By Chantelle Arneaud, Envestors
Over the past couple of years there has been a reduction in the number of growth companies raising capital. However, the good news is that capital is still being raised. Here, we look at some statistics for early-stage businesses from 2021 and offer some advice for companies intending to raise equity during 2022.
All data is based on UK headquartered companies who raised equity capital from 01 January to 01 December in comparative years. Data comes from Beauhurst.
Are fewer companies raising capital?
Only slightly fewer.
The number of equity fundraises in 2021 is slightly above 2020 with a total of 5,315 versus, 5,278. Both figures are lower than 2019 and previous years, however, this is to be expected. As the UK recovers from the emotional and economic ups and downs of the pandemic we can expect the number of fundraises to continue to rise and return to year-on- year growth.
The number of equity fundraises by year
Data from Beauhurst, includes equity fundraises in UK-based companies from 01 January 2021 to 01 Dec, 2021, 2020 and 2019.
Who’s getting the money?
Mega rounds distort the total picture when it comes to funding early-stage companies. Hearing that companies like Revolut, Hopin and Snyk raised billions doesn’t help a seed or early-revenue stage company understand what to expect when they go to raise capital, so we’ve focused in on earlier rounds to give a picture of what is happening in this part of the market.
The number of rounds by broad business stage shows that many early companies have been successful in attracting funding, with seed stage companies accounting for nearly half of all the rounds in the year.
Excludes dead and exited businesses.
The classifications, however, are not hard and fast in their application, so we also have to look at the data according to round size. Keep in mind many businesses nowadays do a number of smaller rounds, and it’s possible that the same business is being counted twice in any category, for example if a business did two £250k rounds in the given time period.
Here we see 70%+ of all rounds were under a million and 40% were under £250k.
Does this mean you should raise £250k or less because there seems to be more activity there? Running multiple smaller rounds is an approach worth considering. This strategy depends on which type of investor you’re targeting though and is no guarantee of success.
It is also worth considering that we’re looking at data on reported raises. No one reports and indeed no one tracks unsuccessful raises, so while there have been 2,000+ successful rounds for £250k or less, it says nothing of those that failed to reach their minimum target. A conservative estimate is that half of businesses fail to reach their target.
Are fintech companies getting all the money?
Well, they are getting a good chunk of it. Alongside them are AI, ehealth, digital security and edtech. Despite the round size or business stage, these categories appear again and again at the top of the list and, of course fintech, is notable for pulling in a number of mega deals.
So, are you doomed if you’re not in those spaces? Maybe not. Let’s pause for a moment and consider what those ‘buzzwords’ mean? Firstly, they all include a focus on tech. The breakdown for most of them is the application of tech to a specific sector like health or education. AI is of course not sector specific, so it can apply to any sector – and it does.
There is some overlap here with companies being counted in multiple categories and some companies knowingly capitalising on trending terms. If you dig into the data, you’ll see the once-grand buzzword ‘big data’ has now dropped down the list with sexier terms taking its place.
So, the message here is tech, tech, tech, and if it uses AI all the better. Make sure it does though. AI is a much-abused term, with companies cashing in on the hype. A study by MMC Ventures in 2019 found that as many as 40% of European firms that were classed as an AI startup, did not actually use AI in any material way.
It’s important to note that it is not necessarily the businesses themselves that are applying the label. In many cases it was third-party research sites. However, the benefit of having such a label applied and doing nothing to correct it was 15%-50% more funding than other technology startups. While the study is now a few years old, there is little evidence to suggest a major correction with this issue.
So, in Q1 of 2022, what should early-stage businesses do to plan a successful fundraise? Here are our top tips.
- Your proposition and USP
This isn’t unique to the current fundraising climate and is always important, yet many businesses fail to get this right. It is competitive out there. We receive hundreds of applications each month and see the same business ideas time and time again. A good idea alone is never enough. Make sure the problem you’re solving and how you’re solving it are clear. Use simple language. While you may be using some clever tech to solve a challenge, save the detail for later. Strip out the jargon, minimise the adjectives and write a description your mum can understand. If no one can understand what you do, no one will want to invest.
Differentiation is also key. What makes you so special? Everyone has a competitor- even if that is the option of doing nothing. So, outline how you are unique, how is that sustainable and be sure you’re taking an objective viewpoint. It’s easy to believe you are better than your competitors, but does anyone who doesn’t work for your business think that? If you don’t know, start asking your customers, prospects and partners.
- Your team profile
Investors invest in people and in fact, many would take a good idea with a great team over a great idea with a good team. So, make sure you have a standout team. That includes sector experience, a balanced management team in terms of functional experience and any previous exits are a bonus.
If you are light in one area, it is a good idea to seek an advisor or non-executive director as that can give confidence to potential investors – as well as providing valuable advice and contacts.
- Evidence of traction
Coming armed with proof that you have product-market fit and sustained growth goes a long way. If you have any big brands as customers or partners, you’ll want to highlight this as it provides further validation for your business. While this is important for all businesses, it is especially important for consumer brands and marketplaces. We see a lot of businesses in these categories and unless you have a growing customer base, your business is little more than an idea and therefore perceived as a big risk by investors.
- Your deal (and all the documents that go with it)
Getting investment ready is a lot of work. It requires pulling together a host of documents from the subscription agreement to the cap table to the balance sheet.
We always recommend companies work with an advisor to create their deal as it helps ensure all information is available, professionally presented and credible. While there are many short-cuts, such as downloading templates from the internet, the risk of a poorly presented deal in such a competitive environment is just not worth taking.
- Your investor target list
The early-stage investment space is sprawling, disconnected and incredibly difficult to navigate. Be clear on what types of investor you want to target, be it angel investors, regional funds or VCs, and build a highly targeted list.
Avoid the temptation of spamming anyone with the key word ‘investor’ on LinkedIn. This is unlikely to inspire confidence. If possible, work with a network like Envestors, which has in-depth knowledge of the players in the space plus relationships with investors. This approach help will reduce the hard work involved in identifying and engaging with potential investors by yourself.
ABOUT THE AUTHOR
Chantelle Arneaud is from Envestors. Envestors’ digital investment platform brings together entrepreneurs and investors across geographies, communities and sectors – creating the single marketplace for early-stage investment in the UK.
Envestors partners with accelerators, incubators and angel networks to provide a white-label platform empowering them to promote deals, engage investors and connect to other networks.
Founded in 2004, Envestors has helped more than 200 high growth businesses raise more than £100m through its own private investment club.
Envestors is authorised and regulated by the Financial Conduct Authority.
Web: https://www.envestors.co.uk/
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Twitter: @EnvestorsLondon