British venture capital funds have £8.4bn ready for investment in fast-growth businesses, according to British Business Bank research.
The venture capital cash could provide crucial investment for innovative companies as the country emerges from the Covid-19 crisis.
Equity investment in unlisted small companies rose by 24 per cent to £8.5bn in 2019, – the highest amount recorded, according to the bank’s latest Small Business Equity Tracker – and a record number of deals, rising 4 per cent to 1,832, with deal sizes up by 21 per cent.
And equity investment in smaller UK tech businesses increased by 27 per cent to £4bn last year. The UK tech sector accounted for 47 per cent of total equity investment in UK SMEs through 691 deals in 2019.
Within tech, those sectors receiving the largest share of deals were software (425 deals worth £2bn) and life sciences (78 deals worth £540m).
The tech 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).
In particular, SaaS companies proved highly attractive to equity investors, with investment value increasing by 69 per cent in 2019 compared with 2018.
Increased growth-stage investment
Growth-stage follow-on deals were the primary driver of increased investment.
Equity investments into growth stage companies rose by 39 per cent to £5.3bn. The average growth stage deal size, where the UK has lagged behind the US, also grew by 27 per cent, driven by a small number of very large deals.
Seed stage investment drops 1%
However, there are signs that equity investment in seed-stage companies was softening even before the Covid-19 pandemic hit. The amount of investment into seed stage companies declined by 1 per cent in 2019. This is compared to seed stage investment increasing every year since 2011, as investors play safe and invest in already-proven businesses. This could have a detrimental effect on the UK small business equity pipeline further down the line.
Commenting on the record amount of dry powder ready to deploy in UK businesses, British Business Bank interim CEO Catherine Lewis La Torre said: “Capital yet to be invested is collectively worth £8.4bn, equating to 12 to 15 months of investment based on 2018 and 2019 investment levels.
“In addition to the record amounts of venture dry powder, I’m pleased to see that for the first time that follow on funding – investment in companies that had already received equity finance – outstripped first-time deals, which shows our innovative companies are able to raise multiple funding rounds.”
British Business Bank programmes are estimated to have supported 11 per cent of UK equity deals between 2017 and 2019.