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<p>Tech North Investment Index: 2007 - 2016 Investment in Northern tech businesses is at a 10-year high but will the growth in investment keep pace with the ambitions of the tech entrepreneurs? Investment in Northern tech businesses at a 10-year high 2016 was a record year for investment in Northern tech companies with a total of £326.9m invested*. This represents a rise of 1,551% from £19.8m in 2007, with the most significant growth taking place in the past three years. More deals were done in 2015 however, with 93 deals to 2016’s 74 deals. The biggest jump in capital invested from one year to the next was seen in 2014 when the figure jumped from £23.7m in 2013, to £169.6m in 2014. Nevertheless, 2016 was a promising year for the sector, as Tech North’s head of investment strategy James Bedford notes: “It’s encouraging to see the 1,551% growth in investment finance going into Northern tech companies over the last 10 years, and even more encouraging to see that last year was the best year to date. The fact that more than half the top angel and VC deals were done in the last two years indicates an improving investment ecosystem.” According to Tim Dempsey, managing partner at Manchester-based investment firm Epiphany Capital, the findings signal a significant opportunity for the region“This research shows that we’ve been hitting peaks for three years running, in relatively new sectors. It won’t be long until the North’s biggest deals include major Series B and C rounds from global venture brands.” he adds. Capital Invested and Deal Count 1 * according to data sourced from Pitchbook In the past 10 years investment has risen 1,551% from £19.8M in 2007 to £326.9M in 2016 1551 Key Findings in Numbers The most significant growth has been in the past 3 years 3 2016 was the strongest year for total capital invested at £326.9M 2016 2015 was the strongest year for total deal count, with 93 deals totalling £232.8M 93 The top 8 deals over the past 10 years were all private equity growth/expansion 8 Source: Pitchbook, Tech North March 2017 2 What’s behind this growth? For Dempsey, the findings are reflective of growing ambition in the North. “The North’s ambition has suddenly skyrocketed and that’s attractive to major London and European investors. More and more tech companies want to capitalise on the infrastructure, talent pool, cost-efficiency and quality of life that the North offers - these are a lot more important now London is pricing itself out of the market and the venture sector is growing,” he explains. Alasdair Greig of Newcastle-based venture capital firm Northstar Ventures agrees that there’s been a shift in ambition in the region. “Not only have we seen a significant increase in the demand for venture capital from regional entrepreneurs, but more importantly, there has been a significant rise in the quality and level of ambition of businesses being built here. Founders now know that they don’t need to relocate their business to the US or to London in order to access finance and support from experienced investors, or to attract the scale-up talent they need to grow,” he explains. Deal Count by Region 5 biggest deals in the past 10 years 1. Atom Bank £135m pe growth/expansion 2015 2. The Hut.com £101m PE growth/expansion (acquisition financing) 2016 3. The Hut £100m pe growth/expansion 2014 4. Chess £50m PE growth/ expansion 2014 5. Trustmarque Solutions £43m pe growth/expansion 2013 But access to finance remains an issue, James Bedford notes, “The North’s digital ecosystem is still at an early stage but it has huge potential. This potential will only be satisfied if the ambitions of the entrepreneurs are matched by an ambitious investment ecosystem. The recent growth is promising but investment is still seen as a key issue by Northern tech companies in surveys conducted for the Tech Nation 2016 report.” Source: Pitchbook, Tech North March 2017 5 biggest VC deals in the past 10 years 1. The Hut £19.4m later stage VC, 2010 (acquisition financing) 2. The Hut , £13m, later stage VC, 2012 3. Performance Horizon, £10.8m, 2016, later stage VC, series C 4. The Hut, £10m, later stage VC, 2010 5. VirtenSys, £9.67m, 2009, series C 5 biggest Angel deals in the past 10 years 1. Fruitful Finance, £5m, 2015 2. MPD Group, £2m, 2015 3. 360 Studios, 1.04m, 2016 4. Living Lens Enterprise, £1m, 2015 5. Wakelet, £1m, 2014 Note: Some deals are double-counted due to pitchbook data labelling A growing digital ecosystem The fact that a digital ecosystem is in the making is also a significant factor in this growth, adds Greig. “In the North East alone we have hubs like Campus North, world-class accelerators like Ignite, and a wealth of support for the tech industry via organisations like Dynamo and Digital Union. There has also been substantial growth in the region’s innovation infrastructure, with universities offering increased support for spin-outs and entrepreneurs. The fact that these institutions are well networked with the region’s business community means startups are able to access finance and support more easily, and at an earlier stage than before.” The same is true for the North West and Yorkshire and Humberside. A growing number of co- working spaces such as SpaceportX (Manchester), Launch 22 (Liverpool), Futurelabs (Leeds), Electric Works (Sheffield) and C4Di (Hull) means that founders and startups are more connected than before. Furthermore, accelerators such as Dotforge, Ignite and Entrepreneurial Spark allow promising early-stage startups a platform to test their ideas, improve their products and access funding to develop their business further. Dominant deal types The top eight deals over the past 10 years were all private equity growth or expansion deals, including the £135m secured by Durham-based Atom Bank. This deal was the largest over the past 10 years and one of two significant raises for the company in recent times, after which they announced a further £83m raise in March 2017. For Greig it’s encouraging that the top deals of the past decade were all growth funding. “As an early-stage investor we know that one of the major challenges facing startups in the North is access to later-stage development finance. That private equity firms are now recognising the opportunities offered by tech and digital businesses in the North is encouraging, and we hope that more investors focus on the growing entrepreneurial talent here over the next 10 years.” The largest number of deals over the 10-year period were either early or later-stage VC deals, with the largest VC deals being The Hut (£19.4m, £13m, and £10m), and Performance Horizon (£10.8m). It’s not just newer companies seeking to grow rapidly with investment finance, Bedford notes. World-renowned Wakefield games studio Team 17 began life in 1991 and recently secured £16.5m. It’s also promising to note that the North’s tech sector appeal is extending beyond the UK too, as Hugh Campbell of GP Bullhound notes. “We are seeing significant investment interest not just from the local private equity community but also from investors around the world such the US, China and Japan. This has been complemented by strategic investment interest with the likes of Halfords and others making minority financial investments in exciting digital companies based here.” Source: Pitchbook, Tech North March 2017 3 Capital Invested by Deal Type 4 Capital Invested by Industry Vertical Source: Pitchbook, Tech North March 2017 Capital Invested by Industry Vertical (2007 - 2016) Number of Deals by Industry Vertical (2007 - 2016) Source: Pitchbook, Tech North March 2017 5 Regional differences The North West leads for number of deals over the 10-year period with 48% of all deals recorded, with the North East at 28% and Yorkshire and the Humber at 24%. Where the money comes from - Top 10 Investors (by number of investments) 7 Company in Focus Cocoon Leeds-based smart home security startup Cocoon was founded by a team with three successful Northern UK exits worth +£20m. The team self-funded to start and then raised $250K from Indiegogo in 2014, later securing +£2.82m from Aviva Ventures, Breed Reply & founders in 2015 and 2016. They’re now fundraising on Crowdcube to support expansion into retail and the US. According to their head of marketing Colin Richardson, raising funds in the North of England hasn’t been easy. “We’ve found it almost impossible to raise funds from investors in the North of England. Aviva and Breed Reply (hardware-focused IoT fund) both based in London, have invested £2.4m in Cocoon in 2015. Both have followed on their investment in our current round on Crowdcube. Most of the investment funds have their offices in hubs like London, New York or Silicon Valley. There is a significant lack of funders outside of the capital and it is hurting the startup economy of the North, but with Tech North championing businesses and funding outside of the capital this is beginning to change. A key advantage of being in the North is that a hardware company like ours stands out locally, it means that local press and business people champion us, something that wouldn’t happen amongst the noise in London. We’re big believers in the power of the crowd, having launched on Indiegogo, so we decided to open our latest round of funding to the public via Crowdcube. This is a different approach than we’ve taken in the past to raising funds, but it’s our hope that we’ll gain a large number of fans as well as the capital we’re raising to grow the business further.” Future growth The signs are positive for the tech sector in the North of England based on these findings. But more is needed to improve the investment landscape for tech businesses here if the sector is to reach its full potential, as highlighted in Tech North’s proposal to government for a pan-Northern co- investment fund. Bedford explains: “The proposal has kick-started cross-departmental discussions in government to try to solve the issues surrounding raising investment. It is hoped that the government recognises the need to harness the growing ambitions of both entrepreneurs and investors to help rebalance the economy and improve productivity in the North. The overall picture is increasingly positive but we know that the investment ecosystem must continue to strengthen if we are to grow the tech sector to its full potential.” About this report Disclaimer The data in this report was sourced from Pitchbook and is intended to offer a guide on trends in the digital technology sector in the North of England. It is intended for general information only and may not include every digital technology deal in the region. The data includes all companies listed under the ‘IT Industry’ category on Pitchbook, excluding ‘semiconductors’. The data also includes companies listed under these verticals: 3D printing; adtech; agtech; artificial intelligence and machine learning; audiotech; autonomous cars; big data; cleantech; cyber security; e-commerce; edtech; ephemeral content; fintech; healthtech; internet of things; marketingtech; mobile; nanotechnology; robotics and drones; SaaS (software as a service). The data was then manually cleansed to remove any companies not classed by Tech North as a digital tech company. The data includes all VC stages, private equity growth/expansion, and ‘corporate’ deals. It does not include M&A deals, IPOs, liquidity or buyout deals. This report is published for general information only. Although high standards have been used in the preparation of the information, analysis, views and projections presented in this report, no responsibility or liability can be accepted by Tech North for any loss or damage resultant from any use of, reliance on or reference to the contents of this document. 1. Northstar Ventures (Newcastle) 2. Enterprise Ventures (Lancashire) 3. The North West Fund (Warrington) 4. Finance Yorkshire (Barnsley) 5. YFM Equity Partners (Leeds) 6. Creative Capital Fund (London) 7. Ignite (Newcastle and Manchester) 8. Dotforge (Sheffield, Manchester, Leeds) 9. Rivers Capital Partners (Newcastle) 10. IP Group (London) “The previous JEREMIE funds, utilising European funding, heavily influence the top 10 with several JEREMIE investors divided between the sub-geographies, reducing competition for investment-hungry startups. It is great to see the influence of the two primary accelerator programmes, Ignite and Dotforge, on the list, proving that private investors still have an appetite despite the dominance of public funds.” Bedford comments. Contact Us Richard Gregory Director of Tech North richardg@techcityuk.com Vicki Shiel Head of Content vicki@techcityuk.com James Bedford Head of Investment Strategy james@techcityuk.com 8 </p>
