Will 2011 live up to UK trade body the British Private Equity and Venture Capital Association’s billing as "the Year of Venture"?
The industry body hopes that its campaign will become a self-fulfilling prophecy, as does the government and most certainly anyone involved in the venture capital industry.
It is certainly true that venture capital investment is back to pre-recession levels in the US, where VC and angel investment database CB Insights revealed that firm spoured $7.5bn into 738 deals during the first quarter of 2011 – an eight-year high.
Can we follow the US lead in the UK? The UK government is certainly taking proactive steps to help. The last Budget introduced a range of initiatives aimed at encouraging growth in the venture capital sector, including the relaxing of rules relating to the enterprise investment schemes and increasing the limit on entrepreneurs’ tax relief.
The UK government is also trying to streamline the process involved in incorporating and starting up a new company (for more on this, see two websites useful for people starting a business – www.startupbritain.org and www.businesslink.gov.uk).
In the past six months, we have seen a renewed interest from venture funds looking at new investment opportunities, rather than simply follow-on rounds or restructuring opportunities.
This is an important development as it means venture funds are looking to deploy new capital into new businesses, rather than into businesses in which they may have initially invested and are now looking to exit.
We have also seen an increase in corporate spin-outs, especially in the healthcare and biotech sectors, where the high-profile closure of the Pfizer site in Sandwich has led to an inevitable interest in the site’s assets and people.
A corporate spin-out has obvious advantages for both the corporate and the venture capitalist. The corporate is able to maintain an interest in the continued development and commercialisation of the asset or project, (usually by being issued shares in the spun-out entity) in most cases without having to contribute any working capital.
The venture capitalist gets to invest in an asset that has generally been developed beyond the pure start-up phase, often with a skeleton management team already in place.
Consequently, these investments can be seen as less risky for a venture capitalist who is not interested in a pure start-up play. Further, if the corporate remains a shareholder in the entity, then the relationship can offer partnering or even exit opportunities.
Sadly, however, the fundraising landscape, at least for venture capital in the UK and Europe, does not look quite as positive as the investment environment. European venture fundraising fell in the first quarter of 2011 compared with last year.
European firms raised $653m for five funds during the first quarter, down from $1.3bn raised for 13 funds during the same period last year. This may in part be due to the fact that many UK and European venture funds have found it difficult to produce good returns over the past few years, and of course it is easier to raise new funds if you can point to good figures from your previous efforts.
In light of the relatively poor fundraising statistics, where is the money coming from? Many venture firms still have considerable dry powder, which has not been deployed over the past few years due to a lack of decent investment opportunities.
We have also seen money emerging from unexpected areas, as demonstrated by last year’s move by the UK’s six largest banks to start their own £1bn venture capital fund.
Money coming out of the corporate sector continues to be an important source of funding for the venture capital industry, with companies such as Intel Capital having strong and active private investment arms. These remain an important source of funding for young companies.
As confidence returns and we start to see some more positive exits, the fundraising environment should also improve.
We are less than half way through the year, but already things look relatively promising. When we look back at the end of the year, I hope and expect we will all be able to enjoy the fact that 2011 really was the Year of Venture.