As we say ‘so long, farewell’ to 2020, Envestors looks ahead to 2021 and what the early-stage investment market can expect.
In place of the usual big bang fireworks, 2021 was ushered in with a series of small pops as people celebrated in isolation, launching hopeful fireworks from their back gardens.
A pop, and not a bang, is fitting metaphor as we look at 2021 and what it will mean for the early-stage investment market.
While we’re all hopeful for rapid change, the reality is that a return to normal levels of investment into early-stage businesses will be both gradual and slow. But it’s not all bad news, 2020, despite its terrible reputation managed to usher in a number of positive changes that will offer huge benefits to the industry.
Here, we explore the highs and lows of what we can expect in 2021.
Capital raising will continue to be a challenge
On the 8th December 2020, the UK began its Covid-19 vaccination programme with pomp and a lot of publicity. Weeks later millions have received a jab. While this is great news, the current estimate is population-wide vaccination by autumn. Until we reach that point, uncertainty will continue. And investors do not like uncertainty.
For businesses looking to raise capital, 2021 will continue to be a difficult year. Undoubtedly, though, it will be better than 2020.
Last year, there was a decrease in number of equity fundraises, 5,371 compared to 6,797. The amount invested also dropped, £14.9bn compared to £18.4bn in 2019. Throughout the year, investment into early-staged businesses ran parallel to the waves of uncertainty, rising and falling with the number of Covid cases. Investors chose to prop up companies in their existing portfolio and backed more mature businesses, leaving seed stage companies struggling to win investment.
We can expect more of the same for the first six months of this year. While we typically see a spike as we approach the 5th April, with investors looking to benefit from the SEIS and EIS tax schemes, this is likely to be a hump rather than a peak. Mark Brownridge, Director General of the EIS Association, says Around a quarter of all money invested through the EIS scheme is raised via Financial Planners and wealth managers and this is where we saw the biggest dent in 2020. With continued uncertainty, we can expect a repeat of that. Further, Mark advises, When you look at the last recession, in 2008, it took a year to get back to normal. Investors don’t like uncertainty and there is still too much of it.
Certainty is not a switch to be flicked at will. Recovery will take time. We predict a return to more normal levels of investment activity in the third calendar quarter of 2021.
Digital investment platforms become an industry standard
The adoption of digital technologies by the early-stage investment market has been slow. Much of this is down to the belief that raising capital is all about relationships ‘ and digital has no place in building relationships. The restrictions on interaction we all experienced last year finally laid that notion to rest. While investment was down ‘ there was still plenty of activity with over £14bn raised in the UK.
In-person meetings were difficult for most of the year and networks quickly realised they needed a mechanism to facilitate investment. Digital investment platforms which allow networks to market investment opportunities, drive investor engagement through rich media and founder Q&A tools, and importantly enable investors to conduct due diligence online, are rapidly becoming can’t-live-without tools for the industry.
SetSquared, the world’s largest incubator explains, While we have already supported over 3,500 entrepreneurs since 2002, raising finance is critical for growth and while we had an informal network of investors, we weren’t in a position to really bring investors and entrepreneurs together. We knew that in order to move forward with our vision we would have to go digital. explained Jake Ronay, Former Investment and Corporate Partnerships Lead at SETsquared.
Adoption of digital investment platforms will continue to grow throughout this year, becoming the norm by the end of 2021.
Between 2001 and the second quarter of 2020, 49% of all equity deals and 59% of all invested funds went into companies located within London. Efforts to address the regional imbalance have been made and yet, we haven’t seen real change in this area. This year we are going to see a new, more effective approach.
Each region across the UK has local players dedicated to supporting growth businesses. Common among regions is a lack of a connected community. This makes it incredibly challenging for entrepreneurs to navigate the plethora of organisations -from regional funds to accelerators, to angel investment networks to venture firms.
In 2020, with early-stage businesses facing increased difficulty, we began to see a shift towards local players collaborating ‘ recognising they shared a common goal and that by working together they would be in a better position to help growth businesses.
The recently launched Birmingham Tech (Birmingham.tech) is a standout example. This non-profit organisation is connecting the start-up ecosystem in the West Midlands. Founder Yiannis Maos explains, I started off with a focus on creating Birmingham Tech Week, but quickly realised there was a much bigger job to be done in fostering collaboration across the tech ecosystem.
Through its platform, Birmingham Tech aims to provide a single access point for all entrepreneur services, programmes, and support across the region. Yiannis explains the idea was met with some initial scepticism, A lot of people felt the concept had been tried before and that it wouldn’t work. But eighteen months later, as it started to come together, minds quickly changed and many who initially viewed the idea with pessimism are fully behind us and supporting our initiatives.
Despite launching a little more than a month ago, Yiannis estimates they have 70% of the community on-boarded including the University of Birmingham, Warwick Ventures, the West Midlands Combined Authority, Barclays Eagle Labs and UKBlackTech.
With 2021 promising continued challenges for growth businesses, and the myriad benefits of regional collaboration, we expect to see more local collaborations and regional super networks forming throughout the year.
We (finally) start sharing deals
The idea of sharing deals between distinct networks has been around for a while. However, it has been slow to gain traction; many investment networks have been reluctant to show partner deals to their investor base. The challenges in raising investment throughout 2020 prompted a rethink and as we ended the year, we began to see a shift in attitudes toward the concept.
UKBAA’s Dealshare, which allows members to post deals to a central platform, is a case in point. Previously only accessible by members, the association opened the platform to non-members and has now seen an increase in the volume of shared deals.
DSW Ventures and NorthInvest also announced a partnership to help companies in the Northern Powerhouse. DWS’s David Smith said, With the economy feeling the impact of the pandemic, it is more important than ever that funders work together to create a supportive start-up ecosystem.
As networks recognise there is much more to be gained than lost with deal sharing, we can expect to see a lot more of it by the end of this year.
Investment readiness becomes a must-do for companies
While investors know the importance of investment readiness, the number of companies that do are few and far between.
Investment readiness is far more than having a snazzy pitch deck; it’s all the detail behind it. From a clearly articulated investment proposition to details on forecasts, financials and disclosures, being truly investment ready dramatically increases a business’ chances of raising capital.
And yet, so many businesses skip the step ‘ and all the hard work that goes with it- perhaps believing instead that investors will simply fall in love at first sight.
With the continued difficultly expected in raising investment in 2021 entrepreneurs will put more emphasis on getting investment ready, viewing it as a prerequisite before going to market.
It’s easy to condemn 2020 as the worst year in recent memory. However, it introduced a number of positive changes that will benefit the early-stage investment space. 2021 will not be without its challenges, but as we progress through the year we will ultimately, as an industry, find ourselves in a much better place.