Market Update: London VC Sector in 2017
Looking retrospectively over 2017, it is clear that London continues to account for most of the UK venture activity, and retain its place in the European market. It is clear that our economy is running on ideas and innovation, as a record £8bn+ of capital was invested across the various layers of the VC sector.
While the number of deals closed has been dropping steadily from 2016, the level of investment has been increasing.
How can this be explained?
The VC world is becoming polarised, with outliers are distorting our perception of performance. This is due in some measure to tech verticals consolidation, and a high-velocity cycle for early-stage companies, which have two options: to grow or die quickly. Like any other sector, we had waves of innovation, the crowd, the platforms, the apps of the early 2000s. It could be an indicator that our VC market is starting to mature, that quality, leadership and performance, are starting to replace the idea-man.
The main indicator for this evolutionary shift in the UK VC world is the emergence of mega-deals like Improbable, Farfetched, Deliveroo, Prodigy Finance, Neyber, Atom, TrueSpeed, and Funding Circle. This trend continued even in Q4 2017 with Truphone TransferWise, OakNorth, and Secret Escapes.
An estimated £2bn was invested in the top 10 deals skewing the perception of the VC activity in London (data from Pitchbook and CB Insight show the same trends). This represents over 25% of the total combined value of VC investments in 2017, all going to technology innovator. Without these outliers, the values across the board would not have increased by more than 50% for Series C to E+ compared to 2016.
In a country where the average exit is around below $100m, we are observing in real time the birth of the multi-billion-dollar global companies. This is great news! If growth technology companies find it easier to raise at higher valuations, larger rounds, without the need to completely shift to the US, then our local ecosystem can thrive. This element should be of great concern considering the imminent departure from the EU.
Early Stage Trends
Consequently, it leads to a more deal-competitive market as more investors become more risk-averse in a space fundamentally based on the positive effects of uncertainty. Further to an upward trend in valuation and size of Seed rounds (data from CB Insight), and potentially a fleeing effect for investors up the VC investment chain, from Series A to later stages.
In this market, only companies with deeper technologies, able to demonstrate early traction and proven models at a very early stage in their development cycle will fundraise without difficulty, and those deals will be naturally competitive.
As a market matures, it is not the lack of capital at an early stage that is the cause for this shift, but the lack of quality deal-flow, as the requirements for such companies have changed dramatically over the last 5 years.
As fewer deals qualify the requirements of our sector, more VC funds will move into the growth stages, leaving a gap in the market for idea capital and more scope for incubators and accelerators.
Our research points to a declined in relative terms of Seed and Early Stage Rounds, with LCIF being involved in over 50% of all such deals in 2017 and 2016 (data from Dealroom.co). The decline in Seed rounds across the board and an increase in the size rounds which prices out early-stage investors.
Even at early growth this shift is observed, marked by a drop in Series A companies invested in 2017, 16.93% of all deals, down from 19.31% in 2016. Consequently, leading to an increase in valuations in VC led rounds.