Research commissioned by UBS Wealth Management and prepared by Library House indicates that last year 1,668 venture-backed companies in the UK raised a total of just under GBP1.4bn, an inc
Research commissioned by UBS Wealth Management and prepared by Library House indicates that last year 1,668 venture-backed companies in the UK raised a total of just under GBP1.4bn, an increase of 27 per cent from 2005.
The report, Funding Growth in a Changing World: The UBS UK Venture Backed Report 2007, draws on an analysis of every company in the UK that is currently venture-backed, finding that the growth was driven by significant increases in activity in both the information technology and services and retail sectors.
There are several potential reasons for the general increase in activity, the report says. First, venture capital investors have increasingly recovered their confidence since the low ebb of 2002, improving the top-level numbers. Secondly, 2005 saw significant fundraising activity by venture capital firms, which consequently had capital to invest the following year.
In addition, Library House says, government policy measures have helped improve the vibrancy of the UK venture capital market, with regional venture capital funds and other public sector-backed vehicles making an important contribution.
The fastest growing sector, with investments up 91 per cent by value from 2005-06, was services and retail, now the largest in the UK venture capital market and clearly demonstrating the opportunities available for venture capitalists outside the technology sector.
The growth of investment in services and retail is probably driven by the robust returns delivered by the sector. According to Library House’s analysis of exits during 2006, services and retail companies delivered the highest company returns of any sector, estimated at an internal rate of return of 66 per cent at a company level.
Although last year saw robust growth, the report also cites the need for further action to support venture capital and innovation in the UK in the context of rapid growth in India and China, as well as the continuing dominance of the US.
The Chinese venture capital market overtook the UK’s during 2006 in terms of absolute size and India is likely to follow suit by 2009. Meanwhile the US venture capital market continues to be approximately three times larger than the UK on a per capita basis (US venture capitalists are also the main non-UK source of financing for UK companies). Although the UK is leading Europe, the key competition is coming from the US and Asia.
The Library House research has also identified the fastest-growing venture backed companies in the UK by revenue. The VentureTrack 20 was headed by Rocela, an independent specialist consultancy that helps Oracle clients manage and deliver projects more effectively, with a compound annual growth rate of 224 per cent. It has seen revenues grow from GBP1.8m in 2004 to over GBP20m in 2006.
The top investor in 2006 by syndicated deal amount was 3i Group, followed by Accel Partners, with DFJ Esprit and Abingworth also in the top 10. Measured by number of deals rather than syndicated deal amount, the top investor was the Scottish Enterprise Fund, which completed 51 investments, followed by the Oxford Technology Venture Capital Trust with 22 investments.
The activity of Scottish Enterprise has presaged a dramatic growth in the number of venture-backed companies in Scotland. Since 1999, when the Scottish Parliament was established, Scotland’s venture-backed portfolio has grown much faster than England’s, albeit from a lower base. However, for a given quantity of public money, less private money follows in Scotland than in England.
‘Last year was a fantastic one for UK venture activity, yet the persistence of a gap between the vibrancy of venture capital in the UK and Europe versus the US suggests the existence of structural problems on this side of the Atlantic,’ says Library House chairman Doug Richard.
‘The most pressing of these problems is the lack of proof of concept and investment readiness funding in the UK and Europe, which results in a smaller pool of investible opportunities here. With the rise of China and India, tackling these problems becomes an urgent necessity.’
