Jenny Tooth comments on the British Business Bank’s 2020 Equity Tracker report
Last week the British Business Bank launched the 2020 Equity Tracker report, based on 2019 data but with an initial look at the market in 2020 so far. The year ended with a record level of equity invested at £8.5bn which was up 24% on 2018, with over 4bn of this going to tech. Its also notable that for the first time follow-on deals outnumbered new investments. However, much of this was going to growth capital and significantly there was a 1% decline in seed stage investing and which is the first time this has declined since 2011. This is significant in that the market for seed and start up investing was already weakening by the end of 2019 and with several regions across the UK experiencing an overall decrease in the level of investment the scene was set for a continuing decline in investment in 2020 as we moved into the impact of Covid. It is also significant that the Equity Tracker Report identified that 43% of Equity backed businesses are likely to have been affected moderate-severely under Covid-19. Notably there are strong indications that this will get worse in Q3 and Q4. We need to rebuild pools of capital especially where there are already existing thin markets and to stimulate more investors to start angel investing.
Beauhurst’s figures also identified that seed and start-up investment was down 50% by end March 2020. Nevertheless, we are aware that there were a number of deals closed by our angel community that were already underway, whilst a number were keen to ensure that they maximised their tax reliefs by end of the tax year. Beauhurst also identified that in Q2 (87 days of Covid-19) there were in total only 324 reported equity deals amounting to £1.67bn and which represents 46% of the investment in Q2 2019.
The BBB report also highlighted that there was little progress in increasing the gender balance of investment with female and mixed female teams receiving only 20% overall capital compared with male counterparts, whilst 22% of Angel investments were made in female founders.
It is clear that these strong existing imbalances in the level of investment in relation to the regions and diversity have been compounded under the Covid crisis. As we look at what actions will be taken to address these ongoing challenges, it is notable that the Government is developing a strong place-based strategy as part of its levelling up agenda. Boris’ “Build Build Build” strategy focuses on jobs and infrastructure to address the challenges of the underserved regions. Yet we know that to rebuild the economies in these regions we need to stimulate small business growth by building strong early stage finance ecosystems – and the Government needs to bring significant funding behind this to help rebuild the local investment base.
The latest UK Research and Development Road Map announced today by Business Secretary, Alock Sharma sets out the Government’s ambitious plans to put innovation, research and technological development at the heart of the post Covid recovery, increasing investment and public funding to £22bn per year by 2024. The Roadmap recognises the need to build on the innovation strengths across the whole of the UK not only in the Golden Triangle but also in the regions and to put in place an R&D Place Strategy, bringing together all of the key players around R&D clusters. This offers a real opportunity to mobilise and strengthen equity investment alongside R&D infrastructure spending and we are looking forward to working with Government, Innovate UK, BBB and key players to develop these plans over the coming months.
Investing in diversity is the other key pre-existing weakness in our investment market and it is now time to address this as we plan for the future of finance post-Covid. The recent events have brought many of us to reflect on the lack of black and minority ethnic founders in our pipeline and portfolios. We know that there is a huge untapped pool of talent, innovation and growth potential among the black and minority ethnic founders across the UK who are not accessing the investment they need to achieve their growth ambitions and we need to understand what we can all do to achieve change. This was very much the subject of the Virtual Roundtable that I organised yesterday and with nearly 240 members of our community joining us for the debate. I was delighted to be joined by 8 leading investors and industry experts from the Black and minority ethic community who are all taking action to enable access to investment and who shared their deep insights with us. What is clear is that there is a growing pool of capital provided by these committed and talented individuals and groups and who bring a huge resource of expertise, knowledge, dealflow and capital. There is a huge opportunity to build around this existing activity to increase our pipeline and to co-invest alongside these Angels and VCs and we need to engage with and leverage this experience, so that we can integrate this good practice into our investment approach. Watch the full roundtable
We will be drawing up an action plan for increasing investment in black and minority ethnic founders for the Angel and early stage community which we hope to share with you shortly and we hope you will commit to working with us and these key players to help achieve change. It will be vital for Government to recognise that the time is now for action and investment to ensure that diversity is a central plank in rebuilding the post-Covid investment landscape.