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Disappointing news for start-up and scale-up Britain – investors’ appetite for funding growing businesses appears to be waning. New research suggests there was a marked drop-off in investment in such businesses last year.
Beauhurst, the research analyst that specialises in emerging growth companies, says equity investors pumped £7bn into start-up and scale-up businesses last year, down almost 19 per cent on 2017. Deal numbers were significantly lower too: Beauhurst tracked 1,572 transactions during 2018, a near 10 per cent fall on 2017’s figure of 1,744.
It should be said that £7bn represents a good year by historical standards, well ahead of ever year other than 2017 over the past decade. For now at least, investment in Britain’s most exciting growth companies is continuing.
Nevertheless, volumes last year were buoyed by a number of unusually large fundraisings, with deal numbers more in line with years gone by – and therefore looking less healthy. Moreover, the break down of Beauhurst’s data is likely to prompt widespread alarm, with the number of investments defined as seed capital or venture capital falling much more sharply than investments in more established businesses. Seed deals suffered most seriously, suggesting that investors now feel significantly less comfortable with more risky businesses.
If that trend continues, it will be a real problem for young companies hoping to expand. Britain already has an issue with scale-up businesses – too few start-ups make the transition into sustained growth beyond a certain size – and a funding shortfall would exacerbate this.
What lies behind the slowdown, then? Well, it’s hard to avoid the conclusion that the political uncertainties of Brexit are finally catching up with the funding market. In part, no doubt, the slowdown seen last year reflects a pause for breath after the records of 2017. But it is not a coincidence that the riskiest areas of the market have seen the toughest contraction – in times of uncertainty, investors naturally become more risk-averse.
Looking forward, a well-managed Brexit is therefore as crucial for Britain’s start-ups and scale-ups as for every other type of business – and remember that the UK’s withdrawal from the European Union will cut off certain sources of state funding.
“The Brexit claxon sounds loudly at this point – it is the ultimate macroeconomic theme of the last decade for the UK,” warns Toby Austin, Beauhurst’s chief executive officer. “From a business funding perspective at least, there will likely be significant negative pressure on available capital, not least with the inevitable loss of cash from the European Investment Bank, the European Regional Development Fund and the European Investment Fund who currently back a range of venture capital funds and grant providers.”
Certainly, there are no guarantees that the public sector in Britain will find a way to fill the shortfall. “The Government is attempting to address this gap, with the British Business Bank and UK Research and Innovation creating schemes such as the UK Innovation Investment and Industrial Strategy Challenge Funds, but some observers are sceptical,” Austin warns.
That puts the onus back on private sector funding. Unless investors’ risk appetite picks up – unlikely until there is greater certainty over Brexit – there could be a crunch.
It’s not all doom and gloom, with certain sectors and types of fund-raising bucking the general downwards trend. Fintech businesses enjoyed another strong year of investment, for example, with those involved in blockchain technologies performing particularly well. The equity crowdfunding sector enjoyed a record year, underlining the ability of peer-to-peer finance to provide an alternative to traditional sources of equity finance.
“In uncertain times, it’s no surprise to see overall levels of equity investment dropping,” says Like Lang, co-founder of Crowdcube, which along with Seedrs has led the charge for the equity crowdfunding platforms. “Crowdfunding has bucked this trend: we are seeing everyday investors stepping up to fill the hole,” he insists.
Still, this part of the industry isn’t going to solve a funding crisis all by itself, if that’s what last year’s decline develops into. Beauhurst’s data provides yet more reason to pray for a speedy conclusion to the Brexit shambles.
February 5, 2019 at 04:34PM
Forbes – Entrepreneurs