US Investments into UK Companies by Penningtons Manches

Aug 13, 2018 | Publisher: Techcelerate Ventures | Category: Business & Economics |  | Collection: Investments | Views: 3 | Likes: 1

www.penningtons.co.uk A REPORT ON US INVESTMENT INTO UK COMPANIES FROM THE GOLDEN GATE TO THE GOLDEN TRIANGLE The companies at the epicentre of this are part of sprawling ecosystems which include entrepreneurs, investors, evangelists and advisors. Each of these, and many more, contribute something to the development of the sector all working together to supercharge growth, turning challenges into opportunities and opportunities into revenue. As a law firm, we often act as a bridge between these key stakeholders making connections and developing valuable relationships. Penningtons Manches has a long history of working with technology firms, their innovators and their investors. We have always had a significant presence in tech hubs across London and the South East and more recently, on the West Coast of the United States. We opened our San Francisco office over three years ago in a bid to better support our growing client base in the Bay Area and to develop meaningful connections between our US clients and contacts and the fast-growth tech companies in the UK that we represent. Whether we're helping a promising UK company to find the support it needs to scale, or enabling a US business to invest in some of the UK and Europe's most exciting technology offerings, insight and understanding are key. That's why we're delighted to present this research, From the Golden Gate to the Golden Triangle, our exploration of US investment into UK companies. What we've found has been both illuminating and reassuring at the same time. It is heartening to see that West Coast investment into UK companies is at an all-time high. Our research, carried out in partnership with Beauhurst, has found there has been an impressive 252% increase in the number of deals since 2011: we saw investors from the West Coast involved in 74 deals in 2017, representing 1.08 billion in value. Whether talking to US investors to understand what motivates them, or hearing how UK companies expect investments to impact them, we have sought to capture and create a clear picture of the inward investment landscape something we continue to support to enable our clients to scale. THERE HAS NEVER BEEN A MORE EXCITING TIME TO BE INVOLVED IN THE TECHNOLOGY INDUSTRY AND ITS IMPRESSIVE PACE OF CHANGE. WHETHER YOU'RE IN CAMBRIDGE OR CALIFORNIA, INNOVATION CLUSTERS ACROSS THE GLOBE ARE NURTURING GROUND-BREAKING TECHNOLOGIES AND CREATING WORLD-LEADING BUSINESSES. James Klein, partner Penningtons Manches Welcome from Penningtons Manches BUILDING STRONG CONNECTIONS A REPORT ON US INVESTMENT INTO UK COMPANIES | 3 06 EXECUTIVE SUMMARY 08 SILICON VALLEY SETS ITS SIGHTS ON UK TECH CHAPTER 1 10 A UK COMPANY MAKING WAVES ON THE WEST COAST CASE STUDY 12 A WIDER PICTURE OF OVERSEAS INVESTMENT CHAPTER 2 16 WHY DO UK COMPANIES LOOK TO THE US FOR INVESTMENT? CHAPTER 3 19 NURTURING THIS VALUABLE NETWORK CONCLUSION CONTENTS 4 | A REPORT ON US INVESTMENT INTO UK COMPANIES A REPORT ON US INVESTMENT INTO UK COMPANIES | 5 Cultivating and maintaining this relationship is important there is so much to be gained for everybody involved. The UK and Silicon Valley are two of the world's leading places to start and scale a technology business. London and the surrounding technology clusters have grown to become Europe's largest tech hub. The Golden Triangle attracts some of the best global talent, produces world-class research and development and has a strong enterprise culture. Early-stage capital and business advice are now far more available than they were 10 years ago. The result is that the number of UK start-ups is now well above the European average. But there is still so much we can learn from established hubs in the States. While we have had some success in creating world- beating technology firms, we still lag behind other countries when it comes to ensuring our swathe of start-ups become strong and growing businesses. If we are to reap the rewards of this entrepreneurial revolution in terms of employment and national prosperity, it is critical a good number develop into thriving companies. For the UK to produce these technology giants it needs the investment required to scale fast-growth businesses. US investors can help plug this gap. It's fantastic to see that funders from the United States made up 25% of total equity investment into UK companies last year. This will no doubt continue to rise over the coming years as the Golden Triangle gathers even more momentum and a larger profile in the States. If companies can successfully attract investment from the US, they'll garner much more than capital. They'll tap into a wealth of experience and advice which will help them navigate the whirlwind of growth. Valley investors have been around the block with start-ups and scale-ups, they know what challenges a company faces long before it does. From building internal leadership capacity and processes to attracting the right talent and winning contracts at home and overseas investors can provide invaluable support and access to a wider ecosystem. Creating closer ties between Silicon Valley and the UK has been a personal mission of mine. When these two hubs meet, great things happen. It's fantastic to see so many invaluable ties being created and delivering meaningful results. Golden Gate, Golden Triangle is more than a phrase, it's a powerful combination and I look forward to seeing it flourish. BRITAIN'S GOLDEN TRIANGLE IS A POWERHOUSE OF INGENUITY AND INNOVATION. THE COMPANIES LOCATED IN AND AROUND CAMBRIDGE, OXFORD AND LONDON GO TOE-TO-TOE WITH SOME OF THE BEST IN THE WORLD AND IT'S NOT SURPRISING TO SEE THAT INVESTORS IN SILICON VALLEY, AND ACROSS THE US, ARE PAYING CLOSE ATTENTION TO THE ENTREPRENEURIAL ACTIVITY ON THIS SIDE OF THE POND. Sherry Coutu CBE, serial entrepreneur, investor and co-founder of Silicon Valley Comes to the UK Foreword from Sherry Coutu CBE GREAT THINGS HAPPEN WHEN TECH HUBS MEET 6 | A REPORT ON US INVESTMENT INTO UK COMPANIES THE UK COULD BE ENTERING A GOLDEN AGE OF SILICON VALLEY INVESTMENT. WE'RE SEEING MORE DEALS INVOLVING WEST COAST INVESTORS AND UK COMPANIES THAN EVER BEFORE, AS INVESTORS AND ACQUIRERS IN THE US LOOK FURTHER AFIELD TO FIND THE NEXT BILLION DOLLAR COMPANIES AND, IN DOING SO, SPREAD THEIR RISK PROFILE. Our research suggests companies in the UK's Golden Triangle are taking the lion's share of this investment, particularly those in the software sector, which have benefited from 2.2 billion in funds since 2011. Whilst West Coast investors were involved in more deals, East Coast investors put more money into UK companies overall evidencing that, whilst Silicon Valley has its eye on the UK, tech hubs in the likes of New York and Boston do as well. We're seeing this as part of a wider trend of inward investment into UK companies. It would appear that Brexit has done little to put investors off and as long as the UK continues to attract the world's best talent, the flow of capital from the US looks set to continue over the coming years. EXECUTIVE SUMMARY GOLDEN GATE MEETS THE GOLDEN TRIANGLE 1.08 BILLION THE AMOUNT INVESTED INTO UK COMPANIES BY WEST COAST INVESTORS IN 2017 NUMBER OF DEALS INVOLVING WEST COAST INVESTORS AND UK COMPANIES IN 2017: THE AMOUNT INVESTED BY WEST COAST INVESTORS INTO UK SOFTWARE COMPANIES SINCE 2011 2.2 BILLION THE INCREASE IN THE NUMBER OF DEALS BETWEEN SILICON VALLEY AND UK COMPANIES SINCE 2011: 252% GREENOAKS CAPITAL MANAGEMENT: THE TOP US HEADQUARTERED INVESTOR BY TOTAL VALUE OF DEALS PARTICIPATED IN EIGHT THE NUMBER OF DEALS INVOLVING 500 STARTUPS AND UK-BASED COMPANIES IN 2017 500 STARTUPS THE US HEADQUARTERED INVESTMENT FIRM INVOLVED IN THE MOST DEALS WITH UK COMPANIES IN 2017 WIDER US AND GLOBAL INVESTMENT TREND 62% OVERALL INCREASE IN OVERSEAS INVESTMENT INTO UK COMPANIES IN 2017 1.31 BILLION AMOUNT INVESTED BY EAST COAST INVESTORS INTO UK BUSINESSES IN 2017 33% OF DEALS BY VALUE INVOLVED A NORTH AMERICAN INVESTOR 25% INVOLVED A US INVESTOR 2.83 BILLION AMOUNT CONTRIBUTED BY DEALS INVOLVING NORTH AMERICAN INVESTORS 373 EQUITY INVESTMENTS INVOLVING OVERSEAS INVESTORS IN TOTAL IN 2017 A REPORT ON US INVESTMENT INTO UK COMPANIES | 7 Silicon Valley investment into UK tech is at an all- time high. Our research has found that the number of deals involving West Coast investors and UK companies has increased by 252% since 2011. Last year, West Coast investors were involved in 74 deals with UK companies, totalling 1.08 billion and representing 4.8% of all UK investments in 2017, up from 59 deals the previous year and 21 in 2011. "The UK is the top European destination for talent and capital, creating a powerful ecosystem of technology companies and this hasn't escaped investors in the Valley and San Francisco that are always looking for the next big thing," says Russ Shaw, founder, Tech London Advocates and Global Tech Advocates. Unsurprisingly, it is the UK's software companies that have had the most investment from Silicon Valley and San Francisco-based investment firms. Since 2011, West Coast investors have put 2.2 billion into software companies. Life sciences companies were the second most invested in, taking 472 million, with hardware companies and medical tech following with 207 million and 101 million respectively. "These figures back up what we've seen and what we continue to see first-hand whilst on the ground in the Bay Area," says James Klein, partner, Penningtons Manches. "Over recent years we have noticed an increase in the levels of US interest and investment in the UK, which has a particularly strong footprint in finance, retail and the creative industries. This has fuelled the start-up space and produced many scalable and investable companies." Silicon Valley-based firm 500 Startups was the most prolific US investor in terms of deals done, making eight investments into UK companies in 2017. "Great companies come from everywhere so it's important to get out of the Valley," says Matt Lerner, partner at 500 Startups. "The UK has an abundance of talent, lots of companies accessing global markets - or Europe at a minimum - and its fintech and health tech innovation is ahead of the Valley." 500 Startups, which counts UK-based Airbnb management service, Airsorted and content monetisation platform Skimlinks among its portfolio companies, is followed by Partech Ventures, which made six investments into UK- based companies in 2017 and GV (formerly Google Ventures) which made five. West Coast investors are looking beyond the Valley for a number of reasons but at the core is an understanding that technology is global and great ideas can be found anywhere. "Entrepreneurial talent and intellect is distributed evenly globally," says Josh Manchester, partner at US-based Champion Hills Labs. "You can find the right teams anywhere outside the US." There are also a number of beneficial factors which draw US investors to the UK. "Common language is a huge benefit," continues Josh. "A lot of European talent comes to the UK and the university and hard science talent is very attractive." 8 | A REPORT ON US INVESTMENT INTO UK COMPANIES 01 SILICON VALLEY SETS ITS SIGHTS ON UK TECH CHAPTER WHAT DOES THE UK HAVE THAT US INVESTORS ARE INTERESTED IN (as cited by US investors in our interviews) TECHNOLOGY TALENT 1 INVESTABLE HARD SCIENCE 2 STRONG INTELLECTUAL PROPERTY 3 A COMMON LANGUAGE 4 LOWER VALUATIONS 5 21 2011 20 2013 56 2015 36 2012 46 2014 74 2017 59 2016 NUMBER OF DEALS YEAR WEST COAST DEALS BY YEAR TOTAL VALUE SECTOR WEST COAST DEALS BY VALUE 2011 2017 2,198M SOFTWARE 207M HARDWARE 58M CLEAN TECH 472M LIFE SCIENCE 101M MEDICAL TECH A REPORT ON US INVESTMENT INTO UK COMPANIES | 9 with an online platform to carry out background checks and screening. d in Oxford by three Oxford University graduates. sing 20k fundraising $4.5m fundraising F 2015 F 2013 CrunchFund ered 470k valuation n San Francisco 2017 F $30m fundraising Microsoft Ventures Salesforce Ventures ONFIDO PROVIDES EMPLOYERS WITH AN ONLINE PLATFORM TO CARRY OUT BACKGROUND CHECKS AND SCREENING. THE COMPANY WAS FOUNDED IN OXFORD BY THREE OXFORD UNIVERSITY GRADUATES. COMPANY REGISTERED CRUNCHFUND MICROSOFT VENTURES SALESFORCE VENTURES $25M FUNDRAISING $30M FUNDRAISING 20K FUNDRAISING 470K VALUATION $4.5M FUNDRAISING CRUNCHFUND OPENED OFFICE IN SAN FRANCISCO R F F F F O 10 | A REPORT ON US INVESTMENT INTO UK COMPANIES A UK COMPANY MAKING WAVES ON THE WEST COAST CASE STUDY ONFIDO A REPORT ON US INVESTMENT INTO UK COMPANIES | 11 "Onfido is a great Oxford success story that has now become a global business with offices in London, San Francisco and New Delhi. Two of the founders met at the university's Oxford Entrepreneurs society and they secured seed funding from Oxford University's Sad Business School. "From these modest beginnings Onfido has grown to be a very exciting company in the artificial intelligence space. It has now received over $60 million in funding from flagship investors including Microsoft Ventures, Salesforce Ventures and Crunchfund." Onfido founders Ruhul Amin, Husayn Kassai and Eamon Jubbawy UK UNIVERSITIES ARE GENERATING WORLD-BEATING INNOVATION Will Axtell, partner, Penningtons Manches. Strong Silicon Valley investment into UK companies is part of a wider investment story which sees increases across the board. Our research has found that 2017 was a record year for levels of overseas investment into companies located in the UK, with 373 equity investments involving at least one fund headquartered abroad a 62% increase on 2016. It's not just the number of deals that has experienced a rise, but also the value of these deals. Investors from outside the UK were involved in 5.9 billion worth of deals, a 187% rise on the previous year and eight times as much as the figure from 2011. "Despite the threat of Brexit, the UK remains a safe bet for investors," says Russ Shaw. "Home to some of the world's best universities and a strong supporter of innovation, it has capitalised on its strengths to become a world leader in science and technology and this is clearly finding recognition among overseas investors." Investors across Europe, Asia and the rest of the world have certainly played a part in this increase in deals, but North America was the most significant source of overseas investment for UK companies in 2017. Of the 8.27 billion worth of investments announced in 2017, 33% or 2.83 billion was contributed by deals involving at least one investor based in North America. 2.15 billion of this total involved US investors, representing 25% of all equity investment into UK companies in 2017. 20% or 1.7 billion involved investors based in Europe (excluding the UK). FOREIGN INVESTMENT LEVELS AMOUNT INVESTED NUMBER OF INVESTMENTS 736M 93 134 149 186 213 230 373 1,036M 814M 1,403M 2,074M 2,048M 5,874M 12 | A REPORT ON US INVESTMENT INTO UK COMPANIES 02 CHAPTER A WIDER PICTURE OF OVERSEAS INVESTMENT 2011 2012 2013 2014 2015 2016 2017 East Coast investment is also at an all-time high West Coast investors may have been involved in more deals, but East Coast investors have provided more capital. They invested 1.31 billion into UK companies in 2017. The relationship between UK businesses and investors in the likes of New York and Boston is certainly getting stronger. Between 2011 and 2017, the total number of deals by East Coast investors into UK companies rose by 48% from 29 to 56. These deals represented 3.8% of all UK investment deals in 2017. "New York can often be a convenient stopping off point for companies on their way to the West Coast or the rest of the US," says Brent Ahrens, partner at Canaan Partners. "For example, onefinestay expanded from London to Paris and New York before moving to the rest of the US." West Coast investors put more capital into software companies than their East Coast peers, who invested 1.95 billion in the period between 2011 and 2017, but East Coast investors were more prolific in their support of life sciences, providing 46% (769 million) of all capital invested by the US into this sector of UK tech. Hardware tech (313 million), materials tech (188 million) and medical tech (144 million) followed. With Boston's strength in life sciences, it follows that investors based there have a keen interest in these kinds of companies, largely based around the UK's Cambridge and Oxford areas. It's also interesting to note that whilst East Coast investors did deals in the materials and nanotechnology sectors, those on the West Coast did not. 56 49 62 39 39 29 38 2011 2013 2015 2012 2014 2017 2016 NUMBER OF DEALS YEAR EAST COAST DEALS BY YEAR A REPORT ON US INVESTMENT INTO UK COMPANIES | 13 US INVESTMENT BY COMPANY SECTOR (VALUE, 2011 TO 2017) TOTAL VALUE SECTOR 1,948M 2,198M 340M SOFTWARE 769M 472M 442M LIFE SCIENCE 313M 207M 36M 10M 23M 15M HARDWARE 144M 101M 58M 108M 9M MEDICAL TECH CLEAN TECH NANOTECH 188M MATERIALS TECH EAST COAST WEST COAST REST OF US COMPANY SIZE AT TIME OF FUNDRAISINGS (UK COMPANIES 2011-2017) NON-US DEALS 34% 20% 47% US DEALS 42% 41% 17% SEED VENTURE GROWTH 14 | A REPORT ON US INVESTMENT INTO UK COMPANIES US INVESTORS EQUALLY INTERESTED IN GROWTH AND VENTURE-STAGE COMPANIES The overall investment by US firms into UK companies illustrates a split in preference between those at venture-stage and at growth-stage. Almost half (42%) and (41%) went to companies at venture and growth-stage, with only 17% going to seed-stage companies. A similar story is evidenced with Asian investors, with 37% of deals involving at least one Asian investor going to companies at the growth-stage. "Oxford Nanopore's recent 100 million investment from investors in the Asia-Pacific region is a great example of this in action," says Will Axtell, partner, Penningtons Manches. "The funding round valued the fast-growing biotechnology company at 1.5 billion." Deals involving US investors tend to be large: the average value in 2017 was 18.2 million. So it makes sense that the majority of US investment is going to companies at a later stage, which are likely to be seeking larger amounts. The UK's Golden Triangle in the spotlight The Golden Triangle the cluster formed by London, Oxford and Cambridge plays host to the majority of the UK's most innovative tech companies. It is no surprise that this geography has been of most interest to US investors, keen to back UK ingenuity. Our research has found that between 2011 and 2017, 79% of all US investment into UK companies went to the those in the Golden Triangle. In 2017, companies in this geography received record levels of capital from US investors, with 2.1 billion flowing into companies there a 64% increase on the year before. "The UK is home to some amazing innovations, particularly in the tech and life sciences spaces," says Ross McNaughton, partner, Penningtons Manches. "Many of those emerging growth companies have their eye on the US as a place to expand, and taking US investment is a natural step to help achieve those goals." One of the trends we are seeing which contributed to this sizable increase, is the rise in deals worth 50 million or more. 2017 saw US investors involved in 10 of these contributing 1.14 billion in funds for businesses in the Golden Triangle. The average value of these individual deals was 113.8 million. Surprisingly, this average is 29 million less than the global average of the larger deals into UK companies, suggesting that the biggest deals are actually being done by investors outside the US. There were 29 deals worth 50 million and over with Golden Triangle companies in 2017, meaning that just over a third came from US investors. 521M 34 60 54 79 100 99 114 359M 400M 933M 1,316M 1,338M 2,164M US INVESTMENT INTO THE GOLDEN TRIANGLE OVER TIME AMOUNT INVESTED NUMBER OF INVESTMENTS 2011 2012 2013 2014 2015 2016 2017 A REPORT ON US INVESTMENT INTO UK COMPANIES | 15 We've seen that US investment into UK companies is on the rise and we've explored some of the reasons why firms in the US are interested in the technology coming out of the Golden Triangle. We also wanted to look into some of the reasons that companies in London, Oxford and Cambridge are keen to do deals with US investors and how they believe such transactions might be affected in the future. Gaining greater access to US markets looks to be the largest driver for UK businesses without any existing US backers. In fact, 83% of non US-backed companies that we surveyed cited access to markets as a reason to take US investment. Access to the US market was followed by technical expertise of the investor (46%) and favourable investment climate (44%) by those without existing US investment. For those UK companies that have already done deals with US-based firms, their primary driver for taking additional US investment was an existing relationship with the investor 48% cited this as a reason, suggesting that once a relationship has been formed, it can lead to further investment at a later date. Similar to those without any US investment, access to US markets (35%), technical expertise of investors (28%) and a favourable investment climate (25%) were the second, third and fourth largest drivers to seek further US investment. 16 | A REPORT ON US INVESTMENT INTO UK COMPANIES 03 CHAPTER WHY DO UK COMPANIES LOOK TO THE US FOR INVESTMENT? US-BACKED COMPANIES 48% 35% 28% 25% 20% 13% Existing relationship with investor Access to US markets Technical expertise of investor Favourable investment climate for the investor Other Existing business operations in the US NON US-BACKED COMPANIES 83% 46% 44% 7% 22% Access to US markets Technical expertise of investor Favourable investment climate for the investor Other Existing business operations in the US A REPORT ON US INVESTMENT INTO UK COMPANIES | 17 Has the exchange rate had an effect on investment? The devaluation of the pound has reportedly created a surge in British exports since the Brexit vote almost two years ago, but do UK companies think this has affected their ability to attract investment from the US? According to our survey, generally, the companies which have raised smaller amounts believe devaluation has had a beneficial effect. All (100%) of the companies surveyed that have raised between 100,000 and 500,000 believe currency fluctuations have been beneficial. This drops down to 67% for those that have raised between 500,000 - 1 million, down to 42% for those in the 1 million - 5 million bracket and keeps going down. The only outlier here is that a minority (33%) of companies that have raised the smallest amount surveyed, less than 100,000, believe fluctuations have been beneficial. We assume that companies that have raised smaller amounts over time are seeking smaller rounds of investment. This suggests that investors contributing smaller amounts are more sensitive to currency fluctuations and therefore need favourable exchange rates to make the transactions worthwhile. "Currency fluctuations play a minor role in motivating investors at the early-stage. You don't want to take a 20% haircut," says Brent Ahrens, partner at Canaan Partners. "Later-stage companies can hedge. But overall, if the opportunity is good, you get in when you can." Have political events had an impact on investment from the US? From the Brexit vote, to President Trump's election and the UK government's performance in the 2017 election, we wanted to see if UK companies felt that notable political events had an impact on their ability to attract US investment. Overall, not many companies feel these events have made US investors more likely to do deals. The majority are split between thinking political events have had no effect and thinking political events have made investors less likely to do deals. Over half (54%) of UK companies felt the 2017 UK general election result had no impact on investor decisions, 45% however, felt it had made them less likely to invest. The Brexit vote had a similar breakdown, with 46% of companies feeling the prospect of the UK leaving the EU had no effect and 45% believing it had put US investors off. "Brexit hasn't had a huge impact," says Suranga Chandratillake, partner at Balderton Capital. "The ability to hire people is a concern because these companies are all about people but it's too early to tell if this will be impacted." POLITICAL EVENTS What effect do you think the prospect of the UK leaving the European Union has had on US investors looking to invest in the UK? It has made them more likely to invest It has made them less likely to invest It has not had an impact ALL UK 46% 9% 45% CURRENCY FLUCTUATIONS Have you found currency fluctuations beneficial to raising investment from US investors? Total amount raised by company throughout its lifetime No Yes 67%33%

The UK’s software-based companies are the most popular destination for Silicon Valley investment, and have received £2.2b of funding from these firms since 2011. Life science companies were the next most invested in, taking £472m over the same period.

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