so when we were part of the EU it was relatively easy to raise funds across Europe, you could just raise funds without having to go into separate national jurisdictions and so on, but now we’ve lost this passporting ability,” he explains.
However, it is just a question of getting around it and people will find ways – for example, by setting up in Jersey.
Looking ahead, Arundale is “reasonably optimistic” both for investors and companies. Very small businesses will struggle, and those that have been made redundant wanting to set up their businesses will struggle, but the high-growth business may flourish.
“If you’ve got a business in the right sectors, a good business model, you’ve demonstrated that there is a growing market for your products and services, you’ve got an excellent management team that has ideally run businesses before successfully – if you’ve got all of those things in place then the future, I think, looks really quite bright for raising venture capital financing.”
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