Venture Capital investment in region maintains robust stronghold in first half

The Venture Pulse Survey by KPMG Private Enterprise reveals that the North’s fast growth businesses continued to attract investment during the COVID-stricken first half of the year.

Data compiled by PitchBook shows venture capital totalling £263m backed 82 businesses across the North in the first six months of 2020.

This represents a jump by value of nearly half (49%) compared with the first half of 2019 when investment reached £176.5m.

The 24% increase in the number of deals shows the cumulative investment rise is being driven, to greater extent, by an uplift in the average deal value than by volume of transactions.

Lizzie Smith, of KPMG Private Enterprise, said: “In a period that saw global lockdowns, economic contraction and a unique health crisis unfold, the expectation was that investment would be hit, but the venture capital market remained buoyant.

“However, much of the funding poured into scale-up businesses across the North in recent months represents pre-pandemic momentum. This data captures the completion of deals that were well under way before COVID-19 truly hit the country.

“The second half of the year may reveal a slowdown.

“This is when any impact on origination levels earlier in the year will be visible.

“Even without any fall in investor appetite, the fundraising process has elongated.

“In part, this is due to practicalities, for example, part of the due diligence process for many investing in entrepreneurial businesses is getting to know the investee, which has been difficult during lockdown.”

Nationally, Venture Capital of £5.4bn has been invested across the UK in 827 deals during H1 2020 which is just under the record values seen at the same time last year.

During the period KPMG noted a focus supporting the survival of companies and providing bridge financing rounds to cover potential gaps.

The more hands-on role of angel investors providing operational support to their start-ups may also be a factor in a drop in angel investments highlighted by the data.

Early-stage companies continued to struggle to attract funding with VC investors focusing on late stage deals. The major exceptions included companies tackling key challenges driven by COVID-19, such as health and biotech companies and B2B productivity companies.

An emerging theme is that megadeals are now part and parcel of the ecosystem.

The second quarter saw another spate of $100m+ deals in the UK, meaning three out of the last six quarters saw deals of this magnitude making up more than 40% of the total deal value – these included the UK-based new sponsor of Everton FC Cazoo ($156m), Checkout.com ($150m) and Starling Bank ($123m).

Over the next quarter, VC investors will continue to assess how consumer behaviours are changing and how these changes will affect the viability of different products, services, and business models in the future.

Some sectors could see a fall in investment or significant consolidation as a result.

Big bets will continue to revolve around healthtech, biotech, fintech and B2B solutions.

Cybersecurity and data analytics are also expected to see additional VC investment, due, in part, to the rapid increase in remote work.

Corporate investment may increase as companies begin to mobilise in the Environmental Governance space and companies that have not emphasised innovation in the past move to accelerate their digital capabilities.

Lizzie Smith said: “I expect a slowdown in the pace of dealmaking in at least Q3 of 2020, with a downward pressure on valuations

“But the following months should see a rebound – especially for those that have demonstrated robust and resilient business models through the crisis.

“Indeed, management teams who can show they were able to grow and adapt over the last few months will be in a strong position when it comes to fundraising in 2021.

“E-commerce, cyber security, enterprise software and healthcare have all seen increased demand and pipelines. This isn’t a short-term response – the normalisation of disruptive technology is here to stay.”