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The good, the bad, and the ugly... The latest VC trends

Last week, I was lucky enough to be invited to attend the BVCA High Growth Event at the Ham Yard Hotel in London. 

The event takes place each year and is definitely worth attending if you want to network with the who’s who in venture capital in the UK.

The event takes place over the course of a full day and is split into short presentations giving industry insights, lively panel discussions and some round table debates (not to mention lots of opportunities to network!).

The first segment was a fascinating chat from Catherine Cutts, a data scientist who looked at how venture capital funds can use data science and artificial intelligence to improve returns.  Organisations are not even scratching the surface of how artificial intelligence and data science can be utilised in operations (automation, manufacturing processes/footprint, fleet routing and supply chain processes), risk (credit risk assessment, fraud/anomaly detection, project risk management, claims management and collections management) and enterprise (sales territory design, workforce deployment design, war gaming/scenario simulation, competitive intelligence and performance management).  These are only some of the areas Catherine covered and I know that I, along with the rest of the audience, found it really interesting.  The only area where it seems that artificial intelligence and data science will be able to have a limited impact will be in HR/recruitment – as well as various ethical considerations to take into account, people are often difficult to predict!  Generally though, most industries may benefit from advancements in artificial intelligence and the application of data science.

It is always interesting to see the market trends for investments by volume, deal size and region.  As a lawyer, I know my clients - regardless of whether they are seasoned investors or high growth companies - look for me to comment credibly on what is going on in the marketplace.  The session from Henry Whorwood of Beauhurst showed that deals below £500k in value have seen the biggest dip in activity.  Although it is difficult to say with any certainty whether this is a supply or demand issue or to pinpoint exactly why Angels are reluctant to invest, the current political and economic uncertainty probably hasn’t helped – if Angels are not sure of the landscape, they’ll generally hold off investing.  This dip will have a knock on effect in years to come because there will be fewer opportunities at venture and growth stage.  After all, the whole investment ecosystem relies on the early stage seed deals to enable new companies to begin to grow.  In terms of sectors, fintech continues to be a real engine of growth for the UK economy with approximately 191 deals in 2019 already followed closely by artificial intelligence, EdTech, digital security and AdTech.  It was really encouraging to hear that there is a big appetite for foreign investors to put money into UK companies so if you are part of a high growth company looking for investment, don’t discount investors that may be a good fit just because of geography.

If you are looking for investment, you’ll be interested to read that the top 5 investors this year to date are Scottish Investment Bank, Mercia Technologies, BGF, Cambridge Innovation Capital and Worth Capital.  From my own experience on deals this year, those names are not a surprise.  Overall, first round investments have decreased over the last couple of years and according to the British Business Bank’s analysis of Pitchbook data, UK venture capital backed companies are just as likely to raise follow on funding as US companies but on average, they’ll raise less of it.

The third session of the day was from Darran Hart, Head of Growth Capital for Santander Corporate and Commercial Banking.  He believes that high growth companies share a number of characteristics - they are ready for growth, they are fit for business, they invest for tomorrow and they are rapidly accelerating.  Again, this was an informative session looking at high growth companies through a different lens to my own.  There was far too much information to cover here in this blog so instead I’ll share a couple of interesting statistics:

  • 78% of high growth companies believe they are good at strategic vision compared with 60% of lower growth companies;
  • 70% of high growth companies believe they are good at executing their strategy compared with 52% of lower growth companies; and
  • 60% of high growth companies agree their leadership makes good use of NEDs and external advice compared with 41% of lower growth companies.

I have recently delivered sessions to high growth companies on preparing for exits so I found one of the final sessions of the day very relevant.  This ‘exit readiness’ panel discussion comprised investors and business leaders who had been through an exit.  The key message to take away is that in preparing for an exit, alignment across the shareholder base is one of the most important aspects to a successful sale.  When it comes to your deal team, it is key that everyone is joined up, saying the same thing and delivering the same messages in a consistent manner.

All on the panel agreed that where you have investors, it is key that the management team have a solid relationship with the investors such that they are able to speak freely about what is important to them as part of the exit.  It was interesting to hear from one investor who said that around 90% of all deals now come with vendor due diligence.  I can see the benefits of this – it brings all buyers up to the same point and to an extent, it streamlines the process.  When it comes to the identity of possible buyers, there is growing interest from private equity rather than trade buyers.  By far the biggest change that all on the panel have seen is the speed of transacting.  Where selling to private equity, if you have a well-organised process and a vendor due diligence pack, the deal can be done in a number of weeks – private equity buyers are often able to move quickly.  If you are looking to sell to trade, very often the preparation for an exit has to start much earlier as the relationship with a trade buyer takes longer to warm up and such a buyer typically won’t move as fast as a private equity buyer.

A recurring but unintended theme throughout most of the day was the lack of diversity within venture capital and private equity.  For every £1 of venture capital funding, female founders get less than 1p.  Only 5% of all pitch decks that reach VCs are from all female founder teams and only 13% of senior venture capitalists are female.  Although these statistics and similar popping up over the course of the day were disappointing, it is great to see that increasing diversity is a topic at the forefront of the minds of those that are able to influence change.  I did note with interest the number of inspiring female speakers on the stage over the course of the day!

From the final session of the day, all founders on the panel agreed that when it comes to raising money, it always takes longer than you think and costs more than you think.  As I’ve always said, the ‘fit’ between entrepreneurs and investors is critical.  If the personalities don’t gel, it will rarely if ever be a rewarding or enjoyable journey for either party.  By far the most amusing anecdote was from Pip Jamieson, founder of Join The Dots.  Pip told us that founders do indeed talk and share notes on who the ‘good’ and ‘founder friendly’ VCs are along with who the ‘bad’ VCs are.  She also said that some founders will get themselves ‘pitch ready’ by pitching to a ‘bad’ VC in order to prepare for meeting a VC that they’d really like to partner with.   So it does happen and that nugget of information got a lot of laughs from those in the room.

I’m looking forward to attending my next event which is the Summer Investor Summit in Mayfair in July.  The day before, I’ll be speaking to a room of high growth companies and investors at an accelerator event in London so keep watching for the next instalment!

Zara Diloo 

Director

zara.diloo@mbmcommercial.co.uk

 

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