Rocket into 2021 | Part 3

Posted on Wednesday 3 February 2021 by Somil Goyal | Investment Lead

Over 2020, through the Covid crisis, we at GovGrant helped almost one thousand innovative UK companies, and over hundred investors, achieve value and investment returns from innovation. This led to over £45mn of timely capital flow, helping companies sustain their business in difficult times.

UK private capital markets in 2020

With our privileged market position, we have a unique insight into the UK private capital markets. This spans thousands of companies, investors and deals. This is across grants, accelerators, crowdfunding, seed or venture capital, private equity or debt, and corporate acquisitions. We are publishing our research and insights from the data this month.

We looked at the challenging market where less capital was flowing, especially to smaller companies. We also looked at factors driving lower deal counts. However, we are pleased to conclude this series on a bright note – follow-on capital for companies who had already received funding prior to the pandemic was not impacted much. In this crucial cohort, 2020 saw:

  1. Advanced rounds: Depending on the time period, 14-21% of deals follow-on included the best possible stage, i.e. a more advanced round or an exit.
  2. Add-on rounds: 11-27% of deals saw more capital added-on, even though at the same stage as before.
  3. Fallback or down rounds: Only a modest 1-11% of deals followed by down rounds or bridge finance.
  4. Out of business: A very low 0-2% of deals were for companies who had to shut down. This is even lower than typical non-pandemic times.
  5. Wait: A significant majority of 53-66% of deals have been followed by companies optimising runway and preserving cash.

This stable capital situation bodes well for the health of UK private funded sector in 2021 and beyond.

Findings and explanations

We looked deeper by splitting the cohort of companies funded pre-pandemic into three types of deal: pre-institutional, early VC and late VC. The charts show stable capital raising in all of these subsets over time. Highlights are:

  • Pre-Institutional: Chart 1 shows 14-18% of pre-Covid deals were followed by institutional rounds in 2020. A further 20-27% of deals were followed by add-on from pre-institutional investors. Both statistics point to good and steady support in 2018-20. view chart here.
  • Early VC: Chart 2 shows 28-41% of companies with early-stage VC financing were followed by further institutional rounds, at the same or better stage. This shows the strength of the UK private capital market, through 2020. view chart here.
  • Late VC: Chart 3 shows that 26 to 38% of late VC deals were followed by more institutional capital. There was good non-institutional and exit activity too. This cohort includes the crown jewels of privately funded sector in UK, e.g. LumiraDx in healthcare; Rapyd, Monzo, and Checkout in fintech; and Cazoo in auto /D2C. view chart here.

Some definitions to note are here:

  • Pre-institutional rounds include incubators, accelerators, crowdfunding, seed, pre-seed and angel investments.
  • Exits can be merger with another company, an acquisition by a company or a private equity, a management or leveraged buy-out, or indeed an IPO.

Cash and capital

In summary, UK private capital markets continued in 2020 to provide strong support to companies that had received funding prior to the pandemic. We at GovGrant praise this engagement, and provide specialists augmentation to innovation capital. Two important avenues are:

  1. Monetise past investments into research and development – R&D tax credits are important for all companies regardless of stage. This provides short-term cashflow and capital for longer runway and faster growth.
  2. Commercialising Intellectual Property is very important for VC-stage companies. This reduces tax liability on profits, provides better investor returns, and is especially useful over the medium term.

How to perform best in this market?

At GovGrant, we have a dedicated offer for private investors and companies they fund. We already work with dozens of active UK investors and hundreds of privately funded companies. Contact us to learn more.

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About Somil Goyal | Investment Lead

Here at GovGrant, Somil works with the venture capital and private equity community to drive value from R&D and innovation activity in their portfolios. He brings an understanding of your investment thesis and portfolio, in order to improve return on capital deployed. View profile