Venture capital investing in the UK and Ireland tailed off in the first quarter of the year, according to Ascendant the technology-focussed investment group.
"As expected, and as many of us experienced, Q1 was characterised by low levels of investment activity and capital commitments", says Stuart McKnight, managing director of Ascendant, "only 44 tech businesses received funding - the lowest level since Q3 2006."
The 44 companies received £114m, which is significantly below the £357m recorded in Q1 2008 and the lowest level since Q3 2005.
The 68% decline between Q108 and Q109 is slightly worse than the drop in activity in the US where the National Venture Capital Association reported that US venture capital investments sank 61% in Q1 2009, dropping to the lowest level in 12 years.
"UK/Irish VCs began to react to the recessionary environment in the last few months of 2008", says McKnight, "they reduced the number of deals they were doing, favoured later stage businesses and committed less capital to each deal."
The average deal size in Q1 was £2.6m - down from £5m per deal in the same period in 2008. The scale of the change was shown by the size of the largest deal in Q1 which was £11m (Viagogo) while the biggest deal in Q1 2008 was £50m (Spinvox).
"Perhaps more worrying is the fact that some VCs are not investing at all," adds McKnight, "the number of active investors in Q1 was 61 - a 40% drop over the Q1 2008 total. The 'truants' range from some of the Alpha/Top Tier firms through to smaller funds such as some of the Enterprise Capital Funds."
Government-backed regional funds have continued to be very active, as have business angels. Angels participated in 30% of the deals of £0.5m or more - often alongside major VCs.
"Given the tax incentives announced by the Chancellor in the recent budget, we expect this trend to continue", says McKnight.
Ascendant found a number of investment trends:
- In Q1, £114m (£357m in Q108) was invested in 44 deals (72 in Q108) by 61 investors (102 in Q108).
- The busiest investors were Enterprise Ireland, Scottish Enterprise, AIB Seed Capital, Archangels, ACT, Atomico, Eden Ventures, Foresight, Imperial Innovations, Intel Capital, South Yorkshire Investment Fund and WHEB Ventures.
- Levels of syndication remained stable - 66% of deals involved more than one investor.
- Private investors' participation in VC deals increased very significantly - 30% of completed deals.
- The 10 biggest deals received 61% of funds invested. The trophy deals included: Viagogo (£11m), Nexeon (£10m), Imagini (£10m), Tribold (£7m), Cambridge Broadband (£5m), 2K Manufacturing (£5m), Vertal (£5m), Miric Semiconductor (£5m), AMCS (£5m) and New Earth Solutions (£4m).
- All sub sectors suffered a decline in both volume and value. In terms of value of investment, Internet/Wireless services and Other Technologies (i.e. miscellaneous, non categorised technologies) were the worst hit sectors.
- There were three primary areas of investment focus - Software (£36m), Cleantech (£33m) and Internet/Wireless Services (£26m).
- The larger Software deals were: Imagini (£10m), InforSense (£3m), Clearpace (£3m) and Corvil (£2.7m).
- The key Cleantech deals included: Nexeon (£10m), Vertal (£5m), 2k Manufacturing (£5m), AMCS (£5m) and New Earth Solutions (£4m).
- In the Internet/Wireless Services sector: Viagogo (£11m), Zoopla (£4m) and ChemistDirect (£3m) received the biggest VC cheques.
- Only 2 semi/opto companies received venture capital - Miric Semi (£5m) and Firecoms (£3m).
- All regions experienced a decline in investment - except Ireland which was broadly static.
- London based tech businesses remained the largest single recipient of VC money taking 48% of the funds invested in the UK and Ireland.
"Clearly these changes and the general poor state of the economy will have a profound effect on the ease with which companies will be able to attract additional finance or undertake any M&A in 2009", concludes McKnight.
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