2020 was a tumultuous year for growth businesses; slowly but surely, it will get better.
2020 was a challenging year for growth businesses raising capital. While the speed and success of the vaccine rollout is improving the mood, it has yet to improve the early-stage investment landscape.
Throughout last year, the number of fundraisings significantly declined. While we ended the year on a stronger note with a small increase in the number of fundraisings, it, sadly, was not the beginning of an upward journey. Figures from research firm Beauhurst for Q1 2021 show a significant decline in the number of raises both compared to Q4, -27%, and Q1 2020, -40%.
While the number of raises decreased, the amount raised in Q1 2021 increased. Good news for the select few; this increase was driven by a smaller number of larger raises such as Hopin, Checkout.com, Blockchain.com and Starling Bank who all raised in excess of £200m each.
Safer bets in uncertain times
While many investors put their hands in their pockets last year, others continued to invest. However, where they directed their funds shifted. Many chose to focus on existing portfolio companies, propping them up to see them through difficult times, rather than adding to their portfolio. And those that did add to their portfolio tended to focus on more mature businesses which carry less risk than their earlier-staged counterparts.
Left out in the cold
As investors favoured portfolio and more mature businesses, seed stage companies struggled to win their share of the wallet. Once the reality of the pandemic set in there was a drop in the number of raises for seed stage companies. We saw a bit of an uplift in Q4 2020, however the first quarter results are showing a drop of 29%.
Tracking the impact of COVID-19
There are few sectors that were not negatively impacted by the pandemic. While most felt the pain, some fared worse than others, such as hospitality and leisure, transport operators and retail.
Beauhurst, who track Covid-19 impact in growth businesses, identified eHealth and EdTech as those sectors who have most benefitted as 34% were ranked ‘Potentially Positive’, from the pandemic. The tech sector largely sat in the middle with 54% experiencing a ‘low impact’ and only 13% who were able to capitalise on the situation.
A coming shift in sector preference
While travel and hospitality businesses felt the most pain last year, they may be in for a change of fortunes. With predictions of a Roaring Twenties style boom, we may see a reversal of this. Bloomberg reports that institutional investors like Aberdeen Standard and UBS are now pouring money into listed companies focused on consumer experience. We can expect this to flow through to earlier stage companies ‘ although investment is likely to be concentrated on those who are able to demonstrate traction and scalability.
Covid-19, like any event which drives feelings of uncertainty had a negative impact on early-stage investing. The good news is that change is coming, albeit slowly. Until then businesses looking to raise capital will need to double-down on investment readiness to ensure they put themselves in the best possible position to win the available capital in the market.