Pre-crisis, the tech ecosystem in the UK was thriving, at the heart of innovation in Europe. More recently, the increased availability of capital at Series B stage and beyond was contributing to a sense that Europe was finally getting its mojo and competing with the might of the U.S.
After enjoying a buoyant market for many years, COVID has been a sharp and unwelcome shock for many early stage companies. Typically, equity funding secured from angel investors or VCs would need to last 15-18 months, but across the board, startups have had to get creative about cost cutting to extend their runway. Founders found themselves under intense pressure to keep their businesses afloat and most VCs acted quickly to provide support to their portfolio. There were some exceptions, with reports early on in the lockdown indicating investors were pulling term sheets on new deals. Figures from law firm SeedLegals estimated that 30% of terms sheets were revoked in the last two weeks of March.
While many VCs insisted they were ‘open for business’, others called for a dose of realism, as the bar for new investments has been raised astronomically high. Despite this much tougher climate, many of our own clients have remained active and continue to invest at pace. MMC Ventures invested in three new businesses in April, and have closed a further three in May. Parkwalk Advisors, which invests in university spin-outs, has closed 10 investments from it’s University funds this year, and 12 deals completed overall since the start of March.
That said, there has undoubtedly been a shift in the market. Pre-crisis, competition for the best deals was often intense, but with investors taking a far more cautious approach, it has become harder to raise capital. This is particularly true for companies at later stage, as much of the growth capital in the UK from corporate investors and family offices is currently sitting idle.
The Government has responded to calls from the community to support early stage companies during this time, recognising that many of these businesses will be the driving force of the economy in the future. It quickly became clear that the first of the policy interventions, the COVID Business Interruption Loan Scheme (CBILS) would not help many early stage tech companies as it is only open to profit-making companies. When the second intervention, the Future Fund, opened last week, requests for £515 million of funding were made in just the first day, dwarfing the £250 million that the government had initially committed.
While the Future Fund was widely welcomed, the design of the fund meant that it is really only open to scale ups, not startups. (The media – or the Government – are clearly confused about the definition of a ‘startup’!) One of the reasons for this is that the Future Fund is not compatible with the Enterprise Investment Scheme (EIS) due to European restrictions on state aid.
Of all of the support packages, the furlough scheme has arguably been the most successful in helping businesses large and small weather the crisis. The scheme currently allows employers to put staff on leave, while the government pays 80% of their salaries up to £2,500 a month. It will be ‘tapered’ from August onwards and is expected to end at the end of October.
Ultimately, as we all know, some of the most successful companies are born out of crises. Spotify raised its Series A in 2008, just after the financial crisis. There is still plenty of money in the system and everything to play for. Just look at Blackstone – the private equity giant that is thought to have $150bn to invest, and has shown no signs of scaling back due to COVID.