Investment pours into UK tech companies

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Equity investment in the UK’s tech businesses increased by 27 per cent in 2019 to £4.0bn, the highest amount since the series began in 2011, according to the British Business Bank’s annual Small Business Equity Tracker report.

The tech sector remains highly attractive to equity investors, accounting for 47 per cent of total equity investment in UK SMEs through 691 deals in that year.

Within tech, the sectors receiving the largest share of deals were software (425 deals worth £2bn) and life sciences (78 deals worth £540m). The verticals attracting the greatest amount of equity investment in 2019 were Software as a Service (471 deals worth £2.5bn), FinTech (193 deals worth £1.8bn) and AI (173 deals worth £880m).

Software Service companies in particular were highly attractive to equity investors, with investment value increasing by 69 per cent, compared to 2018, a much larger increase than that seen in the overall market.

The Small Business Equity Tracker report, which analyses Beauhurst data on equity investments throughout the UK, provides an important benchmark of the market immediately prior to the Covid-19 pandemic.

Alice Hu Wagner: strong interest in growth stage investment

It shows the value of total equity investment in the UK’s smaller businesses rising 24 per cent to £8.5bn in 2019 – the highest amount recorded – and a record number of deals, rising 4 per cent to 1,832 with deal sizes up by 21 per cent.

Fifty two per cent of deals took place outside London, with the South West, Scotland and Northern Ireland showing a strong increase by deal numbers.

Keith Morgan, CEO, British Business Bank, said: “The UK’s small business equity finance market saw a record year in 2019 with investment amounts soaring to £8.5bn. This was a clear sign of investor confidence in UK smaller businesses located across the country and their potential for growth as well as the strong fundamentals of the UK economy as a place to start and grow a business.

“The British Business Bank’s equity programmes are estimated to have supported around 11 per cent of all equity deals in UK SMEs in 2019.

“As the economic impact of Covid-19 continues to affect businesses across the country, the work of the Bank has never been more important. Ensuring a wide range of innovative and ambitious smaller businesses continue to have access to equity investment to support their growth plans will be essential to the UK retaining its world-leading position in science, innovation and technology.”

Despite a record year for fundraising overall, signals of a softening in private UK small business equity markets were apparent prior to the impact of Covid-19.

The amount of investment into seed stage companies declined by 1 Per cent in 2019. While the scale of this decline is small, it is set against seed stage investment increasing every year since 2011.

This decline, combined with the number of companies raising follow-on funding in 2019 being higher than the number of companies raising finance for the first time, has the potential to impact on the future UK equity pipeline.

Investors also appeared to be exercising more caution in 2019, particularly towards some growth stage companies where average pre-money valuations fell compared to 2018. There was an increase in the proportion of equity ‘down rounds’ in 2019, with down rounds forming 12% of all deals in 2019, compared to 9% in 2018.

Unsurprisingly, the Covid-19 outbreak is expected to have an impact on smaller businesses’ ability to raise equity finance.  The Bank’s analysis of Beauhurst data showed that 43 per cent of all UK equity backed companies are at least moderately affected by changes in delivery and demand for their products and services.

Alice Hu Wagner, the bank’s Managing Director, Strategy Economics and Business Development, said:“The Equity Tracker report illustrates a strong interest in growth stage investment in the equity market in 2019, with a particular focus on tech businesses. Ensuring our high-potential later stage companies have the capital they need to compete on the global stage will be crucial to powering the economic recovery.”