The Deal Equity investment in the UK in 2020 2020 in review 1 Analysis: the year that ended in tiers 2 Investment activity in 2020 4 First time fundraisings 6 Impact of coronavirus 7 Investment stages 8 Geography 9 Sectors and verticals 10 Investors 11 Valuations 12 Female founders 13 The biggest deals of the year 14 Sectors in focus 16 Ventures on a virus vendetta 17 Digital security in the WFH era 20 Money on a mission: impact investing in 2020 23 Investors in focus 26 Top investors by UK deal numbers 27 Crowdfunding in 2020 28 Angels in the cloud 29 Basket case valuations 32 About Beauhurst 35 Contents Methodology and glossary Data for this report was finalised on the 3rd February. To be included in our analysis, an investment must be: • Publicly announced between 1 January 2011 - 31 December 2020* • Some form of equity investment • Secured by a non-listed UK company Although we collect data on unannounced rounds, we exclude these from temporal analyses because they are subject to a time lag. Figure 8.3 is the only exception to this rule. This graph includes unannounced rounds in order to paint a more accurate picture, as unannounced rounds are more likely to be flat or down rounds than those that are announced. Future Fund investments Figure 1.2 includes data on investments completed with the Government’s Future Fund, managed by British Business Bank, to show the impact of the fund on overall investment figures. But, given that we don’t have details on the vast majority (88%) of these deals (as they have not yet been announced to the public), we have excluded all deals that include Future Fund participation from subsequent graphs and statistics. Company stage We categorise companies into seven stages of evolution (seed, venture, growth, established, zombie, exited, dead) using over 40 proprietary criteria, taking a balanced view with each decision. Company sector We tag companies with as many sectors from our proprietary sector matrix as appropriate. Valuations An equity raise with a pre-money valuation that is at least 5% lower than the recipient company’s previous post-money valuation is classed as a down round; between 5% lower and 5% higher is classed as a flat round; at least 5% higher is classed as an up round. A bumpy year: 2020 in review The Government’s Future Fund boosts deal numbers to a new high, but the ecosystem does well even without this support. The value of investments fails to match up with record levels set in 2019. 2 There was a great gasp for breath in March when the UK was plunged into an indefinite, supposedly short-term lockdown, with investors, startups and advisors unsure of how to progress. Supply chains seized up, whole industries were stifled, consumer behaviour faltered. For investors and founders alike, the uncertainty in those first few weeks was little short of paralysing. As a first course of action, investors evaluated their current portfolios, and dedicated time and resources to these existing ventures, rather than exposing themselves to new risk. Some continued on with deals that had been in the pipeline for many months and were nearing completion, whilst others pulled the plug on all new investments entirely. In April 2020, we would not have predicted the end result: a record year for deal numbers and the second highest annual amount invested (when we include figures from the Future Fund). Indeed, in January we predicted the other way round: that deal numbers might decline from 2019’s level but that the amount invested would be superseded. We won’t beat ourselves up too much for not seeing coronavirus or the Government’s response to it coming, but it is worth figuring out what changed. In a nutshell, the capital requirements of almost every high-growth business. More companies needed external finance, but many of them raised less. Some deals happened that were smaller than they would have been without the pandemic: office expansions were postponed, international expansions were deferred. But some deals happened that weren’t anticipated: pivots had to be financed, lost revenues made up for. Into the gap where more capital seemed to be needed, and uncertainty was claimed to be having a paralysing effect, came the Future Fund, a matched funding programme to support the innovative, pre-profit businesses that were unable to reach their full economic potential due to the pandemic. As of 31st January, the Future Fund is closed to applications, but the complete list of recipients of these convertible loan notes is yet to be announced. For the sake of consistency, we’ve excluded all Future Fund investments (even those 114 that have been announced) from the bulk of this report, but will be analysing the Future Fund’s investments in other articles and publications. The Future Fund was a show of confidence in the UK’s companies. But it isn’t without its problems. As you’ll see in the contents of this report, it seems that startups and scaleups that were already on the equity ladder needed little support in securing funding. Instead, it’s those businesses that haven’t raised equity before— the ones actively excluded from the Future Fund—that struggled the most to find capital. We began to sound the alarm about the seed stage in 2019. During the pandemic, first-time fundraisings have taken an even bigger hit. They are the riskiest part of an already risky asset class and tend to be backed by angels whose investment habits can be most easily changed Deal numbers rocket, thanks to the Future Fund With the help of the Future Fund, UK companies secured a record number of investments in 2020, up to 2,928. But even without the Future Fund, figures almost matched up to levels seen in 2019, declining just 1%. The UK secures its status as a tech nation Through the coronavirus pandemic, the high-growth economy leant on digital sectors for growth. Fintech, blockchain and digital security companies received record investment, while artificial intelligence deals dropped off. First-time rounds take a tumble, but angels prop them up The number of companies raising equity finance for the first time declined 19% from 2019—the biggest year-on-year drop on record. Individual business angels were the only investor type to increase their activity in this space. The impact of coronavirus subsided quickly 37% of Q2 investments were deployed to companies that were experiencing a negative impact at the hands of coronavirus—categorised as ‘survival finance’. By Q4 2020, that figure had reduced to just 10%. The year that ended in tiers Year in review Key findings in response to macroeconomic conditions, so some lockdown-induced retrenchment was inevitable. But we need a busy seed stage: the more you put into the funnel, the more life-altering technologies / jobs / unicorns you get out. There’s no easy fix, however, and we’re expecting the problem to persist into 2021. Indeed there are plenty of (non-COVID) reasons to be pessimistic about 2021—reasons which will do nothing to help those early-stage companies. The looming threat of changes to bring Capital Gains Tax (CGT) in line with income tax is already triggering some entrepreneurs to look into exiting their businesses early. Certainly, the changes will make the sacrifices that being an entrepreneur entails even less appealing. Given the state of the economy, every effort should be being made to encourage entrepreneurship, not stymie it. It is for that same reason that the National Security and Investment Bill also needs rethinking. It creates an unnecessary and additional bureaucratic obstacle to raising investment when in 99.9% of cases, there is no basis for a national security interest. There are easier ways to monitor emerging technologies and the people influencing them—not least of all, a subscription to the Beauhurst platform. Despite those depressing headwinds, the UK’s high-growth ecosystem is crammed full with exciting venture-stage and growth-stage businesses. We expect to see a decent amount of investment this year, with plenty of eye-catching deals—there were six £100m+ deals in January alone. And who knows, it may even become possible this year for the investors writing those cheques to meet their investee founders face to face! As ever, a big thanks to all those who have contributed their time and expertise to this report. We hope that you enjoy reading it as much as we’ve enjoyed putting it together, and are always keen to hear your feedback. Have any questions or comments? Get in touch using the details below. “We need a busy seed stage: the more you put into the funnel, the more life- altering technologies / jobs / unicorns you get out.”  info@beauhurst.com  @Beauhurst  company/beauhurst  beauhurst 4 Investment activity in 2020 1.1 Number of deals and amount raised excluding Future Fund (2011–2020) Despite all the uncertainty and disruption that very quickly defined 2020, investment into startups and scaleups remained relatively steady. Excluding the future fund, there were 1,957 equity investments worth £9.8b announced to the media, down from 1,977 worth £11.7b in 2019. Against the odds, investment activity remained resilient, despite the global pandemic. The quarterly picture is emphatic of that resilience. As expected, Q1 was the busiest quarter for deal numbers and amount invested, with £2.82b deployed across 511 rounds. This almost meets the total number of equity deals completed in the whole of 2011 (516). Deal numbers dropped to 481 in Q2—the quarter shrouded in the most uncertainty—and continued at that rate through Q3 and Q4. In terms of the amount invested, Q4 almost matched up to Q1, with £2.80b of capital deployed. Year in review 1,957 investments into UK businesses in 2020 £9.8b investments into UK businesses in 2020 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 £11.7b£2.1b£2.0b£3.6b£4.3b£4.4b£9.3b£7.8b£1.6b£9.8b1,447 516 1,610 1,614 775 1,863 1,882 1,042 1,957 1,977 Number of deals Amount raised (£) Q1 20 Q2 20 Q3 20 Q4 20 £2.82b£1.90b£2.30b£2.80b483 482 511 481 “[As the pandemic hit], Some continued on with deals that had been in the pipeline for many months and were nearing completion, whilst others pulled the plug on all new investments entirely.” Henry Whorwood, Head of Research & Consultancy Beauhurst 5 Year in review Investment activity in 2020 The Future Fund provides convertible loan notes (CLNs) to eligible companies that have been negatively-impacted by the pandemic. If these are not repaid, then they will convert to equity on the recipients’ next fundraise. These transactions require matched funding from third party investors. On 17th December, the British Business Bank (which manages the Future Fund) confirmed that 971 deals totalling £976m had been completed.1 We’ve picked up on 114 of these deals through press mentions, but the remaining 857 are currently unknown. In these cases, the whole round probably went unannounced to the media, but it’s possible that the third-party matched funding was announced, whilst the Future Fund participation remained undisclosed. Because of this, the numbers here may include some double counting. To avoid this as best we can, we’ve separated out Future Fund figures, and excluded all known rounds from the remainder of the report. 1.2 Number of deals and amount raised including Future Fund (2011–2020) 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 £11.7b£2.1b£2.0b£3.6b£4.3b£4.4b£9.3b£7.8b£1.6b£9.8b1,447 516 1,610 1,614 775 1,863 1,882 1,042 1,957 1,977 £11.8b 2,928 Number of deals Amount raised (£) Amount raised (£) including Future Fund Number of deals including Future Fund Q1 20 Q2 20 Q3 20 Q4 20 £2.82b£1.90b£2.30b£2.80b483 482 511 481 733 941 743 £11.8b invested into UK businesses in 2020 (inc. Future Fund) 2,928 investments into UK businesses in 2020 (inc. Future Fund) “Only 114 of the 971 beneficiaries of the 2020 Future Fund have been disclosed but if the full value of the Future Fund’s investments are included—£976m plus at least £976m of matched funding—the figures for 2020 total 2,928 deals and £11.8b invested.” 1. https://www.british-business-bank.co.uk/future-fund-publishes- diversity-data-of-companies-receiving-convertible-loan-agreements-6/ 6 2.1 Number of deals by round number 2.2 Proportion of deals by round number 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 899 950 39 679 220 1,270 1,475 1,274 449 612 589 569 555 1,408 660 477 482 715 First round Beyond 593 768 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 0% 20% 40% 60% 80% 100% 29% 33% 32% 41% 44% 53% 57% 72% 92% 25% 1 2 3 4 5 6 7 8+ First-time fundraisings Although deal numbers were similar between 2019 and 2020 (-1%), the investment profiles were not. In an exaggeration of an existing trend, first-time fundraisings declined to 25% of all investments, down from 29% in 2019, and 44% in 2015. That’s 482 first-time rounds completed in 2020, down from 569 in 2019: a record 15% decrease. The increase in proportion of fundraisings that are second-time raises and beyond is indicative of market maturation. But risk-averse sentiment in the face of coronavirus has catalysed this trend, with investors backing later-stage businesses with more traction, that they may already have a stake in. Through the pandemic, many investors shied away from taking on new risk, and instead doubled down on their existing portfolios, ensuring each business had enough runway to survive lockdown or—for those who were experiencing an increase in demand—enough capital to scale rapidly. Year in review 7 3.1 Proportion of deals by impact of coronavirus (April – December) April May June July August September October November December 0% 20% 40% 60% 80% 100% Positive (Recovery) Potentially positive Low Moderate Severe Critical Impact of coronavirus Since April, our in-house data team have been diligently tracking the impact of coronavirus on the UK’s 30,000+ ambitious companies, categorising each business with one of six impact statuses. This allows us to see what proportion of funding rounds could be classed as ‘survival finance’, which seem to be unaffected by the pandemic, and which were for the purpose of capitalising on our new way of life. As expected, Q2 saw the highest proportion of survival finance rounds: 37% of announced equity fundraisings were deployed to companies with a moderate, severe or critical COVID impact. By Q3, that figure had fallen to 20%, and by Q4 just 10%. No fundraisings went to critically-impacted businesses in Q4. Instead, the bulk went to low impact businesses (55%), whilst 35% went to positively-impacted, or recovering businesses. Year in review Positive recovery A company that has experienced a negative impact of coronavirus, but is now showing signs of recovery and is experiencing a potentially positive impact. Potentially positive impact A company that can potentially grow its operations as a result of these circumstances. Low impact A company that will be able to largely continue normal operations, albeit possibly with safety measures, such as working from home, in place. Moderate impact A company that has suffered disruption beyond mere inconvenience but is mostly able to continue operations. Severe impact A company that has suffered serious disruption to its ability to operate. Critical impact A company that is facing an existential threat to its ability to continue in operation. 8 4.1 Number of deals by stage of evolution 4.2 Amount raised by stage of evolution 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 0 £2b £4b £6b 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 0 200 400 600 800 Seed Venture Growth Established 4.3 Proportion of deals by investment brackets NB. It’s important to note here that whilst the stage of a business may well be connected to the number of deals and amount of investment that it has secured, a company can begin raising equity finance at any stage of growth. This explains how first-time fundraisings have declined whilst seed and venture-stage fundraisings have not. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 £0–£499k £500k–£1m £1m–£2m £2m–£5m £5m–£10m £10m–£50m £50m+ Investment stages It’s positive to see seed and venture-stage businesses secured more deals in 2020 than in 2019. Although early-stage businesses are agile in operational terms (small teams, digital infrastructure) they are unlikely to have the financial cushioning to adapt to changes in cash flow, and will need to draw on external resources. Indeed, 42% of venture-stage investments went to negatively impacted businesses in Q2, higher than any other stage of evolution. In terms of the amount raised, venture-stage businesses saw the highest spike in year-on-year funding, from £2.22b to £2.82b. Meanwhile, the value of growth-stage rounds decreased from 2019. This closing in of venture and growth-stage funding could be the intimation of a new trend, whereby large-ticket investors are becoming increasingly interested in earlier-stage businesses. Indeed, 20% of venture-stage fundraisings in 2020 were closed at £5m or more. Year in review 9 5.1 Number of deals per region, 2011–2020 5.2 Number of deals by major cities London East of England South East Yorkshire and the Humber East Midlands Wales Scotland South West Northern Ireland West Midlands North West North East 31 70 152 930 69 25 58 126 15 42 78 18 3 37 24 97 43 48 126 29 66 68 238 184 120 78 67 106 51 23 29 74 917 Geography As always, deal activity differed across the regions in 2020. Deal numbers plateaued in London, but the South East, Yorkshire and the Humber, and Scotland all saw record investment activity. Edinburgh was the epicentre of deal growth in Scotland, with 103 deals worth £114m completed in 2020, compared to 79 worth £143m in 2019. At the other end of the scale, the East Midlands, North West and Northern Ireland had relatively low deal numbers—but none saw a particularly drastic decline from 2019. Despite the mass exodus from the office to the home, funding distribution across major cities remained fairly similar in 2020 to 2019. It seems the communities in and around cities have remained incredibly important during the remote work era. It’s particularly positive to see there are no significant downward trends in cities that suffered the worst COVID outbreaks and the most severe lockdowns (e.g. Birmingham and Manchester). Year in review Edinburgh £114m 103 deals Glasgow £37.1m 43 deals Belfast £10.3m 12 deals London £6.61b 921 deals Manchester £191m 65 deals Birmingham £29.7m 16 deals Cambridge £329m 69 deals Oxford £710m 60 deals Bristol £174m 18 deals Cardiff £18.6m 27 deals 10 6.1 Deals in selected verticals over time 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 0 50 100 150 200 Artificial intelligence Blockchain Life sciences Edtech Digital security E-health Fintech Sectors and verticals Whilst swathes of the hospitality, travel and retail sectors were decimated in 2020, a rush to digitisation has provided a record year for many tech verticals. Fintech remained the most popular sector, with a record 221 deals completed during the year. With exceptional demand for healthcare innovation, life sciences and e-health also grew, marking a 15% and 49% increase from 2019, respectively. Similarly, digital security saw huge growth, with a record 82 investments worth £981m. Meanwhile, despite school closures and a sudden move to home-learning, edtech ended the year on 38 deals, down from 56 in 2019 and 67 in 2018. But perhaps the most surprising change is a slump in artificial intelligence deals. For the first time, fewer rounds were secured by AI companies than in the year prior. We expect this is a blip in the otherwise meteoric rise of AI. But as blockchain continues to capture investor interest, could 2019 have been the peak of inflated expectations for AI? Year in review “The pandemic has accelerated digital transformation that was already underway across the industry, and it is now largely accepted across the board that cyber plays a fundamental, and non-discretionary, role as part of businesses’ wider ability to innovate and stay agile.” Saj Huq, Programme Director LORCA 5% growth in fintech deals from 2019–2020 46% growth in digital security deals from 2019–2020 11 “History has shown that a lot of really great opportunities present themselves in times of economic uncertainty. We’ve already seen a high volume of mission-driven, passionate founders through the summer.” Reece Chowdhry, Founding Partner RLC Ventures deals including PE/VC funds in 2020 839 7.1 Number of deals by fund type Business angels Corporate Crowdfunding PE/VC Angel Networks 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 0 100 200 300 400 500 600 700 800 Investors The two most prolific investor types, private equity and venture capital firms, and crowdfunders, remained buoyant through 2020, with just a 1.6% and 2.5% drop from 2019, respectively. Corporate funding activity declined at a more significant rate, down 22% from 2019 and 5% from 2017/2018. Over in the angel realm, activity amongst networks and syndicates has declined since 2019. It’s worth noting here that angel networks take their time to announce which deals they have participated in. So whilst the data currently shows a 37% decline from 2019, it will likely look a lot less dramatic as further round details trickle in. Individual business angels were the only investor type to increase activity between 2019 and 2020. In fact, they had their most active year yet, with announced participation in 324 rounds, narrowly surpassing the record 320 in 2017. We delve into these trends in more detail in later chapters. Year in review deals backed by the crowd in 2020 424 12 8.1 Median valuation 8.3 Proportion of deals by round type Valuations Median valuation sizes continued to climb in 2020, but at a slower rate than between 2016 and 2019. There may have been a natural adjustment of valuations in the first few weeks of coronavirus chaos, but it seems they quickly returned to more normal levels. The mean company valuation paints a more dramatic picture, with an 80% increase from 2019, landing on £36.2m in 2020. This figure is driven by an ever-increasing number of unicorn companies; seven UK businesses joined the billion-dollar club through the year. Some of these companies have raised multiple rounds this year, further skewing the figures. For example, Revolut was valued at £3.52b in February and £3.98b in July. We also saw the proportion of down rounds increase to 18% in 2020, up from a low of 14% in 2017. Flat rounds increased to a new high of 26%. Just 55% of deals with a known valuation closed at a higher pre- money than the previous post-money valuation. Year in review 8.2 Mean valuation 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 £2.21m£1.47m£1.22m£1.43m£2.09m£2.40m£3.42m£4.00m£4.42m£4.50m£36.2m£20.1m£19.8m£19.6m£11.5m£9.17m£7.66m£5.98m£9.08m£9.00m2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 NB. In order to present a more accurate picture, this graph includes unannounced funding rounds, as well as those announced to the media. Unannounced funding rounds are more likely to be flat or down rounds than announced funding rounds. 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 0% 10% 20% 30% 40% 50% 60% 70% Down round Flat round Up round 13 Female founders Year in review 9.1 First-time fundraisings by gender of founding team 9.2 Proportion of deals by gender of founding team 9.3 Proportion of value by gender of founding team Back in October, The Entrepreneurs Network produced their Resilience and Recovery report with Barclays. By analysing Beauhurst data and conducting interviews with founders, they were able to show that female-led, high-growth companies experienced a disproportionately negative impact from the pandemic. Despite this, female-founded businesses showed great resilience, and this has borne out in the funding figures. First-time fundraisings into female-founded companies dropped just 11% between 2019 and 2020, compared with a 19% decline for all-male-founded companies. This represents a healthy pipeline of investable female-led businesses. Meanwhile, 22% of all announced equity deals went to companies with a female founder, on par with 2019 and the record, first set in 2016. In terms of deal value, 15p in every £1 of investment went to female-founded startups, just shy of the 16% record in 2016. 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 393 406 423 274 361 36 513 113 441 123 127 128 492 132 164 90 137 324 83 318 Female-founded Male-founded 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 89% 82% 81% 82% 81% 78% 79% 79% 78% 78% 11% 18% 19% 18% 19% 22% 21% 21% 22% 22% Female-founded Male-founded 95% 90% 87% 89% 86% 84% 89% 87% 90% 85% 10% 13% 11% 14% 16% 11% 13% 10% 15% 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 14 The biggest deals of the year Year in review 2020 was another strong year for the UK’s top startup companies. As previously mentioned, we welcomed seven new companies to the unicorn club, and witnessed 39 megadeals (deals worth £50m+) announced over the year. 13 of those moved into the gigadeal category (£100m+). Many of 2020’s megadeals took place pre-lockdown, with 14 completed in Q1. The second and third quarters were slower, with six and seven megadeals, respectively, before picking up again with 12 completed in Q4. Of course, the majority of these deals went to companies based in the Capital (32) and the South East (3). Trafford-based Receipt Bank was the only northern company to secure a megadeal in 2020. 14 of the 39 megadeals went to companies operating in fintech, whilst six went to digital security, and five to artificial intelligence. Surprisingly, just two of the announced megadeals were secured by life sciences companies. The largest round of the year (by quite some way) was secured by challenger bank Revolut for £383m in February. The second largest went to sister-led Karma Kitchen in July, and totalled £252m. 10.1 Megadeals and gigadeals Gigadeal Megadeal 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 26 14 16 16 15 13 16 12 3 8 3 4 4 9 4 4 1 2 2 10.2 Megadeals over time (2020) 1 Jan 1 Mar 1 May 1 Jul 1 Sep 1 Nov 0 £100m £200m £300m £400m Venture Growth Established deals worth £50m or more completed in 2020 39 13 deals worth £100m or more completed in 2020 15 10.4 Megadeals by sector 10.5 Most-funded companies of the year 10.3 Megadeals by location £446m Revolut Revolut operates a challenger bank. Through its app, users can trade cryptocurrency, track and send money, and complete a range of other consumer financial services. Total raised in 2020 £446m over 2 deals Location London Sector Fintech £386m OneTrust OneTrust develops software designed to help users manage their online security, privacy and third-party risk—particularly through artificial intelligence. Total raised in 2020 £386m over 2 deals Location London Sector Digital security £365m Cazoo Cazoo operates an online marketplace for second- hand cars. In-house experts appraise each car and then deliver it in as little as 72 hours. Total raised in 2020 £365m over 3 deals Location London Sector Automotive £270m Snyk Snyk develops tools that help users to fix security vulnerabilities in their open-source coding, and alert them if issues occur. It reached unicorn status in just five years. Total raised in 2020 £270m over 2 deals Location London Sector Digital security £252m Karma Kitchen Karma Kitchen operates industrial kitchen spaces which can be hired to businesses that do not have facilities themselves, as well as offering equipment hire, storage, ingredient supply, and cleaning. Total raised in 2020 £252m over 1 deal Location London Sector Property/land management £200m Gymshark Gymshark creates a range of performance-focused sportswear and accessories for men and women. Its first ever equity investment, raised in 2020, valued the company at over $1b. Total raised in 2020 £200m over 1 deal Location Birmingham Sector Clothing West Midlands 2 South West 1 South East 3 North West 1 London 32 Fintech 13 Digital security 6 Internet platform 3 Health 3 Recruitment software 2 Energy 3 Automotive 4 AI 1 Clothing 1 Internet hardware 1 Property/land management 2 Sectors in focus Healthcare was the star of 2020, but not all health sectors fared well. Meanwhile, demand for digital security services saw investment skyrocket, whilst social impact funds are truly helping to ‘build back better’. 17 Ventures on a virus vendetta Freya Hyde The global coronavirus pandemic has put a spotlight on healthcare sectors like never before. Both global and national bodies have called for increased focus and government spending into healthcare. Despite some criticism for his wide praise of China’s handling of COVID-19, Dr Tedros Adhanom Ghebreyesus, WHO Director- General, reviewed the lessons of the year: “First and foremost, 2020 has shown that governments must increase investment in public health, from funding access to COVID vaccines for all people, to making our systems better prepared to prevent and respond to the next, inevitable, pandemic.”1 When the UK government announced £3b of additional funding for the NHS in England in July, many responded that it was not enough. While Danny Mortimer, Chief Executive of the NHS Confederation, welcomed the investment, he said “We would expect this to be followed up soon with the additional funding that will be required to meet the extra costs of COVID-19.” 2 However, less discussed than public funding is the continuing need for private equity investment rounds into innovative healthcare companies. In addition to the ongoing development of novel technologies to support a variety of health concerns, the pandemic has inspired further innovations to deal with COVID-19. Several of these have attracted investors whose money can support further research and scaling to meet pandemic demand. While 2020 was a record high for investment into UK pharmaceuticals, the year was also interesting for other health sectors, for investment both related and unrelated to COVID-19. Unlike pharma, not all sectors of the healthcare industry fared well in 2020. COVID-19 and medtech Covering clinical diagnostics, medical devices and instrumentation (but not pharmaceuticals, which remains a separate sector outside this analysis), Medtech is vital to all stages of healthcare, from prevention and diagnosis to treatment and care. Without counting the Government’s Future Fund, the sector raised £192m of investment across 82 rounds in 2020. Some of these investments were indeed secured by companies with innovations that fight the pandemic. In 2020, Iceni Diagnostics, a University of East Anglia spinout, worked on a rapid lateral flow test for COVID-19 that gives results in just 15 minutes. The test, which resembles a pregnancy test with its ‘red line’ output, was first backed by a small Innovate UK grant in May. In December, Iceni Diagnostics received £2m of equity investment to build commercial infrastructure and take on more staff. Co- founder Professor Rob Field stated that “There’s a vast, global potential in the application of our unique technology. We are using it to tackle COVID now, but it will also produce better vaccines and Sectors in focus   1. https://www.who.int/news/item/30-12-2020-covid-19-anniversary-and-looking-forward-to-2021 2. https://www.nhsconfed.org/news/2020/11/3bn-spending-review 18 new diagnostic and therapeutic products in the future.” 3 Cambridge Respiratory Innovations has received 11 grants since being founded in 2013, but 2020 was its first year for equity fundraising, securing £1.7m across two rounds. The company is currently working with NHS Trusts to supply its handheld monitoring device, N-Tidal, for use in respiratory monitoring, helping to identify when a patient with COVID-19 is deteriorating and may require ventilator support. Surprisingly, however, it seems that the largest investment rounds into medtech of the year were not related to COVID-19. Bit Bio raised a significant £32.6m in June and is a company that develops research tools and technologies where human cells are reprogrammed and produced for cell therapy. The second largest investment of £28.7m went to 2012 University of Oxford spinout Perspectum, which delivers technologies to aid in the diagnosis and care of patients with liver disease. Moreover, a total investment of £192m for the year is the lowest it’s been for the sector since 2016, despite a great number of innovative products, services and solutions in development. Investors into medtech usually look for companies with clinical evidence to prove their novel product or technology is valuable, as well as regulatory approval and patents. With many non-coronavirus laboratory projects being shut down, and as regulatory approval continues to be a difficult process for early-stage companies, these criteria have been all the more challenging to meet and may explain the slow down in investment in 2020. The rise of e-health? Coming into existence in the 1990s, the e-health sector refers to the use of information and communication technology in relation to healthcare practices. It includes a range of services and systems such as health informatics, telemedicine, and electronic health records. The year 2020 saw 61 announced equity fundraisings into e-health companies, totalling £250m. This compares with £110m over 46 rounds in 2018 and £52.5m over 39 rounds in 2016. The largest investment of the year was £53m and secured by Cera4 to fund expansion. The company offers technology that arranges home care for the elderly. Based in London, Cera has certainly shown promise since its early days, attending three accelerators in its first couple of years. In 2020, the company featured on the Startups 100 and Deloitte Fast 50 high-growth lists. Other notable deals in the e-health sector in 2020 include £23m for Lumeon and £22.7m for Your.MD, also both London-based. Used by clients across Europe and the US, Lumeon’s software improves administrative efficiency and helps track the progress of patients. Meanwhile, Your.MD offers an app called Healthily that uses artificial intelligence, allowing users to check their symptoms before seeing a doctor and providing plans and advice for self-care. A significant chunk of investment, £95.7m, into e-health in 2020 actually occurred in Q1, suggesting that growing interest and demand for the sector was occurring before the pandemic took hold in the UK. On a global scale, the WHO has certainly urged the importance of e-health for a number of years before the pandemic, believing that “The use and scale up of digital 11.2 Number and amount raised by e-health companies 11.1 Number and amount raised by medtech companies 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 £250m£110m£562m£163m£26.9m£52.5m£23.7m12.2£8.88m£4.69m30 29 39 41 61 7 46 56 11 13 Number of deals Amount raised (£) £117m£192m£432m£170m£226m£150m£205m£304m£74.1m£71.8m73 61 78 79 44 94 82 47 49 87 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Number of deals Amount raised (£) 3. https://www.cambridgenetwork.co.uk/news/uk-rapid-covid-test-firm-iceni-diagnostics-announces-%C2%A32m-investment 4. Cera shares significant shareholders with Beauhurst, but has had no editorial input to this article health solutions can revolutionize how people worldwide achieve higher standards of health, and access services to promote and protect their health and well-being.” 5 A multiyear upward trend and the strength of pre-pandemic 2020 for e-health investment indicates it is not solely COVID-19 driving the rise of the sector. Yet COVID-19 may mean this already rapidly growing sector will expand even faster. While the value of investments actually dropped quite sharply in Q2 and Q3 of 2020, it climbed back up to £86.4m in Q4. In October, Push Doctor received £13.7m of investment for its product: an online GP service where patients can have video consultations with NHS-trained clinicians. In 2021, an unprecedented level of pressure continues to face the NHS as millions are still not receiving care outside of COVID-19, meaning that e-health and digital services may become not only desirable, but essential to society. Increased demand may require companies to take on new investment to support further research, as well to allow for rapid and effective scaling. One such example is Welsh company Bond Digital Health, which has been developing the digital element of a rapid testing system to help authorities track and monitor positive cases and hotspots of COVID-19. With the backing of Wealth Club and the Development Bank of Wales, the company raised £700k in April for R&D and £1.2m in November to fund product development and expansion into new markets. The overall diagnosis for the healthcare industry Last year demonstrated the importance of non-pharmaceutical interventions such as social distancing and handwashing as well as the development of a vaccine. At the same time, COVID-19 has presented the medtech industry with many challenges, ranging from huge delivery pressures to being unable to access resources and laboratory space when research is not coronavirus-related. Going forward, however, medtech will play an even more crucial function in disease diagnosis and care, especially as the population ages. Investment opportunities may indeed go on the rise again, particularly as artificial intelligence, nanotechnology and robotics emerge in the sector. In 2020, nine of the 82 fundraising rounds into medtech were secured by companies using AI. Turning to e-health, the future looks promising. Although the NHS has been viewed as slow to adopt e-health innovations compared to foreign counterparts, the sector is rapidly growing. With COVID-19 changing how the UK conducts its healthcare permanently, and with secure digitised health services more in demand than ever, it is safe to say that e-health is here to stay. Iceni Diagnostics Iceni Diagnostics develops carbohydrate- based therapeutics and diagnostics for disease. The company developed a COVID-19 test that diagnoses through glycans, rather than genetic code. Date founded March 2014 Location Norwich Number of employees 10–15 Cambridge Respiratory Innovations Cambridge Respiratory Innovations develops digital cardio-respiratory devices. It has supplied NHS trusts with N-Tidal devices for live respiratory monitoring throughout COVID-19. Date founded April 2013 Location Cambridge Number of employees 10–15 Your.MD Your.MD develops a health assistant app named Healthily, that allows users to diagnose health issues. Healthily allows organisations to reduce the risk of COVID-19 spreading by offering in-app diagnostics and screening. Date founded October 2013 Location London Number of employees 100–125 Lumeon Lumeon has developed web-based software to track the progress of patients and administration tasks. Lumeon has provided numerous COVID-19 solutions, such as vaccine management, fielding test results, and home monitoring. Date founded August 2005 Location London Number of employees 100–125 Push Doctor Push Doctor provides an on-demand online GP surgery. Push Doctor has partnered with the NHS and various pharmacies to offer digital-first, COVID- safe consultations, aiming to reduce strain on health services. Date founded July 2013 Location Manchester Number of employees 75–100 Bond Digital Health Bond Digital Health has developed a digital connectivity and data platform to enhance lateral flow tests. Transform allows test data to be captured at the point of use, stored securely and accessed and shared by end users. Date founded June 2015 Location Cardiff Number of employees 15–25 Top healthcare companies “First and foremost, 2020 has shown that governments must increase investment in public health, from funding access to COVID vaccines for all people, to making our systems better prepared to prevent and respond to the next, inevitable, pandemic.” Tedros Adhanom Ghebreyesus, Director General, WHO 5. https://www.who.int/health-topics/digital-health#tab=tab_1 20 Digital security in the WFH era James Richardson The coronavirus pandemic and its impact on our everyday interactions, both social and professional, has further accelerated our reliance on virtual spaces. An even greater proportion of our lives are now spent online, partially or entirely replacing time which we would previously have spent interacting physically. The information exchanged and stored virtually is often sensitive in a personal or commercial context, and so it is vital that it is held securely. We trust that what we put online will only be seen by those we intend to see it; indeed we have few alternatives. Similarly, we trust that the applications required for home working, remote collaboration, and communication are reliable. The brief outage of almost all Google services worldwide in December 2020 illustrated just how dependent we are on this technology, and highlighted the potential disruption and damage a malicious attack can cause, when countless organisations suddenly found themselves unable to communicate. Saj Huq, programme director at the London Office for Rapid Cybersecurity Advancement (LORCA), highlights the role coronavirus has played in shaping the future of the sector: “The pandemic has accelerated digital transformation that was already underway across the industry, and it is now largely accepted across the board that cyber plays a fundamental, and non- discretionary, role as part of businesses’ wider ability to innovate and stay agile.” In short, as the stakes in our online world have grown, so too has the need for reliable and secure digital services. Impact of COVID on digital security companies This increased reliance on digital security has led to an overall positive impact on the companies in this sector. In April 2020, 40% of digital 12.1 Number and amount raised by digital security companies Sectors in focus 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 £115m£536m£291m£232m£981m£129m£35.6m£16.1m£71.2m£98.8m82 54 31 56 57 28 10 23 68 18 Number of deals Amount raised (£) 21 security companies were potentially positively impacted by the coronavirus pandemic, rising to 45% by the end of the year, primarily through increased demand for their services (36%) and growth in job opportunities (26%). This is in contrast with an average of just 16% of all Beauhurst-tracked companies, and 23% of technology companies, potentially positively impacted. Given the broadly positive impact of the pandemic, it is unsurprising that 2020 was a record year for investment into this sector. The number of deals increased 46% from 2019 to 2020, to an all time high of 82, in contrast with a 18% decrease from 2018 to 2019. The total amount invested increased 83% from 2019 to a record £981m in 2020. What is not so clear, however, is if this huge growth is solely a direct result of the pandemic, or simply the continuation of the existing trend of increasing cash being invested into these companies. As in most sectors, the UK lockdown did appear to stymie investment activity in digital security. Q2 2020 saw a significant drop from Q1 levels (from 21 deals totalling £319m to 16 deals totalling £130m) as the true impact of the pandemic and resulting lockdown hit home. However, both the number of deals and the amount raised remained higher than Q4 2019, and recovered into Q3 and Q4 2020, indicating that the initial shock felt across the ecosystem had minimal impact on the sector beyond this. Digital security unicorns Two digital security companies joined the UK’s unicorn club in 2020: Snyk and OneTrust joined University of Cambridge spinout Darktrace to make three digital security companies in the now 23-strong herd. Both of these companies completed their first raise at a valuation over $1b before the effects of the pandemic were felt strongly in the UK. Snyk raised $150m in January 2020, and a further $200m in September 2020, bringing its valuation to a reported $2.6b. OneTrust also raised two megarounds in 2020: a first $210m round in February 2020, and a further $300m in December, resulting in a $5.1b valuation. Commenting on their second round in 2020, Snyk CEO Peter McKay hinted that the pandemic was a factor, saying that they saw business pick up through lockdown, and correspondingly expanded their team: ‘our business never slowed down… We’ve just capitalized on this accelerated shift to the cloud and modern cloud-native applications’. 1 That being said, investors only commit cheques of this magnitude to companies who they believe have significant long-term growth potential, indicating that the importance of these companies is here to stay, and won’t diminish once the effects of the pandemic have faded. First-time raises in 2020 However, when we look at digital security companies raising investment for the first time, a slightly different picture emerges. The number of first-time fundraisings increased 42% from 2019 to 2020 (from 12 to 17), but this is still well below the all-time high of 28 in 2016. The total amount of first-time raises dropped a huge 94%, from the all time high of £265m in 2019 to just £14.7m in 1. https://techcrunch.com/2020/09/09/snyk-bags-another-200m-at-2-6b-valuation-9-months-after-last-raise/ 12.2 First-time numbers and amount raised by digital security companies “Our business never slowed down … We’ve just capitalized on this accelerated shift to the cloud and modern cloud-native applications.” Peter McKay, CEO Snyk 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 0 £265m£55.0m£14.7m£11.9m£56.4m£53.7m£35.5m£49.7m£9.56m£3.81m28 15 17 17 14 12 12 12 8 22 Number of deals Amount raised (£) 22 2020. This is partly due to 2019’s numbers being skewed by two first-time megaround raises: OneTrust’s $200m and Onecom Group’s £100m (combined equity and loan) rounds, both in July 2019. Excluding these two reduces 2019’s total to just £5.4m, painting a more positive picture for 2020. Still, 2020’s number is well below the next highest figure of £56.4m in 2015. Across the board, we have seen the number of companies raising equity investment for the first time continue to drop in 2020. Whilst this trend has been apparent over the past few years, the pandemic has only exacerbated this worrying situation, as investors become more risk-averse and seek to deploy capital into their existing portfolio companies. It is, therefore, a promising sign to see the digital security sector buck this trend in 2020, but, as Huq comments, it is not out of the woods yet: “Whilst we do not expect there to be a downturn in market appetite for new products within digital security post-COVID-19, there are significant risks to the early-stage ecosystem if the current investment trends continue, with the sustainability of the overall innovation pipeline under threat.” Digital security in the future The question, then, is what will happen in the digital security sector in 2021. Will we see another record year for the amount of money invested, continuing the trend? Or has the pandemic artificially accelerated investment in the sector to unsustainable levels? As we’re all aware, the immediate effects of the pandemic aren’t fading just yet, and we are likely to be reliant on virtual working and communication methods for many months—if not years—to come. Beyond this, the longer- term shift it has caused in our approaches to working from home and international travel will guarantee a continuing need for heightened security and reliability of online services, beyond the time when restrictions are relaxed. The amount invested in this sector has significantly increased every year since 2013, and 2020’s figures are no different. Of course, the pandemic is likely to have played a part in this, and fully decoupling its effects is impossible, but the simple explanation of the continuation of the trend suffices to explain 2020’s record numbers by itself. Another bumper year for the digital security sector is therefore on the cards for 2021; with over 350 companies at the earlier stages of growth (seed and venture) in the UK, there are plenty of investable companies in the pipeline— although it remains to be seen if investors will start becoming more risk-hungry and increase investment in these younger businesses. More megadeals are certainly possible too—a handful of companies, such as Quantexa and Privitar, have reached valuations of hundreds of millions of pounds and recently raised investment to fuel further growth and expansion. These companies may well join the unicorn herd with further raises in 2021. Snyk Snyk develops tools that help users to fix security vulnerabilities in their open- source coding, and alert them if issues occur. It reached unicorn status in just five years. Date founded July 2015 Location London Number of employees 450–500 OneTrust OneTrust develops a platform to help users manage and secure their cybersecurity, privacy, and third-party risk. Over 7,500 customers use OneTrust to comply with privacy and security laws. Date founded September 2016 Location London Number of employees 1,300–1,400 Darktrace Darktrace has developed security software to identify behavioural anomalies, alerting clients to potential security threats. It was the first company to develop an AI system for cybersecurity. Date founded June 2013 Location Cambridge Number of employees 1,500 Onecom Onecom is the UK’s largest independent telecommunications provider, delivering communications and connectivity solutions. Date founded June 2012 Location Winchester Number of employees 400–450 Quantexa Quantexa develops technology to secure organisations’ data and flag potential illegal activity. It works with sectors handling large volumes of data, such as banking, public sector, and e-commerce. Date founded March 2016 Location London Number of employees 250–300 Privitar Privitar’s technology protects customer data to allow the safe and ethical mining of datasets, primarily across sectors such as financial services, healthcare, and retail. Date founded November 2014 Location London Number of employees 200–250 Top digital security companies “There are significant risks to the early-stage ecosystem if the current investment trends continue, with the sustainability of the overall innovation pipeline under threat.” Saj Huq, Programme Director LORCA 23 Lucy Wilson For many, 2020 was and always will be the year of COVID. But, it was also a year of devastating wildfires and extreme weather events brought on by our escalating climate crisis. It was the year the fast fashion industry came under greater scrutiny, following allegations of human rights abuses in the supply chains of popular UK brand Boohoo. And it was the year the US formally withdrew from the Paris Agreement on climate change, a day after the country’s presidential election, in which Kamala Harris was voted the first female, Black, and South Asian Vice President of the United States. Alongside all this, there were innovative companies working hard to address some of the world’s most pressing issues, from social enterprises reinvesting their profits into local community programmes, to certified B Corps pledging carbon neutrality, and retraining prison leavers and homeless people. Supporting these companies were a host of equally purpose- driven investors, local enterprise partnerships, and accelerator programmes, all of which help make up the UK’s impact landscape. Impact investing is investing with the intention to generate positive, measurable social and environmental impact, alongside a financial return. This dual objective of reaching financial goals and having a positive impact is what sets it apart from other forms of investment. Whilst it’s difficult to establish a precise definition of ‘positive impact’, our analysis includes funds that have explicitly stated that a company’s impact on the planet or its people is central to their decision to invest, as opposed to it being a by-product of their philosophy or sector restrictions. It’s also not the same as ESG, which is instead predominantly a risk framework of environmental, social, and governance factors to inform companies’ decision-making. So, how did impact investing fare in 2020: has social responsibility been put on the back burner amidst the financial strains of the pandemic, or is the need for positive change as clear to investors as ever? Impact equity trends in a year like no other Impact investing has become increasingly popular over the last decade. Within the UK private market, we’ve seen a steady increase in deals involving impact funds since 2011, which saw just 11 fundraisings, totalling £58.9m. Both the number and value of impact investments peaked in 2019, at 70 deals, worth £174m in total. Deal numbers dropped off in 2020, but they remained high at 66 equity investments completed over the course of the year. This small, 6% decline is in keeping with overall funding figures, indicating that purpose-driven businesses have not suffered disproportionately to the wider high-growth landscape during COVID. But whilst the frequency of deals has not changed as much as we might have expected since 2019, the value of these investments still fell by a third, landing at £116m. As a result, the average deal size in 2020 stood at just £1.76m, compared to £2.49m in the year before. Impact investment has begun to enter the Sectors in focus Money on a mission: impact investing in 2020 24 mainstream in recent years, but many would argue it still has a long way to go. Perhaps if investors are becoming more risk-averse during the pandemic, we could soon be seeing a renewed vigour in impact funding, as it’s becoming increasingly clear that investments into businesses creating a positive impact on the world are, in fact, a safer bet. According to ReGenerate, an organisation supporting the impact landscape, “COVID-19 has helped people realise that there is more to business than profit, and that companies have a huge role to play in improving the quality of people’s lives and the health of the planet. Moreover, the pandemic has strengthened the now overwhelming case that purpose-driven companies not only do good, but they are also more likely to be successful and sustainable.” Game changers At present, there are 39 active funds matching our definition of an impact investor in the UK equity market. These investors are taking on social responsibility in sectors ranging from fishing and urban farming, to microfinance and affordable housing. Notably, the vast majority of these funds are deploying capital in the environmental and sustainability space, with 13 of them making it their sole focus. But the spread of the Black Lives Matter movement across the globe in 2020 has also fueled greater interest in the diversity and inclusion (D&I) space. We expect to see this translate to a heightened focus on D&I investing in the coming years. There are, however, already a handful of active funds dedicated to this cause. Impact X is one such fund, providing venture capital to underrepresented entrepreneurs across Europe. Then there’s Big Issue Invest, a non-profit fund helping to scale up charities and social enterprises that are serving a disadvantaged population, for instance through financial inclusion or education programmes. Meanwhile, fellow non-profit iAMDigital, a partnership between Creative England and the Social Tech Trust, is another champion of D&I in the startup world. The organisation invests specifically in companies focused on increasing digital skills and inclusion in the UK, outside of London. Despite concerns back in March, many of the UK’s impact funds have continued investing throughout COVID. The most active investor in 2020 was Ascension Ventures, an early-stage VC built by exited entrepreneurs to back the next generation of tech and impact founders. Fair By Design, managed by Ascension, participated in eight fundraisings last year with ambitious startups whose products and services benefit low-income families and address the ‘Poverty Premium’. Emma Steele, Investment Director at Ascension Ventures, explained: “COVID has unfortunately meant a lot of financially vulnerable families have had to suffer huge shocks. Much of our portfolio has been busier than ever, as we think COVID is throwing the impact of financial vulnerability much higher in people’s agenda, whether it be individuals, employers or local government. For Fair By Design, this has reinforced the sector 13.2 Number and amount of cleantech investments 13.1 Number and amount of impact investments 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 £180m£241m£200m£145m£270m£186m£181m£303m£629m£524m78 53 68 96 66 84 64 63 87 90 Number of deals Amount raised (£) 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 £58.9m£102m£34.8m£49.1m£28.7m£58.5m£43.9m£144m£174m£116m11 18 Number of deals Amount raised (£) 26 36 30 44 44 51 70 66 “COVID-19 has helped people realise that there is more to business than profit.” Regenerate 25 verticals we were focusing on, but has also led us to explore some of the ancillary areas where we can help. As for deal flow, we’re seeing more great founders building impact businesses, and more VCs competing to invest in them, which is fantastic for the ecosystem.” Of the UK’s active impact funds, 24 are private equity or venture capital firms like Ascension— unsurprisingly, this makes them the most common type of impact investor at 60% of the market. Angel networks are also central to the impact market, however, with Green Angel Syndicate supporting promising entrepreneurs in the UK’s green economy across seven announced equity funding rounds in 2020. Lauren Stewart, Founder and CEO of Invigorate, an online advisory marketplace for scaling businesses, shares her views on the topic: “When COVID first entered the scene, the business world went into crisis mode, and with so much noise and chaos, impact investing got put on the back burner for a while. But, looking forward, I also think it has presented us with a great opportunity, a clean slate—we’re already seeing some really innovative companies and technologies emerging in the impact space, prompted by the pandemic.” “I’d like to see some of the bigger players and institutional investors in the market stepping up in 2021, and getting behind these purpose-driven businesses that are solving large societal issues.” The green economy Investment into cleantech reached record levels in 2019 and, with so many of the UK’s impact funds currently focused on the sector, 2020 was another strong year for startups and scaleups contributing to the green economy. Impact investors have funded a long list of exciting UK companies and disruptive technologies this past year, in various verticals within the sector. Piclo, for instance, is developing a peer-to-peer renewable energy marketplace that allows producers to sell electricity directly to local customers. Most recently, in December, Piclo secured a £1.5m equity deal with cleantech investor Clean Growth Fund. The startup has also attended numerous accelerator programmes, including the Climate-KIC Accelerator and Bethnal Green Ventures, designed to nurture young companies in the impact space. Another alum of the Climate-KIC Accelerator is Econic Technologies. The Imperial spinout has found a way to reduce our reliance on fossil fuels by turning waste CO2 into polymers, for use in creating everyday plastics. In November 2020, it secured a £3.2m equity deal, in a funding round that included follow-on investor OGCI Climate Investments. This is the investment arm of OGCI, an initiative led by oil and gas corporations to reduce greenhouse gas emissions. Meanwhile, back in April, Thrift+ secured a £950k equity deal involving three UK impact funds— Clearly Social Angels, Green Angel Syndicate, and Triple Point Impact EIS. The company’s online charity shop platform allows users to donate and buy used clothing and accessories, and gives a portion of profits to charities selected by its customers. Unlike traditional charity shops, Thrift+ has been able to continue its operations throughout the pandemic, and should benefit from the huge surge in donations we’ve seen during each lockdown. Also investing during COVID, Turquoise International’s Low Carbon Innovation Fund supported several cleantech projects last year. This included a £160k follow-on investment in September, into AI startup Spark. Spark aims to accelerate electric vehicle (EV) adoption by producing highly accurate, personalised range predictions through its software. The company was listed on 1000 Companies to Inspire Britain in 2017, and has attended five accelerator programmes to date. And then there’s StormHarvester, an IoT software company that has developed an automated water management platform to prevent pollution and flooding. The Belfast- based startup secured a £1.82m equity fundraising in July, with involvement from Green Angel Syndicate. Speaking to the London-based angel network, they emphasised how: “The members of Green Angel Syndicate have a common motivation to support early companies in the fight against climate change. That hasn’t changed due to the pandemic and it will be even more important as we emerge and create jobs, and reboot the economy going forward.” Future-proofing in 2021 Going beyond simple ESG box-ticking, the UK is home to an ambitious ecosystem of startups and scaleups that put impact at the heart of their business models. Despite the slight drop-off in deals during 2020, COVID-19 has made the need for purpose-driven businesses, and the funds that back them, all the more pressing. This is a critical moment in the impact space, with 2020 demonstrating the crucial role that technology and innovation can play in supporting the planet and its people. We hope to see more funds joining the ranks of socially responsible investors this year, as the UK embarks on its mission to ‘build back better’. “I’d like to see some of the bigger players and institutional investors in the market stepping up in 2021, and getting behind these purpose- driven businesses that are solving large societal issues.” Lauren Stewart, Founder & CEO Invigorate Investors in focus Crowdfunding platforms retain their crown as most active investors and, with a merger ahead, could dwarf other funds. Angels storm ahead, and we compare startup valuations to the public market bounce back. 27 Top investors by UK deal numbers Investors in focus Last year, Crowdcube topped the charts as the most active investor in the UK’s high-growth space, facilitating 203 equity investments backed by the public. Ex-rival, and now potential partner platform, Seedrs came in a close second with 179 investments through the year. The crowdfunding platforms announced plans to merge, back in October. This is still under investigation by the Competition and Markets Authority (CMA), but there’s no doubt that the deal activity of the resulting behemoth would dwarf that of all other UK investors. In fourth place, and taking the title of the most active UK venture capital firm in 2020, is Mercia Asset Management, with 102. Mercia invests through a number of funds, including NPIF Equity Finance, SME Innovation Fund, and Mercia EIS Fund. As always, the investment arms of devolved administrations—Scottish Enterprise and the Development Bank of Wales— rank highly, with 156 and 52 equity investments, respectively. This ranking excludes any deals that were known to include Future Fund participation. 14.1 Top investors by UK deal numbers 30 32 37 44 52 77 102 156 179 203 CrowdcubeSeedrsSeedcampMaven Capital PartnersSFC CapitalBGFDevelopment Bank of WalesSyndicateRoomMercia Asset ManagementScottish EnterpriseThis chart was corrected on 22.02.2021 to show that Scottish Enterprise invested 156 deals, and Mercia Asset Management 102, at time of original data export Crowdcube Top investor into seed-stage companies Crowdcube operates an online equity crowdfunding platform. In October 2020, Crowdcube announced that it would be merging with rival platform Seedrs. Over £1b has been invested through Crowdcube since 2009. Number of seed investments in 2020 117 Notable 2020 investees Miso Robotics, Clim8 Invest, Kvasir Analytics Ticket size £50k–£8m Scottish Enterprise Top investor into venture-stage companies Scottish Enterprise is a devolved government fund, investing in companies based in Scotland through both equity and debt investment. It has invested over £394m into over 180 high-growth, private companies. Number of venture investments in 2020 91 Notable 2020 investees TravelNest, BDD, Talking Medicines Ticket size £10k–£10m BGF Top investor into established-stage companies BGF was founded by leading UK banks following the 2008 financial crisis. It invests primarily in growth-stage and established businesses, and has invested over £2b into more than 300 companies since 2011. Number of established investments in 2020 11 Notable 2020 investees Yorkshire Wildlife Park, Decora, Emma Bridgewater Ticket size £1m–£15m 28 UK crowdfunding Investors in focus Crowdfunding fared well through 2020, with 424 deals completed down from a high of 435 in 2019. Activity picked up towards the end of the year, with 131 equity deals completed in Q4. The CMA is still investigating the planned merger between Crowdcube and Seedrs, on the grounds that it will “give rise to a realistic prospect of a substantial lessening of competition in the supply of equity crowdfunding platforms”. There are a handful of other UK platforms, such as AngelsDen, Crowd2Fund and Growthdeck, but none as far-reaching as Seedrs and Crowdcube. Meanwhile, Crowdcube has claimed there is no threat to competition, because it is institutional investors with which the platforms are competing, not each other: “The proposed merger will result in no substantial lessening of competition because [...] the merged entity will continue to face strong competitive constraints from incumbent forms of equity finance provision including venture capital firms and business angels.” It’s safe to say that, by next year, the crowd- funding landscape could look entirely different. 15.1 Crowdfunding deal numbers over time, all platforms 15.1 Crowdfunding deal numbers, major platforms 15.2 Crowdfunding amount invested, major platforms 2018 Q2 2018 Q4 2019 Q2 2019 Q4 2020 Q2 2020 Q4 145 105 108 94 94 93 131 113 91 91 80 83 Crowdcube 203 deals, of which 14 pre-emptions Seedrs 179 deals, of which 36 pre-emptions Crowdcube £126m, inc. £485k pre-emptions Seedrs £104m, inc. £1.29m pre-emptions 29 Angels in the cloud: wealthy individuals back early-stage business from afar Hannah Skingle Over the past two decades, business angels have become an integral part of the UK’s startup ecosystem, funneling their own earnings into risky ventures in exchange for equity, and a potentially large return down the line. As institutional funds have increasingly drifted towards larger ticket prices, and focussed more on later-stage investments, angels have been a mainstay of the early-stage ecosystem. Not only do they provide cash to fuel growth, but also frequently provide support, guidance, experience and access to vast business networks. As Beauhurst data shows, the UK’s most prolific business angels are increasingly starting to resemble those in the US market—high-profile, named individuals, championing particular sectors. A diverging market We’re starting to see a separation of classes occur within the angel ecosystem. There is no absolute separation between these segments, indeed many angels will not fit neatly into one, but they are becoming increasingly distinct, helpful lenses through which to look. At one end, we have crowd-angels. These people tend to be contributing a couple of thousand pounds to crowdfunding campaigns. They probably have a day job and a bit of spare capital to invest in startups, on the off chance that they might make back a few grand. Crowdfunders may also be motivated by non- financial aspects, such as becoming a brand ambassador, receiving early access to new features, or getting special deals or discounts on products. Mid-level angels typically invest via networks, but may also have their own deal flow through industry connections. They may have exited their own business, have greater disposable income than the average crowdfunder, and put more time aside to vet and support investments. Some will have a diverse portfolio with a couple of dozen companies. At the upper end of the scale lie super-angels. These are ultra-high-net-worth (UHNW) individuals who have substantial disposable income and dedicate a significant portion of their time to investing and supporting businesses. They have the greatest appetite for risk and will have tens, perhaps even hundreds of companies, in their portfolio. Over time, they’ve become well-known in the industry with vast networks as well as relationships with VC firms and adjacent funds. Although any individual can look to invest in a private company, it’s the super-angels that are most likely to be announced in a fundraising. The media doesn’t care if Joe Bloggs from Bolton has put £5k into a blockchain startup. But replace Joe Bloggs for Alex Chesterman, and £5k for £100k, and you have a totally different story. That’s a vote of confidence in the business that the founders themselves will likely want to shout about, and the media want to know about. This is the most likely kind of individual to fall into this investor category: ultra-high-net-worth, increasingly high profile. A maturing market As the UK’s early-stage startup scene matures, and global wealth continues to climb, there’s an increasing roster of super-angels in the space. At Beauhurst, we’ve identified 78 individuals who have shareholdings in at least 40 UK companies, and 40 individuals with shareholdings in over 50 UK companies. This includes the likes of Matt Robinson, co-founder of GoCardless and Nested who, according to research from Sifted, invested in 50 companies in 2020. Similarly, Songkick co-founder Ian Hogarth is reported to Investors in focus 30 16.2 First-round fundraisings by fund type have invested in 30 companies last year, whilst Gumtree co-founder Michael Pennington backed 12 companies.1 Needless to say, these individuals are completing far more than the average of three deals a year (based on data from the UK Business Angels Association (UKBAA)).2 And as their profiles and experience build, so too do their relationships with funds. Chris Mairs is a successful tech entrepreneur-turned- angel investor, who has invested in around 120 companies since 2012 (including Beauhurst). He tells us that “the longer you’ve been in this ecosystem, the stronger your networks become, and the more companies you get to see. My deal flow has improved significantly as I’ve become better known by the VCs.” Reece Chowdhry, Founding Partner at RLC Ventures, and occasional angel investor himself, tells us that RLC has been building its own network of angels across the UK, now numbering 30 to 50. He confirms our finding of a divergence in the market. “We’ve seen two pools of people in the pandemic. Those in the UHNW pool have had a really strong appetite for co-investment opportunities.” “But some of the investors who might have put in the occasional £10k to £20k ticket have said ‘sorry, I’m not investing for the next year or so’— they just want to ride it out and see what’s what.” Individual angels were reported to have participated in 324 UK equity deals in 2020, up from 272 in 2019, and narrowly improving on the record 320 in 2017. It’s particularly reassuring to see this upwards trend in a time of crisis, given that angels have the ability to stop investing completely, unlike VC firms which are accountable to their LPs and committed to deploying their capital. And their appetite for risk is not only evident in the number of ventures they’re putting money behind, but the stage of venture, too. Individual angels were the only investor type with an increased number of first-time rounds announced to the press, with 111 disclosed in 2020 versus 79 in 2019. “Without angels, first-round fundraisings in 2020 would have been decimated,” says Roderick Beer, Managing Director at UKBAA, noting that even first-time rounds led by VC firms often include angel participation. In general, individual angels may not have had as great a demand for “survival funding” as other fund types. According to angel investor and serial entrepreneur Sam Simpson, once a company has progressed to using institutional funding, it is likely to revisit their VC firm to draw down more funds, rather than raise another angel round. This would afford some angels comparatively more time and resources to consider first-time rounds in 2020 than, for example, venture capital and private equity firms. But that’s certainly not been the case for every angel. Having surveyed 265 angel investors (predominantly UK-based) back in July, UKBAA found that 50% had been negatively impacted by the pandemic. The two most frequently cited reasons for this “were that the economic 16.1 Number of deals by fund type Business angels Corporate Crowdfunding PE/VC Angel networks 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 0 100 200 300 400 500 600 700 800 Business angels Corporate Crowdfunding PE/VC Angel networks 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 0 50 100 150 200 250 1. https://sifted.eu/articles/uk-angel-investors-2020/ 2. https://ukbaa.org.uk/wp-content/uploads/2020/10/20201008-BBB-Business-Angels-Report-Final.pdf uncertainty had affected the angel’s own personal investment capacity and that they concentrated on supporting and investing in their portfolio businesses.” 3 Investing to the beat of the same drum Whilst the pandemic has had differing impacts on different angel groups, and indeed different angels within those groups (especially as each angel will have their own sectors of interest, some of which will have been far worse affected than others), the rhythm of investments through 2020 seems to have been similar across the board. “In lockdown one, everyone stopped spending for a bit, took stock and wanted to see what happened to the economy and which sectors were impacted,” says Simpson, who has a preference for SEIS rounds, and invests between £10k and £50k. “I personally helped a couple of businesses that were mid-raise and struggling to close.” “But by the middle of the year, everybody had realised which sectors would be most negatively impacted, and could focus their efforts away from travel, tourism, hospitality—anything in those areas, adjacent or reliant on them.” He adds that, on the other side of the table, “a lot of founders panicked at the beginning of the pandemic and either brought forward a funding round or just tried to close early. But things seem to have settled back down to normal now.” The picture was similar for Mairs: “When lockdown first hit, people thought the economy might completely tank and that that would have a knock-on effect on venture funding. But that didn’t happen, and partly because we could all see how the stock markets remain remarkably buoyant.” Caroline Halliday, who predominantly invests in EIS eligible cleantech rounds via Green Angel Syndicate, also noted how “the original drop in the stock markets and volatility in property markets had everyone worried that their assets would weaken, and it’s very tempting to pull back from riskier asset classes in that instance. But a robust stock market gave people the confidence to make these more marginal, risky investments”. “The pandemic has created lots of opportunities”, she adds, “Green Angel Syndicate has had a much better year than forecasted and the pipeline is still very strong.” Harder, Better, Faster, Stronger The switch to remote work also seemed to have a consistent impact—and a positive one at that. Simpson saw deals close faster than ever before. “The use of Zoom has massively reduced latency. I can have my first call today, read the pitch deck tonight, do my due diligence and be back on another call tomorrow.” For Mairs, remote investing has been far more successful than he first anticipated. “In those early days, there was a worry that not being about to meet face-to-face would make investment decisions more challenging. But actually, Zoom has worked very well and most have adopted it very quickly.” Mairs confirms that, despite not having any in-person meetings since March, the last ten months have been the busiest period in his investment career. And his geographical horizons have expanded massively through the pandemic: “I now don’t have to try and find a time and a space where the founder and I can meet. You can do things at shorter notice, you don’t have to be geographically close and you don’t need to have a location barrier at all: I can invest in someone in Edinburgh, in Exeter or France—it no longer makes a difference.” And that interest in startups further afield will have worked in the UK’s favour too. Foreign super-angels now have easier access to the UK’s innovative businesses and world-class talent. Indeed, Chowdhry says that RLC Ventures has seen increased appetite from US angels in particular, with involvement in two deals in the past year. The switch to virtual has also allowed Green Angel Syndicate to increase existing membership engagement. According to Halliday, “a lot of members were unable to travel in and out of London for every pitch event pre-covid, but virtual pitches are far easier to attend, so we’ve seen audience sizes increase.” And that’s not the only benefit of virtual meetings, “some people may not have the confidence to ask a question in a room of 80 people, but are comfortable speaking in front of a large audience online. So it’s allowed for a more participative-type forum, and of course the more you understand a company, the more likely you are to invest.” On the other side of the coin, it’s become more difficult to network with new people and increase membership size. “Because people aren’t going out to see friends and meet new people, there’s less opportunity to say ‘have you heard about this syndicate? Why don’t you come along to the next meeting?’”. A positive outlook Though some angels may find that their capacity to invest has been squeezed through the recession, furlough, or forgone bonuses, it seems that there is a strong consensus that the future looks bright for startups and angels alike. As Chowdhry puts it: “History has shown that a lot of really great opportunities present themselves in times of economic uncertainty. We’ve already seen a high volume of mission-driven, passionate founders through the summer, and I expect to see a huge wave of prominent startups coming out of the pandemic. And the more long-term and experienced investors will recognise this and remain active through 2021—it’s certainly going to be a busy year for us”. 3. https://ukbaa.org.uk/wp-content/uploads/2020/10/20201008-BBB-Business-Angels-Report-Final.pdf 32 Basket case valuations Dan Robinson The price of private companies may have increased by as much as 50% during 2020. The second half of 2020 saw a boom in public markets, perhaps best represented by the extraordinary valuations reached by tech stocks such as Tesla and Zoom. Beauhurst data suggests that a similar boom took place in the UK’s private equity and venture capital market. Analysis of a hypothetical basket of private UK companies suggests that private company prices have increased by nearly 50% during 2020. This is likely due to a confluence of factors: a record amount of investment into private companies; a global trend towards larger fund sizes; and the Bank of England’s changes to monetary policy to cushion the impact of the pandemic. Given the longevity of these factors, it seems likely that 2021 will see a continued and significant increase in the transaction-derived valuations of private companies. Measuring price changes over time To analyse prices changes over time, the cost of a group of nine ‘average’ companies was calculated for the end of each calendar year since 2011. The price of the companies was based on the mean company valuation by stage of evolution and sector over the calendar year, based on equity fundraisings. Every year, the basket of companies consisted of an average- valued seed, venture and growth stage company in the technology, business and professional services, and industrial sectors. These sectors were chosen because they represent 88% of the total number of equity deals since 2011. Beauhurst has deep data on companies that have fundraised at the three growth stages selected, helping to ensure accurate pricing of the basket. This methodology—using a basket of ‘goods’—is also employed to calculate inflation. The price of the basket of average companies increased by 48% from £185m in 2019, to £274m in 2020. A similar increase in price occurred when the basket rose 60% from £115m in 2016, to £184m at the end of 2017. Potential contributing factors are discussed under the headings below. Increased investment into the UK’s private companies There was significant investment of £9.8b into the UK’s private companies in 2020, down slightly from the high of 2019, when £11.7b was invested via announced deals. Notwithstanding the plateauing, or record number of deals in 2020 (depending on if you include the Future Fund or not), the rough trend since 2017 has been high annual investment via a declining number of deals. Naturally, as more money seeks fewer deals, valuations will rise. Most of the price increase in the basket of companies has been driven by those operating in the business and professional services sector. The average price of the companies in this sector rose 68% to £102m. This is unusual, as one might expect technology businesses—which are more likely to have thrived under lockdown conditions—to be more desirable investments than business and professional services firms. However, the technology sector firms only increased in value by 34%—half as much as those in the business and professional services sector. An explanation for this could be that companies in the technology sector already trade at significant premiums to other sectors and that institutional investors are harder to push into exuberance than retail stock buyers. The forced change to remote working may also go some way to explaining the increased value of companies in the business and professional services sector. While technology sector companies are likely to already enjoy many of Investors in focus 33 the benefits of a technology-enabled workforce, companies in the business and professional services may see significant improvements in productivity enabled by the adoption of software tools for remote working. Larger fund sizes The average fundraising for a fund has increased every year from 2015. In 2015, the average fund raised was £149m, while in 2020, the average fund raised was £361m. The simple argument here is one we’ve heard before; a rising tide lifts all boats. More money for investments means prices will rise. Another subtler aspect may be that, as investors raise larger funds, it becomes more challenging from an administrative and psychological standpoint to write smaller cheques. Even when investing in smaller companies than usual, a fund manager or VC may find it easier to agree to higher valuations and cut familiar-sized cheques. With an effect like this in place, valuations for earlier rounds are shifted upwards, which then drives up valuations at later stages. In the accompanying chart, the global average fund fundraising has been plotted alongside the price of the basket of companies. Increases in the size of the average fund raised by calendar year match up with increases in the price of the basket the following year. This suggests that some of the increase in private company prices in 2020 was probably driven by investors’ successful fundraising efforts in the 2018 and 2019 period, when the average fund raised increased by 56% from £218m to £339m. Because fund managers have accepted a mandate to invest their limited partners’ money and derive their own income from doing so, it is hard for them to hold back from investing, even during a pandemic. So the large funds raised over the last couple of years have likely been deployed throughout 2020 but into a smaller number of companies that are ‘promising’ in pandemic conditions, again driving up valuations. Changes to monetary policy The base rate chart shows the price of the nine hypothetical companies from 2011 to 2020, overlaid with the Bank of England’s official base rate. This rate impacts how much it costs to borrow money. When rates are low, investors pursue riskier asset classes (such as venture capital) to achieve returns. With more money flooding into private equity assets, prices start to rise. As can be seen, rate cuts in 2016 to curb the impact of the Brexit vote, and in 2020 to cushion the impact of coronavirus, line up with price increases in the basket of companies. The other part of the story is quantitative easing. Because base rates have been low since the financial crisis of 2008, there was only so much lower that the Bank of England could go, and this alone was not guaranteed to provide the necessary economic stimulus. So, the Bank of England created more money. To do this, it buys billions of pounds of government bonds, which gives investors cash which can then be invested 17.1 Average global fund raised and basket of companies price £274m £115m £102m £88m £182m £184m £185m £75m £72m £70m £193m £218m £221m £179m £159m £149m £145m £339m £281m 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 £361m Average fund raised (global) (Preqin)1 Price of basket of mean valuation companies (Beauhurst) 17.2 Bank of England base rate and basket of companies price £70m £75m £72m £88m £102m £184m £182m £185m £274m 0.10 0.50 0.50 0.75 0.25 0.25 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 £115m Bank of England base rate (Bank of England)2 Price of basket of mean valuation companies (Beauhurst) “Beauhurst data shows that equity in the UK’s private companies saw a significant price increase in 2020 and suggests we will see further increases throughout 2021.” 34 into other financial assets, boosting the value of assets overall. Quantitative easing also fits with the increases in the price of private equity assets. The bond purchase chart shows cumulative Bank of England bond purchases against the basket of companies. Where no purchases occur, and the rates are stable or increase, the price of the basket remains relatively steady. This was the case in 2018 and 2019. Where cuts in the base rate coincide with bond purchases, the impact on the basket is more extreme, as was the case after the Brexit referendum and during 2020. Given the scale of the Bank of England’s interventions in the face of the pandemic, a continued dramatic increase in the prices of private companies seems likely throughout 2021. What next? Beauhurst data shows that equity in the UK’s private companies saw a significant price increase in 2020 and suggests we will see further increases throughout 2021. Many aspects of the increase are likely rational and related to increased risk-seeking, in pursuit of higher yield in a low-yield environment. Though, as 2020 has shown, irrational exuberance can take hold of investors under any conditions. 17.3 Bank of England bond purchases and basket of companies price £895b £745b £645b £375b £445b £200b £70m £75m £72m £88m £102m £115m £184m £182m £185m £274m 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Bank of England bond purchases (Bank of England)3 Price of basket of mean valuation companies (Beauhurst) 1. https://www.preqin.com/insights/research/blogs/private-equity-aum-will-top-9tn-in-2025 2. https://www.bankofengland.co.uk/monetary-policy/the-interest-rate-bank-rate 3. https://www.bankofengland.co.uk/monetary-policy/quantitative-easing £ 35 About Beauhurst  info@beauhurst.com  @Beauhurst  company/beauhurst  beauhurst This report is just the beginning. The Beauhurst platform is the most powerful way to understand the UK’s high-growth economy, with comprehensive profiles on over 30,000 fast-growing companies. This includes all of their transaction history, investors, financials, news features, and key person contact details. And with up-to-the-minute funding stats, sector movements, and geographical maps, you can understand whole markets at a glance. If your business is UK-focussed and works with high-growth companies, you need Beauhurst. Want access? Sign up for a free demo and we’ll help you navigate the platform, allowing you to: • Search fast-growing companies and their funders • Explore every UK fundraising (even the 70% of rounds that are unannounced, and not included in this report) • Build targeted lists of key companies and contacts Everything will be customised around your business and needs, so you can explore relevant data and get the most out of the platform. Plus, you’ll get a customised report of your findings. Book a demo here to get started. “Having Beauhurst is like having your own extended team doing the data work for you, allowing me to do all the meaningful insights myself so that I can better (and more efficiently) support our community of SMEs. It’s a huge time saver – once set up, deep data analysis that previously would take me weeks now only takes hours”. Andrew Waterworth, Industry Engagement Manager at the Royal Society of Chemistry Author Hannah Skingle Contributors Henry Whorwood, Freya Hyde, James Richardson, Lucy Wilson, Dan Robinson Design Ella Halmari © Beauhurst 2021