AUTHOR: Kerry Dwyer, Equity Funding Manager at Swoop
The end of this year is seeing a downturn in VC investment. Business owners will have to work a little harder if they want to earn a slice of the pie.
Venture Capital (VC) is not just an important part of the business funding landscape; trends in VC can tell us a lot about the overall health of an economy.
When VCs are happy to take bold risks with investment, it’s generally because the overall tide is rising. If good companies struggle to find VC investment, it may be because something else is at play, and the fate of a business will depend upon external factors regardless of how well it is run.
As we look forward to 2023, where are we right now with VC investment?
The outlook is not good, despite a promising start to the year in Europe: despite the outbreak of war in Ukraine and the beginnings of the energy crisis that have come to the fore in recent months, capital invested remained on pace with 2021.
Deal value totalled €76.0 billion through Q3 2022, but Q3 saw a sharp drop off: at €18.4 billion, investment was down 36.1 percent compared to Q2 2022. Unless something highly unusual happens in Q4, the decline expected by analysts has arrived.
What’s spooking the market?
The answer is predictable – it’s all the stuff we are seeing in the headlines: as cost of living goes up, energy costs increase and supply chain issues impact businesses, it’s getting harder for companies to stay profitable. There is also the issue of capital efficiency.
Capital efficiency is the measure of how a business uses its cash and is a major KPI for investors, especially given the current macroeconomic environment. Compare 2021, when an investment into a company could have been used to refurbish premises, purchase new equipment or enter a new market. All these would be considered as “efficient” as they offer a clear path to growth and increased profitability. In 2022, that investment could be swallowed up by rising energy costs – essentially an inefficient use of funds that adds little value to the business receiving the money other than keeping the doors open.
In a world where consumer spending is declining, simply keeping the doors of a business open is not an attractive prospect for an investor who wants the maximum return for their money.
What does this mean for businesses based in the UK/Ireland?
Businesses based in the UK and Ireland have enjoyed a level of investment that is slightly higher than other regions across Europe: as the graph below shows, for the last ten years, about a third of European investment comes to the UK/Ireland. While the overall amount of investment may be going down, there should still be more of it in this region than in other regions.
This consistency has held firm despite the economic and political fallout from the 2016 Brexit referendum. Fears of a mass exodus of companies and talent from the UK have been largely unfounded.
Mark Goldberg, Partner at Index Ventures described the situation to TechCrunch:
“Last year was the party. This year is the hangover”.
Even so, investors still need to invest as that is where they make their money. Goldberg’s approach is to look at the consumer trends and place his bets in the infrastructure that underpins the big changes. In this case, Index is investing “aggressively” in the next generation of fintech companies:
“I’m invested in the infrastructure side of fintech… there’s resilience there… but it’s also just a function of the inherent lack of volatility on the infrastructure side of the market.”
Goldberg’s approach is typical of VCs, as this second graph shows: software has steadily increased its share of total investment over the last ten years. The headline news is that investment may be decreasing this year, but UK and Irish software firms will be in the best position to take advantage of what VC opportunities still exist.
Swoop has always offered equity funding as part of the package for the businesses with which we work. We help businesses create slide decks that make them attractive to investors, and introduce them to VCs from our network.
Neil Dillon, Head of Equity at Swoop says that if budgets are being cut, Swoop has an important role to play in helping both sides of equity investment get the best out of the relationship:
“What investors need at times like these is reassurance. Which are the businesses that are making growth a priority? Which are the ones going to use the money well? As for the companies looking to raise investment, they need to be supported in making the case for investment, particularly when there is less money in the wider market.”
Should you be talking to Swoop’s Equity Team? If you are thinking about raising money by selling shares in your company, click here to arrange a discussion about how Swoop can help.