Stuart McKnight is the Managing Director of Ascendant, a technology and media focussed Corporate Finance house that specialises in growth stage companies. Ascendant also has experience in fundraising for buying and selling businesses and technology licensing deals. RIG’s Managing Director, Shields Russell sits on Ascendant’s Advisory Board.
Ascendant has tracked all growth-stage investments in technology companies in the UK and Ireland since 1996. Their definition of technology is broad – covering software, telecoms, Cleantech, semiconductors, and internet/wireless services – but excluding life sciences and most medical devices, as well as Management Buy-Outs and Private Equity deals.
What are the growth-stage investment trends that you look to cover?
“We keep track of five key questions in the growth-stage technology sector in the UK and Ireland: how much money is being invested; who’s writing the cheques; what they’re investing in; the stage of the companies; and whom they’re co-investing with – that’s very important as well.
“2011 was a very interesting year – we saw good growth in the total amount of investment (£786m up from £620m in 2010) and the capital was more concentrated – there were 193 deals greater than £0.5m in 2011 compared to 213 in 2010.
“228 different investors participated in those deals last year. That number 228 is important because if you speak to the many of the London-based VCs and ask them how many different people are investing they typically say 20-25 – or a maximum of about 40 – but nobody imagines that it’s closer to 250.
“There is a geographical locus in terms of where VCs are based but not in terms of what they invest in. Most of the most active VCs in the UK and Ireland are based in London but many look at companies throughout the UK and at deals in Europe too.
“There are also a large number of trade investors looking to invest. In 2011, there were 34 deals in which trade investors participated. So financial VCs are not the only solution.”
How do companies perceive VCs in the UK compared to overseas?
“If I had a pound for every person who came to me saying that they were looking for a US investor, I’d be a very rich man.
“Companies can spend a lot of time looking for a US investors as there is a perception that they are better at Tech investing than the Brits. For a company that’s grown well in the UK the obvious next stop is the US and so picking up a US VC whilst you are there seems like a good idea. Add the belief that there is a big pot of gold waiting for them over there and you get an army of UK companies getting on planes to head for the US.
“Initially many find that there is a lot of interest. It’s easy to get meetings in the US – anyone can line up two weeks of investor meetings of 45 minutes to an hour each. However many US investors see these as a ‘fishing trip’ to see what’s going on in the European market. But it’s much more difficult to get serious, hour-and-a-half meetings where investors are really thinking about you as an investing opportunity.
“Companies and their shareholders have to be really sure that the US is right for them They need to be realistic about the chances of getting US money – only 11 UK tech companies received money from the States last year.
“Europe’s actually been a much more fertile ground, and it’s much more enthusiastic on mobile/internet companies. The VCs in Munich, Paris, and Brussels have been active in the UK, and the Nordic funds have recovered a bit but they’re still not back to the position they were in about a decade ago.”
Which sectors are getting the most interest at the moment?
“There’s been a strong sector bias – the three primary areas of investment were Internet/Wireless services, Cleantech, and Software. We find that in many cases investors tend to hunt in the same packs: they follow the same trends and look for the same ideas. There’s a cohesion about what investors look for at a certain time.
“Cleantech is interesting because it’s still strong but we’re beginning to see it wane. I could go to a Cleantech conference every day of the week but in truth there was a dramatic drop in Cleantech deals last year, even taking a broad definition of Cleantech that includes solar, fuel cells, electric motors, and so on.
“In Q1 last year there were hardly any Cleantech deals – perhaps 2 or 3; Q2 was very busy then Q3 and Q4 were very low. There were only 31 Cleantech deals in total compared to 45 in 2010, which compares to typically 60-70 deals per year in Internet/Wireless services and 45-50 in Software.
“Investors in Cleantech are making bigger gambles on later-stage companies than they were when Cleantech started to become popular and we started tracking it in around 2004/5.
“A lot of these businesses are still effectively early-stage because they are struggling to get meaningful orders from customers or even just getting a customer even though they’ve been going for many years. For most LLP backed VCs, when an investment holding period extends beyond 5 years, the IRR on the investment starts to get difficult. Many funds are starting to realise that in some cases Cleantech can be like semiconductors in needing lots of capital and long holding periods. Hence the rapid reduction in the number of active investors in the sector.
“Cleantech companies are starting to look for other options like funding through the balance sheet investors or ‘green funds,’ and we’ve seen a larger participation from non-standard VC funds like trade funds or family funds that can take a longer-term position.”
The majority of deals last year had more than one investor. Why do firms co-invest?
“Co-investment can be a bit of a magic trick for investors and for companies. Not all investors get the same deal flow – some get a lot of high-quality deals; some get a lot of average deals; and some struggle to find the right opportunities.
“Well-established firms like Index, Balderton, and Accel see a high-quality deal flow, whereas for the others a bit further down the league table it can be a rational business development strategy to build up relationships with other investors and look to co-invest with them.
“It’s in the investors’ interest to network. The relationships between VCs are partly personal and partly corporate. The relationships are primarily personal but there is such a thing as corporate memory – people will remember joint successes and they’ll remember joint failures.
“In the UK around 60% of deals have more than one investor. This is one indicator that the market is in ‘good health.’ Just before the ‘internet bubble’ burst in 2000-1 less than 40% deals were done jointly – reflecting the misplaced sense of confidence VCs had at that time – they were so sure that they had the best deals that they did not want to share and wanted everything for themselves. Fortunately many of those folks are no longer with us.”
What advice would you give to growth-stage companies looking for funding at the moment?
“Before a company speaks to investors, they need to have a significant opportunity, a clear differentiated plan to exploit it, a good team, and realistic expectations in value and the amounts they want to raise.
“For Ascendant to take on a deal, we would need to comfortable on all these points and be certain that we could identify 30-40 potential investors who would actively consider the opportunity. We are happy to give some guidance to companies looking at funding options – it is a tricky market out there. ”
For more information on Ascendant contact Stuart McKnight at email@example.com