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UK tech investment: what’s the deal for 2016?

2016 man walking

Sam Pearse is a partner in Pillsbury’s corporate and securities team in London. This article, co-authored by Christina Pearson, a counsel in Pillsbury’s corporate and securities technology team in Palo Alto, explores what will be the UK tech investment trends for 2016.

The UK benefitted from over £3bn of investment by venture capital firms in 2015, representing approximately 25% of the total VC investment in Europe during the year.

Despite this bumper level, the year saw a decline in angel and early VC investment, although a slight uptick in late stage investment, and overall the number of funding rounds closed dipped to less than 800 for the first time in three years.

This mirrored what was seen on the other side of the pond and there are common reasons for the cooling – concerns over increasing valuations of private companies, particularly in the technology sector and the uneasy public markets. The early market movements in 2016 evidence the concerns and as prices fall, the bears step forward and the bulls retreat.

A look back

Before looking at the tea leaves for 2016, we should closely examine at what happened in 2015 both here and in the bellwether of Silicon Valley:

  • Median pre-money valuations increased across all stages, from seed-stage to late-stage, and the term “unicorn” (a venture-backed company valued at $1bn or more) continued to be used with annoying frequency as the number of members of the exclusive ‘Unicorn Club’ doubled in 2015.
  • Most of the capital that was invested in 2015 was invested in late-stage companies, with more than half the capital invested going to companies raising Series D rounds or later. In the UK, there was a record-high number of VC investment rounds of £10m or greater.
  • The exit-by-acquisition trend of the past few years continued to remain strong in 2015, significantly out-numbering the number of exits via initial public offering or buy-out.
  • In Silicon Valley, the software sector continued to be the recipient of a sizeable portion of the capital raised in 2015.
  • Silicon Valley also saw an increasing number of overseas venture-capital investments, particularly in Europe, with just under £3bn invested.

2016 trends

So what trends are we expecting for 2016? This year is likely to bring a right-sizing of valuations. The extent of the correction is uncertain, but recent capital market volatility and other macroeconomic trends have seemed to create a sense of uncertainty that will undoubtedly affect valuations.

After a busy 2015, we can also expect to see investors increasing their focus on administering their portfolio companies.

Additionally, capital market volatility will restrict exit opportunities for the members of the ‘Unicorn Club’ and other late-stage companies, resulting in companies staying private for longer, and potentially a few very large acquisitions in 2016.

The end of 2015 saw large private companies suffer market debuts at lower valuations than the previous funding rounds and this will have damaged the confidence of private companies with high valuations.

IPO exits may remain suppressed whilst private money remains available, as is expected with interest rates both in the US and the UK being unlikely to markedly shift upwards with the soft global economy and the upcoming US election.

Furthermore, whilst the number of European fundraisings declined year-on-year, the amount of capital raised jumped. The established VC firms have received large amounts of institutional cash which they will need to deploy in increasingly bigger tranches, most likely in late-stage investments.

What this may amount to is that exit-by-acquisition will continue to be the main avenue for companies seeking liquidity, although the volume of deals may decline.

Sectors in the spotlight

In terms of sectors in the spotlight for 2015, the FinTech, biotech and pharma sectors suffered less last year than most others.

The UK’s strong reputation for FinTech persists and we expect this sector to grow, fuelled by increased regulation of financial services, particularly in terms of reporting, and growing business and consumer interest.

Despite the noise around FinTech over the past 18 months, it has not reached full maturity and value can be found for investors.

Biotech and pharma are more mature markets and represent good homes for “safe” investments. The United States’ recent announcement of the multi-billion dollar cancer “Moon Shot” program will also prompt further interest in the already lucrative sector.

Software will undoubtedly continue to receive a large portion of the capital invested in 2016 and finally, we saw investment in the energy sector decline over 2015 and for so long as oil prices are low we can expect this to continue.

So, what’s the conclusion? 2016 will see Silicon Valley investors continue to export the “Valley” model overseas, looking for investment opportunities around the globe and their focus will include the UK.

There are a great many synergies between the UK and the US and the investment will continue, particularly after the anticipated valuation correction and if the dollar continues its resurgence.

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