Venture capitalists are prioritising their portfolio companies over new startups as they anticipate a slowdown in investment during the coronavirus pandemic.
According to new research by Plexal and Beauhurst, investment since lockdown began grew 34 per cent to reach £663m. However, the drop in the number of deals, down 39 per cent, indicates investor confidence has been dented somewhat.
Andrew Roughan, managing director of Plexal, tells City A.M. that there is a particular focus on current investors “shoring up existing investments to make sure they have liquidity and cash flow to survive the current period.”
Of the £663m raised, just £50.2m went to startups that had never raised funds before.
Tim Levene, who runs the fintech venture capital firm Augmentum, tells City A.M. he is not actively looking for new deals. It is in part because lockdown has made the logistics of forging new deals, as well as due diligence, more difficult.
“Our priority is our existing portfolio at the moment. We’re unlikely to jump in if a business asks for capital urgently and we don’t have a relationship with them,” he said.
Kerry Baldwin, managing partner of early stage fund IQ Capital, adds: “I’m advising to extend the runway on my portfolio, and advising businesses to protect the customers they have. There’s a lot of work you need to do in-house.”
New startups will struggle in tough climate
As venture capital firms turn to protecting their portfolios, the nature of investment will undoubtedly change in the next few months.
Baldwin tells City A.M. that while IQ Capital is still investing the firm has had to be frank with businesses as it will be a “tough funding climate out there”.
“We’ve had to tell them that assembling a syndicate might not be as simple as normal and we’re looking at projections with more detail,” she adds.
The scale of the challenges facing many startups is clear. While the technology sector remains somewhat resilient, the vast majority are struggling to raise funding. Nearly 1,000 small businesses in administration or liquidation, according to Plexal and Beauhurst’s research.
This pressure will only intensify as investors pause to assess the full impact of Covid-19 on business models.
“Even in April we do not have enough data for investors to take a good look at the full impact – that will require the best part of two months for investors to make decisions,” says Levene.
There is some glimmer of hope as the outbreak of coronavirus presents opportunities for certain companies. The outbreak has accelerated the adoption of Augmentum’s portfolio company FareWill, a wills and probate service.
Additionally, Levine has seen an acceleration in the digital adoption of financial services. “An event such as this forces the hand of those consumers who were previously reluctant,” he tells City A.M.
Venture capital firms call for more to be done for startups
A scaling back of investment amid the economic turmoil risks losing a generation of startups.
VCs have welcomed the government’s Future Fund, which provides government loans for small businesses but there are calls for greater clarity.
“To pull something together as quickly as they did was impressive,” says Levene. “The devil will be in the detail and we’ll wait for more specifics. It’s a good initiative but it has to be executed in the right way.”
To be eligible for the convertible loans, firms must have raised at least £250,000 in the last five years. In addition, the government loan must be at least matched by private investors, and will automatically convert into an equity stake in the majority of cases. Levene hopes the fund will be extended beyond the initial £250m pledged.
Additionally, there are increased calls for an exit strategy that will allow startups to forecast when customers are coming back to work. “Companies are screaming out for contracts – not a loan or grant but real business,” says Roughan.
He adds: “While the Future Fund is an excellent first start, it’s clear that more is required to protect the businesses that have driven job creation and economic growth in the UK for the last 10 years.”