In the first 10 months of 2021, we saw £25bn invested into UK start-ups and scale-ups. If the growth rate from 2020 was to continue, more than £50bn would be invested next year. That’s improbable, but if you’d asked me at the beginning of this year what the numbers for 2021 would look like, I’d have underestimated.
I’m not the only one questioning whether this rate of investment can be sustained. Some limited partners told the Venture Capital Journal there’s a ‘make hay while the sun shines’ feeling. Nonetheless, it looks like the sun might shine for a while longer.
New venture capital (VC) funds and new fund managers are entering this market at a record pace. More notable is the entrance of players that have at most only ever dabbled in this risky, illiquid end of the asset class. Perhaps most notable has been the ‘hedge fund’ Tiger Global, but you could say it’s not behaving like a hedge fund at all. A hedge fund focuses on price and valuation of the business or asset rather than its fundamentals, investing in liquid assets or securities so it can benefit from (or hedge) price movements. It would seem odd for this kind of financial institution to invest in such illiquid assets.
But early-stage companies are now so in demand that their prices have, arguably, become divorced from the fundamentals. A hedge fund need not make a call on whether the company will be a success in the long run, but instead decides whether someone will buy the asset from them at a premium. And clearly, right now, they think there will be such buyers.
This being so, more and larger investors – not only hedge funds – will turn towards start-ups and scale-
ups, even before the pension fee cap is reformed in the UK to allow those limited partnerships to invest in this asset class. So, maybe a £50bn total in 2022 isn’t such an outlandish idea after all.
In the UK, the bulk of VC money is flowing towards a UK speciality: fintech. Over the first 10 months of the year, seven of the 10 biggest deals involved fintech ventures. But we’re also seeing deals for slightly more ‘exotic’ technologies. In September, Hertfordshire-based Cogitat raised £500,000. It’s developing software that scans brainwaves and converts them into digital commands. October saw Lancaster-based LiNa Energy raise £3.5m to support its work developing solid-state sodium battery technology. And in November, genome-sequencing firm Cambridge Epigenetix secured £64.6m from investors, including Sequoia and GV.
Local news
Because of the preponderance of fintech deals, London is the focus of this activity. This is not for lack of trying on the part of initiatives in the rest of the UK’s regions and devolved nations, nor indeed of the government’s ‘levelling-up’ agenda. And those initiatives seem to be yielding early returns.
There’s no better evidence of this than Selazar in Belfast, which received £20m last month – the largest early-stage raise in 2021 in Northern Ireland by £9m. Similarly, at Beauhurst, we recently worked with the Development Bank of Wales to produce a report on the investment ecosystem there (at tinyurl.com/CF-WalesRep), which showed record levels of investment into start-ups and scale-ups in 2020.
The regional imbalance still needs to be addressed. Pots of money, via the British Business Bank, are set to increase for most regions outside London and the South East, which will help. As more money chases a limited asset class, there’s an opportunity to make sure the funding is more equitably spread. Hopefully, in a year’s time, I’ll be able to tell you that a record percentage of that £50bn has been invested outside of London.
Author bio
Henry Whorwood, head of research and consultancy, Beauhurst, a publisher of data and analysis on UK high-growth and ambitious companies, and a member organisation of the Corporate Finance Faculty.
