In the first half of 2016, 557 deals were completed and announced, which was a decrease of 22 per cent from the second half of 2015. Why is this occurring? What are the alternatives for technology startups and fast growth businesses? The consensus view is that this was predictable, short term and a blip. Perhaps more interesting is how the research points to the evolution of crowd funding.
The uncertainty leading up to the Brexit referendum and its fall out has inevitably had an impact on investor appetite and where capital is invested. UK startups recruit heavily from abroad, particularly software developers and data scientists in and around London, and there is uncertainty over the status of current workers from abroad and their right to remain. Brexit may affect the £2.3bn funds available for UK SMEs from the European Investment Fund. A slowing macro-economic outlook has seen the UK lose its AAA credit rating, a tightening of credit, more expensive debt and more cautious appetite to risk. Geopolitical concerns also persist ranging from the conflict in Ukraine, the terrorist threat posed by ISIS, the Syrian war and refugee crisis and the US elections.
The new government has emphasised that the UK remains “open for business”, stressing the role of SMEs, seeking to calm fears and highlighting the UK’s many other advantages, including a favourable tax regime and reliefs, a simplified and transparent company registration and filing system, a global transport hub, a multi-cultural environment, the rule of law (with an extensive tried and tested body of case law and reputation of equity and impartial judgments) as well as the English language.
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In this environment, the typical sources of capital for fast growth businesses have not changed but may (temporarily) have become more challenging for some, particularly for start ups: bootstrapping (self-funding), angel investors (whether individually or via a syndicate) and venture capitalists, as well as (in some cases) venture debt and bank debt. Venture capitalists, more than happy to cut out a middle man, are not in principle hostile to crowd funding. However, they are aware of some of its challenges, having often dealt with them, especially in relation to exit. For example, dealing with “the long tail” of sometimes unsophisticated, uncontactable, unrealistic, small but numerous shareholders “wagging the dog” is not just an issue for the company or founders.
Crowdfunding and more traditional negotiation with select investors may not therefore be a binary choice but may appear so unless concerns are addressed appropriately.
We should be cautious before writing off the benefits of using technology to access capital. The data involved in market surveys is never perfect; deals may be disclosed later or not at all; fast growth businesses may wish to be in stealth mode or hold back news for competitive reasons or to coincide with a big splash launch; and a more cautious investment environment may have also dampened demand for capital.
Although the number of equity crowdfunding deals is down (on historic highs), the average amounts raised (by fewer businesses) is increasing. In future, the (already blurred) distinction between seed, venture and growth funding may be less correlated with the use of crowd funding and more by the amounts raised and terms achieved. Crowdfunding may become less associated with retail investors, social media, the arts, music and philanthropy and more with a different breed of professional, technology-savvy venture capitalists looking for the next big thing at all stages and writing bigger cheques than typical crowdfunders have done to date.
Thomas Colmer is a partner in the corporate team at PwC Legal.
Meanwhile, as an alternative finance strategy that has grown in popularity over the last few years, Adam Tavener argues that a recent downturn in new listings is more likely the result of regulatory pressure and greater due diligence – rather than the easy blame of Brexit.
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