Government support and female founders lead fast growth companies to record VC deals

Beauhurst scale up research

British scale-ups secured a record number of investments in 2020 in the face of the impact of the Covid-19 pandemic, boosted by the Government’s Future Fund scheme.

This is according to Beauhurst, the UK’s leading database for fast-growth companies, which today announces the findings of its annual flagship report, The Deal.

High-growth companies in the UK secured 2,928 announced deals in 2020, a 48 per cent increase on the previous year. Although these deals were worth a total of £10.8 billion, this represents a year-on-year fall of eight per cent in total investment volume, down from £11.7 billion in 2019.

Despite the relative resilience of venture capital activity in 2021, the UK Government was a significant contributor. Without convertible loan raises via the Future Fund, scale-ups would have received £9.8 billion via 1,957 deals, representing 16 per cent and one per cent reductions respectively when compared with 2019.

A crucial reason for the reduction in venture capital last year was the fall in first-time fundraisings, as investors were more conservative and shied away from riskier investments. Although there has been a steady fall in first time funding since 2011, indicative of a maturing market, deal numbers dropped 15 per cent year-on-year to 482, the lowest number since 2012. In contrast, second time deals and beyond increased by five per cent, due to investors doubling down on existing portfolio companies to provide runway or back firms in particularly relevant industries.

Among companies that received funding for the first time, those with at least one female founder had less of a drop in funding rounds during the pandemic than those with all-male teams. Last year, 26 per cent of first-time funding went to businesses with a female founder, marking a one per cent increase in 2019 and just below the record high of 27 per cent in 2016. Across all activity in 2020, a record number of deals and volume of capital went to businesses with at least one female founder. This included significant deals for the likes of Starling Bank, Streetbees and Karma Kitchen.

Businesses based in Scotland, the South East and Yorkshire & The Humber saw record deal numbers in 2020. The number of deals in Scotland rose to 216 in 2020, in comparison to 216 in 2019, while in the South East it rose to 184, compared to 176 in 2019. In Yorkshire and the Humber, the number of deals totalled 68, compared to 65 the previous year. The West Midlands (£368 million) was the only region to secure a record volume of investment, predominantly as a result of Solihull-based Gymshark’s £200 million unicorn raise.

In terms of sectors, technology companies attracted by far the most investment – particularly fintech, blockchain and digital security companies, which all received record levels of investment. The number of fintech deals totalled 221 in 2020, compared to 210 in 2019, while the number of investments in blockchain companies rose to 44 in 2020 from 40 in 2019. Digital security deals rose to 82 in 2020, up from 56 in 2019.

Despite the caution exercised last year, private equity and venture capital firms were still the most active type of investor. However, individual angels saw the most year-on-year growth in investment, aside from the emergency interventions of the Government’s Future Fund, at a record 324 deals in 2020, up from 272 in 2019. The role of individual angels in propping up first-time fundraisings is unexpected, as angel funding is typically the first to fall in an economic crisis, just as crowdfunding figures have plateaued. However, angel investor confidence has remained strong, sensing the opportunity to back the great, resilient businesses that are often born out of recessions.

Henry Whorwood, Head of Research and Consultancy at Beauhurst, comments: “Last year saw the Covid-19 pandemic have an unprecedented impact on the venture capital ecosystem and fast-growth businesses across the UK. Despite record deals and activity across a number of regions and sectors, the Government-driven Future Fund has played a significant role in propping up the figures in 2020, which hides some of the difficulties faced by early-stage companies, particularly those seeking investment for the first time.

“In the face of challenging circumstances, however, we’ve seen the tech sector go from strength to strength, which will undoubtedly play a key role in driving the UK’s economic recovery. It’s fantastic to see female-founded businesses getting the recognition they deserve. As restrictions from the pandemic continue to impact funding activity, the outlook for 2021 remains uncertain, but we can be optimistic that investors have capital to deploy to drive growth in scale-ups of all stages.”