Equity investment in smaller UK tech businesses increased 27% to £4.0bn last year
- Value of total equity investment in UK’s smaller businesses rose 24% to £8.5bn
- Growth stage deals are the primary driver of increased investment
- Early signs of market softening before emergence of Covid-19
- British Business Bank programmes supported 11% of all UK equity deals
Equity investment in the UK’s tech businesses increased by 27% in 2019 to £4.0bn, the highest amount since the series began in 2011, reveals the British Business Bank’s annual Small Business Equity Tracker report, published today. The UK’s thriving tech sector remains highly attractive to equity investors, accounting for 47% of total equity investment in UK SMEs through 691 deals in 2019.
Within tech, the sectors receiving the largest share of deals were software (425 deals worth £2bn) and life sciences (78 deals worth £540m). The verticals attracting the greatest amount of equity investment in 2019 were Software as a Service (471 deals worth £2.5bn), FinTech (193 deals worth £1.8bn) and AI (173 deals worth £880m). Software as a Service companies in particular were highly attractive to equity investors, with investment value increasing by 69% in 2019 compared to 2018, a much larger increase than that seen in the overall market.
The Small Business Equity Tracker report, which analyses Beauhurst data on equity investments throughout the UK in 2019, provides an important benchmark of the market immediately prior to the Covid-19 pandemic. It shows the value of total equity investment in the UK’s smaller businesses rising 24% to £8.5bn in 2019 – the highest amount recorded – and a record number of deals, rising 4% to 1,832 with deal sizes up by 21%.
52% of deals by number took place outside of London, with South West, Scotland and Northern Ireland showing a strong increase by deal number in 2019, rising by 34%, 26% and 24% respectively. Several regions also saw investment levels by value increase strongly in 2019, including Northern Ireland (191%), Scotland (51%), North West (50%), London (37%), West Midlands (36%), and the South East (27%).
The growth stage engine
Equity investments into growth stage companies rose by 39% to £5.3bn. The average growth stage deal size, where the UK has lagged behind the US, also grew by 27% driven by a small number of very large deals. Such financing is important as it is often used to help international expansion and to enter new markets, demonstrating both the increasing strength and maturity of private UK SME equity markets and the broader potential of later-stage private companies.
Keith Morgan, CEO, British Business Bank, said: “The UK’s small business equity finance market saw a record year in 2019 with investment amounts soaring to £8.5bn. This was a clear sign of investor confidence in UK smaller businesses located across the country and their potential for growth as well as the strong fundamentals of the UK economy as a place to start and grow a business.”
“The British Business Bank’s equity programmes are estimated to have supported around 11% of all equity deals in UK SMEs in 2019. As the economic impact of Covid-19 continues to affect businesses across the country, the work of the Bank has never been more important. Ensuring a wide range of innovative and ambitious smaller businesses continue to have access to equity investment to support their growth plans will be essential to the UK retaining its world-leading position in science, innovation and technology.”
Emerging signs of market changes before Covid-19
Despite a record year for fundraising overall, signals of a softening in private UK small business equity markets were apparent prior to the impact of Covid-19.
The amount of investment into seed stage companies declined by 1% in 2019. While the scale of this decline is small, it is set against seed stage investment increasing every year since 2011. This decline, combined with the number of companies raising follow-on funding in 2019 being higher than the number of companies raising finance for the first time, has the potential to impact on the future UK equity pipeline.
Investors also appeared to be exercising more caution in 2019, particularly towards some growth stage companies where average pre-money valuations fell compared to 2018. There was an increase in the proportion of equity ‘down rounds’ in 2019, with down rounds forming 12% of all deals in 2019, compared to 9% in 2018.
Unsurprisingly the Covid-19 outbreak is expected to have an impact on smaller businesses’ ability to raise equity finance. The Bank’s analysis of Beauhurst data showed that 43% of all UK equity backed companies are at least moderately affected by changes in delivery and demand for their products and services.
Alice Hu Wagner, Managing Director, Strategy Economics and Business Development, British Business Bank said: “The British Business Bank’s Small Business Equity Tracker report illustrates a strong interest in growth stage investment in the equity market in 2019, with a particular focus on tech businesses. Ensuring our high-potential later stage companies have the capital they need to compete on the global stage will be crucial to powering the economic recovery.”
The British Business Bank Effect
British Business Bank programmes are estimated to have supported 11% of UK equity deals between 2017 and 2019, compared to 9% between 2016 and 2018 as reported in last year’s report. The increase in market coverage is due to British Patient Capital fund activity, which has grown considerably over the same period.
Seed and venture stage deals supported by the Bank are generally smaller than the wider market, while growth stage deals tend to be larger, showing the Bank’s programmes are tackling market gaps at both ends of the UK SME equity spectrum.
The commercialisation and growth of the UK’s science-based companies, crucial for building the future economy, is well supported by the Bank’s equity programmes – 50% of our deals between 2017 and 2019 went to technology/IP-based businesses.
Addressing regional imbalances remains core to all British Business Bank activity, with two funds in particular specifically targeting underserved regions. The Northern Powerhouse Investment Fund and Midlands Engine Investment Fund (MEIF) contributed to 16% and 19% of deals in their respective areas.
 NB – companies can appear in one or more verticals.
For further information please contact:
07827 552 301
The British Business Bank team
+44 20 3128 8589
About the British Business Bank
The British Business Bank is the UK government’s economic development bank. Established in November 2014, its mission is to make finance markets for smaller businesses work more effectively, enabling those businesses to prosper, grow and build UK economic activity. Its remit is to design, deliver and efficiently manage UK-wide smaller business access to finance programmes for the UK government.
The British Business Bank programmes are supporting more than £7.7bn of finance to over 94,900 smaller businesses (as at end of December 2019).
As well as increasing both supply and diversity of finance for UK smaller businesses through its programmes, the Bank works to raise awareness of the finance options available to smaller businesses:
- The Business Finance Guide (published in partnership with the ICAEW and a further 21 business and finance organisations) impartially sets out the range of finance options available to businesses at all stages – from start-ups to SMEs and growing mid-sized companies. Businesses can take the interactive journey at https://thebusinessfinanceguide.co.uk/
- The new British Business Bank Finance Hub provides independent and impartial information to high-growth businesses about their finance options, featuring short films, expert guides, checklists and articles from finance providers to help make their application a success. The new site also features case studies and lessons from real businesses to guide businesses through the process of applying for growth finance.
As the holding company of the group operating under the trading name of British Business Bank, British Business Bank plc is wholly owned by HM Government and is not authorised or regulated by the Prudential Regulation Authority (PRA) or the Financial Conduct Authority (FCA). The British Business Bank operates under its own brand name through a number of subsidiaries, none of which are authorised and regulated by the FCA.
British Business Bank plc and its principal operating subsidiaries are not banking institutions and do not operate as such. A complete legal structure chart for British Business Bank plc and its subsidiaries can be found on the British Business Bank plc website.