Some very interesting annual statistics have recently emerged from the British Venture Capital Association, in the shape of its annual Report on Investment Activity. As the UK Business Angels Association notes in its newsletter, the latest data show very clearly that the flow of formal venture capital into young companies is slowing to a trickle. This trend has been under way for a while and recent conversations with professional investors in smaller companies shows that their appetite for the riskiest, early-stage deals is very limited nowadays. Most prefer to move up in deal size and buy into better-established companies with a track record and some profits to show for it.

 

In 2014, UK Venture Capital funds put £293m into 320 companies, according to the BVCA statistics. Of that, less than 10% (£28m) went into seed and start-up companies. The previous year they committed £61m to these deals: more than 20% of 2013’s total investments. Early stage investment was roughly level at £80m vs £81m the year before, and later stage investment was up from £156m in 2013 to £185m last year. So the pattern of VCs moving away from the riskiest areas of the market is clear – as is the unmistakeable and accelerating growth of equity crowdfunding in exactly this part of the market over the same period.

 

The new online platforms are helping to replace – and occasionally complement – formal VC funds on the bottom rungs of the equity ladder and this is not just because of diminished risk appetite among VCs. There’s also the cost differential – VCs have much higher overheads and costs of due diligence than angels and crowdfunders so these high-risk deals are expensive for them to do in any case. In time, it may be that equity crowdfunding platforms come to offer more late-stage deals as well, but for now it looks like the first rounds in the equity game will increasingly feature the equity crowdfunding newcomers and that VCs looking for deal flow will find it among the ranks of companies that have successfully raised money via online crowdfunding. 

 

To appreciate how far the landscape has shifted, it’s interesting also to look a bit further back to the boom-times before the crash of 2007-08. In 2005, VC funds reporting figures to the BVCA invested £160m in start-ups and £222m in early-stage companies. That grand total of £382m invested in just the earlier-stage deals dwarfs the £293m invested last year across the entire VC industry in the UK. Even in the dark days of 2009, VCs invested far more in the riskiest deals than they do today.

 

It’s possible of course that the way the BVCA’s research team defines start-up and early stage transactions might have shifted a bit over a decade, but the contrast is clear nonetheless – VC investment in the smallest and riskiest UK companies is a shadow of its pre-crisis self and even the rising tide of money from equity crowdfunding will have to get very much bigger before the flows start to rival the VCs’ peak years. That may be a good thing, since too much money flying around rarely leads to happy outcomes, but it should also give pause for thought to any professional investors tempted to look down their noses at equity crowdfunders as a bunch of lemmings.

 

Back in 2006, for instance, at the top of the market, UK VCs invested £946m in start-ups and early-stage companies – nearly three times the total in 2005. If that isn’t the behaviour of lemmings, it’s hard to know what is.

 

Note: I own shares in the equity crowdfunding platform Syndicate Room