Investment by venture capital has spurred the rise of “Unicorns” – privately held start-up companies valued at over $1 billion. Of the 6 UK companies to achieve this legendary status during 2019, 5 were backed by venture capital. So why have UK Institutional Investors been slow to take advantage? Judith Hartley, CEO of British Patient Capital and Chirag Shah, CEO of Nucleus Commercial Finance share their thoughts.
A report recently published by the British Business Bank raised many points regarding investment. It identified how equity investment into private smaller companies reached new heights in 2020, rising by 9% on 2019 levels to £8.8billion. The report also pointed out how the average size of investment deals continues to increase, being primarily driven by a small number of very large deals, and that the longstanding trend of increasing average deal sizes is continuing, particularly for later-stage deals. Similarly, equity deal sizes increased by 3% in 2020, with the number of deals greater than £10m increasing from 173 in 2019, to 176 in 2020.
With this amount of investment growth taking place, the assumed time taken for companies to achieve unicorn status reduced in 2020. Data supplied by Beauhurst estimates that the average age of companies gaining unicorn status was 7 years. In comparison, the UK currently boasts 22 unicorns, with 2 of the newest entrants being members of British Patient Capital’s underlying portfolio of companies: virtual events platform, Hopin, and Cazoo, who are rapidly transforming the UK market for used vehicles.
When compared alongside Beauhurst’s 7-year estimate, Hopin gained unicorn status after only 1 year of operating, whilst Cazoo achieved the feat after just two. These companies are outliers to the norm, and serve as a reminder that success in venture capital doesn’t come from the average deal or company; with the aforementioned exceptions.
Judith Hartley, CEO of British Patient Capital commented: The British Business Bank’s Small Business Finance Markets report reveals that, despite the global pandemic, equity investors continue to find smaller private UK companies highly attractive.”
Venture capital is not exclusively about unicorn creation. While unicorns are an important indicator of success, they are not the sole objective of a fund. Many high-impact and successful companies never achieve unicorn status but are nonetheless of high value within a venture capital investor’s overall portfolio. ‘Dragons’ – a single company in a venture capital fund portfolio that will, on exit, deliver a return at least equal to the value of the fund – can be just as important as unicorns; which is why “Dragon Chasing’ remains a priority for many venture capitalists. These companies have proven to be equally as rare and as valuable as unicorns.
The UK continues to make the smallest allocation to alternative assets, such as venture capital, providing just 8% versus the average of 26%. This creates a significant opportunity for British Patient Capital and for other institutional investors. It’s one of the reasons why British Patient Capital focusses upon committing capital to UK focused ‘venture growth’ funds, which is defined as those investing at Series B onwards. There is an increasing pool of experienced venture and venture growth managers backing some of the most exciting high-growth companies in the UK. It is through these managers that UK institutional investors can both drive and capture the value that exceptional companies such as Cazoo and Hopin have proven capable of creating.
Chirag Shah, CEO of Nucleus Commercial Finance added “The British Business Bank and the lending industry have played a vital role in ensuring SMEs have had access to the crucial funds they need to survive during the pandemic. Over the past 12 months we have seen fintech and alternative lenders move into the mainstream due to their ability to provide SMEs with funds quickly and, as a result, more businesses now turn to our industry as their first point of call.”
“The impact of Covid-19 on SMEs will be long lasting so we need to see continued innovation across the industry to provide creative solutions which suit businesses’ individual needs. We firmly believe fintech lenders are best positioned in the industry to support SMEs thanks to the ability to design flexible products, powered by cutting-edge technology. Future innovation will further reinforce that fintechs can no longer be considered an alternative; we are the true mainstream lender.”
