WHAT CAN WE LOOK FORWARD TO FOR EARLY-STAGE INVESTMENT IN THE COMING 12 MONTHS?

By Chantelle Arneaud, Envestors

 

What can business owners expect in the early-stage investment space in 2021? Having faced the challenges that 2020 presented we predict there will be much-needed changes coming that will ultimately benefit every player in the industry including growth businesses, investors and the wide variety of organisations that support and serve them.

Let us share our predictions for 2021.

 

Capital raising

Life as normal is still a long way off. No one knows when vaccinations will be complete and how this impact life. That means continued uncertainty. And investors do not like uncertainty.

2021 will continue to be a difficult time for start-ups to raise equity finance. But it should be better than 2020.

In 2020 we saw a decrease in number of equity fundraises, 5,371 compared to 6,797. There was also a drop in the overall amount invested, £15.4b compared to £18.4b in 2019. Throughout the year, investment into early-staged businesses ebbed and flowed with the waves of uncertainty. Investors propped up existing investments and favoured more mature, and less risky businesses while seed stage companies saw little of the available pool of investment.

Chantelle Arnaud

The first half of 2021 is unlikely to be any different. While we usually see a spike at the close of the tax year with investors looking to capitalise on the SEIS and EIS tax schemes, this is likely to be more of a hump than a peak.

Certainty is not a switch and will take time to recover and we predict an increase investment activity by the third calendar quarter of 2021.

 

The new norm: digital fundraising platforms

The early-stage investment space has been slow to adopt digital believing that raising capital is all about relationships and therefore couldn’t benefit from online tools. 2020 quashed that idea.

With in-person meetings difficult at the best of time, networks needed a mechanism to facilitate investment. Digital platforms which provide always-on access to information for due diligence, investor-founder Q&A, and analytics that make clear which deals are generating the most interest, are quickly becoming can’t-live-without tools for investment networks.

“While we have already supported over 3,500 entrepreneurs since 2002, raising finance is critical for growth and while we had an informal network of investors, we weren’t in a position to really bring investors and entrepreneurs together.  We knew that in order to move forward with our vision we would have to go digital.” explained Jake Ronay, Former Investment and Corporate Partnerships Lead at SETsquared.

 

These digital platforms offer benefits for all parties:

  • Fundraising companies can track investor interest, control who sees their confidential documentation and streamline the due diligence process for potential investors
  • Investors can filter deals based on interests, track companies and ask founders questions online and conduct due diligence at their leisure
  • Investment networks can promote deals, track which deals are generating the most interest and close investment online

Adoption of digital investment platforms will continue to grow throughout 2021, becoming the norm by the close of the year.

 

Expansion of regional super networks

Between 2001 and the second quarter of 2020, 49% of all equity deals and 59% of all invested funds went into companies located within London. In 2021 we are going to see a new, more effective approach.

Every region across the UK has its unique set of local players dedicated to supporting growth businesses, though they tend to be disconnected. This makes it incredibly difficult for businesses to navigate the array of organisations —from accelerators, to angel investment clubs to workspace providers to LEPs. It also represents a duplication of effort and therefore inefficiencies.

Towards the end of 2020, with the increased difficultly faced by early-stage businesses, we started to see a shift towards local players teaming up – understanding they shared a common goal – and working together to support those local businesses.

A notable example is the recently launched Birmingham Tech. This non-profit organisation is aimed at connecting the start-up ecosystem in the West Midlands. Founder Yiannis Maos explains, “I started off with a focus on creating Birmingham Tech Week, but quickly realised that there was a much bigger job to be done in fostering collaboration across the tech ecosystem.”

Through its platform, Birmingham Tech seeks to provide a single access point for all entrepreneur services, programmes, and support across the West Midlands. Yiannis admits this approach was met with some initial scepticism, “A lot of people felt the concept had been tried before and that it wouldn’t work. But eighteen months later, as it started to come together, minds quickly changed and many who initially viewed the idea with pessimism are fully behind us and supporting our initiatives.”

With 2021 promising continued challenges for early-stage businesses, we can expect to see more regional super networks launching throughout the year.

 

More deal sharing

As a concept sharing deals between distinct networks isn’t new. However, it gained traction slowly as many investment networks were reticent to open up their investor base to partner deals. The challenges in raising capital throughout 2020 caused a rethink and there was a shift in attitudes toward the concept.

Take UKBAA’s Dealshare. Previously only accessible by members, the association opened its doors to the broader industry. We also saw a collaboration between DSW Ventures and NorthInvest to help companies in the Northern Powerhouse.

As networks recognise the benefits of collaboration, we expect to see deal sharing become commonplace in 2021.

 

Companies becoming investment ready

Every investor knows the value of investment readiness.

For companies being investment ready means more than a fancy pitch deck. It requires the articulation of a proposition that credibly tells an investor how they will get their money back. This is all in the detail – from the valuation to the sales forecast to market size.

With the continued difficultly predicted in raising capital in 2021 entrepreneurs will start to put more emphasis on getting investment ready to increase their chances of securing capital investment.

We see positive change ahead in the early-stage investment space and better times emerging.

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