UK venture capital performance increased sharply in the last year, as the value of funds’ investment picks appreciated almost in line with those of the US, according to research by British Business Bank (BBB) published today.
VC funds have seen their total value to paid-in (TVPI) multiple – the metric used to track the value of funds’ investment picks – increase by almost a third from 1.81 in 2020 to 2.09 in 2021.
And the pooled amount paid out to investors relative to the amount they’ve paid in to the funds – the distribution to paid-in capital (DPI) – increased from 0.79 in 2020 to 1.05 in 2021.
A combination of swelling company pre-money valuations and strong exit activity in 2020 and 2021 helped push up UK fund valuations, according to the research from BBB, the UK government’s economic development bank.
It’s also helped them keep pace with their US counterparts – historically much larger and more lucrative, owing to the mature nature of the market in Silicon Valley, home to the Big Tech giants.
The BBB’s data implies that UK VC funds’ financial returns are closer to those of the US than expected, when the amount invested is taken into account.
Between 2002 and 2016, US VCs had a pooled DPI multiple of 1.12, while UK VCs’ multiple stood at 1.01 during the same timeframe.
And the US pooled TVPI multiple during that period was 0.11 lower than in the UK.
In the most recent data, the top three per cent of US funds do still outperform the UK’s in 2021, but this is much stronger than in 2019, when the UK’s funds kept pace until the top eight per cent.
The BBB also surveyed UK fund managers to find out their views of current market conditions, and almost all (93 per cent) reported exit conditions were strong in 2021.
But as UK startups keep innovating, more and more VCs want a slice of the pie, and 60 per cent of fund managers reported a higher level of competition for deals in the last year.
Descriptions of the UK’s transition to a “founder’s market” from an investor’s are widespread, and the race among VCs to get on the most innovative startups’ cap tables is fattening valuations more and more.
So what does all this cash mean for the UK ecosystem in the long-term?
“We need a deeper pool of money available, and bigger tickets to be written, to help the UK generate more long-term successful companies,” says Matt Adey, director of economics at BBB.
“Having a healthy VC environment is what will give us the startups that deliver the UK’s recovery over time, with their new approaches to tackling issues like the transition to net zero, medical and life sciences issues, and fintech improvements.”
Although they reported tough competition, fund managers were united in their view that a very good availability of deals in the UK persisted – in what has been a record year for megarounds in the UK.
“It’s a sign that our ecosystem maturing,” says Will Dufton, principal at Omers Ventures.
“For a very long time, Europe has been in the shadow of the US. But now this competition is intensifying as several US funds have woken up to the fact that valuations here are much more amenable than they are on the West Coast, and the talent and quality of companies is just as high.
“This shows we’re on a par with Silicon Valley. Valuations will move up to those levels, but maybe we should have expected that to happen even sooner – we’ve now minted so many unicorns.”
And as the bar for valuation uplifts rises to US levels, will founders be able to keep up with these growth expectations?
“Yes, it’s a natural progression of the ecosystem,” Dufton continues.
“The quality of growth, retention and product creation has never been stronger.”
While funding rounds in the UK have historically involved more risk-averse sums than the US, and the bar for valuation uplifts has hovered at around half, the amount of capital being poured into startups here now can also accelerate innovation.
“In the past, smaller deals and raises meant that the money didn’t last as long, and founders were constantly worried about the next raise,” says Matt Adey.
“The amounts we’re seeing now give them the space to concentrate on scaling properly and optimising their product.”
At the rate British startups are growing now, the soaring valuations of x100 revenue that many are being pitched at are “not even that much”, according to Ed Lascelles, a partner at Albion VC.
“Lots of UK companies are growing at well over 100 per cent per annum, so for them to deliver on their ambition, these valuations are a fantastic thing,” he says.