As you may have seen from our reports, 2017 has been a record year in a number of ways. More cash has been invested in British high-growth companies than ever before in ever-larger megadeals, fintech growth shows no signs of slowing, and we’re seeing more governmental interest in the high-growth ecosystem than perhaps any time in history.
This is all particularly remarkable given the gloomy prospects anticipated in the wake of Brexit. We explore what happened in brief. For more detail, keep an eye out for our full-year edition of The Deal – coming soon to your inbox!
1. The big picture: investors parting with more cash than ever
The number of investments into fast-growing companies has remained fairly constant since 2016, but this is not so for the amount invested – which is up on last year by £4bn thus far. That’s saying something, given that the total amount invested throughout 2016 was £4.9bn.
That means there’s more cash to go around for every investment. In short, the average deal size in 2016 was £3.3m. In 2017? £6.3m. This leads us on to point two…
2. The rise of the megadeal
This is a trend we identified in our Q3 report: in that quarter alone, we’d seen eight ‘megadeals’ of £50m or more. Looking at the data for the whole year, there have been 29 so far. That’s almost three times as many as 2016, which saw 10, and whilst 2015 performed well at 23, this was preceded by just 13 in 2014.
All of this is to say that whilst deal numbers as a whole have not made much progress in 2017, there have been more megadeals than ever before. Interestingly, a significant proportion of the megadeals are being supported by foreign direct investment (FDI).
It’s a curious pattern, particularly given that the effect is unlikely to be a direct result of the falling pound. After all, if a foreign investor seeks to profit from currency arbitrage, committing to investment in private companies is not the most efficient way to do it (though, of course, it’s possible that those who already intended to do so adjusted the timing of their deal).
The average pre-money valuation of a company raising investment has rocketed since Beauhurst’s records began in 2011. It’s increased every year since 2013, but the rise has been particularly steep this year. As you might expect, as company valuations increase, the stakes taken by investors have declined in size (a valuation being made up of both investment size and stake taken).
It’s likely that this is the natural result of a maturing high-growth ecosystem, with many companies that formed in 2013-14 (and raised equity at low valuations, thus bringing down the average valuation) now progressing to more advanced stages of development, which in turn means we’re likely to see higher valuations and a need for more cash.
The news has all been positive so far, but when it comes to tech there’s a different story to tell. 2015 saw 1,056 tech deals – but 2016 saw an increase of just 4 deals; a negligble increase (0.4%) that amounts to stagnation.
We’re not totally finished with 2017 yet, but with deals now winding down for Christmas, the year looks set to see fewer than 1000, with 978 completed so far. This isn’t looking at technology as a percentage of all deals; it’s looking at raw deal numbers. They’re seeing a decline.
The same cannot be said of fintech investments, which have been rising steadily since their surge in 2014 – yes, that’s #despiteBrexit!
5. A macroscopic perspective
We’re almost 18 months down the line from Brexit. This year has seen the Patient Capital Review, the Industrial Strategy, and two Budgets with plenty of news for high-growth firms.
We’ve written lots about what each of these things means for the ecosystem, but here’s a handy debrief:
- Brexit: it’s a mixed bag, but there are certainly grounds for optimism. The drop in deals this year is less steep than that from 2015-16, and even if the 2015-16 drop were attributed to Brexit uncertainty, the lessening of the decline suggests that, at minimum, the reality is proving more positive than predictions suggested.
- The Patient Capital Review is a vital step in addressing the potential equity gap that we at Beauhurst warned of last year (The Deal, Q3 2016). Patient capital firms tend to take larger stakes in firms in exchange for a long (ten year plus) exit horizon, and our response to the consultation identified a need for this kind of finance that currently goes unmet.
- The Industrial Strategy, released just weeks ago, bodes very well for innovating firms. A new UK Research & Innovation (UKRI) body is to be created with a mandate to invest around £8bn per year into cutting-edge projects and companies, and big changes are coming to both Innovate UK and the British Business Bank.
- This year saw in Philip Hammond’s first two Budgets as chancellor, and both were packed with news for startups. Business rates were capped, corporation tax was reduced, and there were substantial reforms to R&D tax credits – amongst other things! Take a look at our rundown of commentary on Hammond’s performance here.
The best bit
We’ve saved the best present until last, of course.
We’re happy to say that all the insight here is just a preview of what’s to come in our full year Deal report, released at the start of February, which will offer a full retrospective on how high-growth firms fared over 2017 – from the youngest Dalston tech stars to scaling pioneers of manufacturing and construction.