Venture capital investors drive unicorn creation, but UK institutional investors are yet to take advantage

British Business Bank’s Small Business Finance Markets Report:

• The report shows that equity investment into private smaller companies reached new heights in 2020, rising by 9% on 2019 levels to £8.8bn.

• Average deal size continues to increase, primarily driven by a small number of very large deals. Equity deal sizes increased by 3% in 2020 and the number of deals greater than £10m increased from 173 in 2019 to 176 in 2020.

• The time taken for some companies to achieve unicorn status reduced in 2020. Beauhurst estimates the average age of all companies gaining unicorn status was 7 years, but Hopin gained unicorn status only after one year and Cazoo after 2 years.

• Of the six UK companies to achieve unicorn status in 2019, five were backed by venture capital.

Judith Hartley, CEO of British Patient Capital commented: The British Business Bank’s Small Business Finance Markets report was published today and it reveals that, despite the global pandemic, equity investors continue to find smaller private UK companies highly attractive. The report shows that equity investment into private smaller companies has reached new heights in 2020, rising by 9% on 2019 levels to £8.8bn 

The report also shows that the longstanding trend of increasing average deal sizes is continuing, particularly for later stage deals. This trend has been primarily driven by a small number of very large deals, most obviously where new unicorn companies have been created. In 2019, of the six UK companies to achieve unicorn status, five were backed by venture capital.

The UK currently has 22 unicorns and two of the new entrants to this list are in British Patient Capital’s underlying portfolio of companies: virtual events platform, Hopin, and Cazoo, which is rapidly transforming the UK market for used vehicles. What these companies have in common is the sheer speed of their growth. Beauhurst estimates that it takes on average seven years for a company to gain unicorn status - in comparison, Hopin gained it after only one year and Cazoo after just two.

These companies are obvious outliers to the norm and are a useful reminder that success in venture capital doesn’t come from the average deal or company but from the few exceptions. 

Notwithstanding this, it would be wrong to think that venture capital is all about unicorn creation. While unicorns are an important indicator of success, they are not the sole objective of a fund. Many exceptionally high-impact and successful companies never achieve unicorn status but are nonetheless of high value within a venture capital investor’s overall portfolio. ‘Dragons’ can be just as important as unicorns and that’s why “Dragon chasing’ remains a priority for many venture capitalists. A dragon is a single company in a venture capital fund portfolio that will, on exit, deliver a return at least equal to the value of the fund. These companies are equally as rare and as valuable as unicorns.

While the Small Business Finance Market report comments on the general trends in the UK venture capital market, it doesn’t comment on the paucity of UK investors writing big checks for later stage funding rounds in the UK. As the third largest pension market in the world, the UK is certainly not short of deep pools of institutional capital. Yet despite this strength, the UK makes the smallest allocation to alternative assets, such as venture capital – 8% versus the average of 26%.

This creates a significant opportunity for British Patient Capital and for other institutional investors. It’s one of the reasons why British Patient Capital focusses upon committing capital to UK focused ‘venture growth’ funds, which we define as those investing at Series B onwards. There is an increasing pool of experienced venture and venture growth managers, who are backing some of the most exciting high-growth companies in the UK. It is through these managers that UK institutional investors can both drive and capture the value that exceptional companies such as Cazoo and Hopin can create.