Industry Update
Brian Perry
01-Jul-06
We all know too well what happened with the last tech crash and how for a while, angel investing left a slight sour taste in our mouth. Well, guess what? Things are getting exciting and angel investment activity is on the rise once again and stronger than it has been in several years.
Some signs of renewed activity are popping up across the region. The Oxford Investment Opportunity Network (OION) for example has recently reported they invested £ 2.5 million in 13 companies in 2005. As a result of their success, various other networks are trying to do the same. The Thames Valley Investment Network, Southampton and Hampshire are all following the model of OION.
The Yorkshire Association of Business Angels state they have invested 2.5 million in 13 companies and Leanna Jones of the Xenos network in wales reports they have invested over £ 1 million in 10 deals, a 50% increase over the previous year.
As a result of the recent changes in the Enterprise Investment Scheme (See Cover Story) in March, higher amounts are now qualifying for EIS tax relief. Obviously this will have a favourable response for angel investment in 2006 and beyond.
Throughout the region, the trend is clearly increasing as more and more angels are starting to take interest once again after a very quiet few years. From an entrepreneurs and economic perspective, these investments are crucial as they allow the companies to leverage this cash infusion as equity in the company and therefore being able to attract traditional or second-stage funding.
As a result of the tightening up of commercial bank loans and this renewed interest in angel investing, start-up companies are quickly learning this avenue is one to pursue when raising capital. With that said, the quality of dealflow from an angel’s perspective has increased in numbers but not necessarily in quality. As always, entrepreneurs come up with extremely diverse and varied types of opportunities. Some worthy of investment and some not.
In terms of VC investing, things are looking up there as well. According to VentureOne, a unit of Dow Jones, and Ernst & Young, European VC funds equity investments, for cumulative three quarters of 2005, was €2.5 billion, slightly below €2.7 billion for a similar period in 2004. However, noting that the UK VC market represents 30% of this (although France and Germany appear to be coming on strong with 19% and 10% respectively) and Silicon Valley 1Q results for 2006 are showing some large increases over 2005, 2006 is looking to be a very active year.
Fenwick and West LLP has presented the following from their 1Q06 Silicon Valley report:
- Up rounds exceeded down rounds for the ninth quarter in a row, and by the largest margin since our survey began (74% up vs. 15% down, with 11% flat).
- The Fenwick & West Venture Capital Barometer showed a 64% average price increase for companies receiving venture capital in 1Q06 compared to such companies’ previous financing round.
This was also the largest increase since the survey began. Other U.S. venture industry related results for the quarter included the following:
- The amount invested by venture capitalists in the U.S. in 1Q06 was approximately $6 billion, an improvement over $5.1 billion in 1Q05, and on par with the last 3 quarters of 2005.
- Acquisitions of venture-backed companies in the U.S. in 1Q06 totaled $7.5 billion in 92 transactions. This was flat with $7.5 billion in 93 transactions in 1Q05, and with 2005 on the whole, but is a significant improvement over $4.8 billion in 86 deals in 4Q05.
- There were 13 IPOs of venture-backed companies in the U.S. in 1Q06, of which 8 were healthcare companies. This was an improvement over the 8 IPOs in 1Q05, and generally flat with the last half of 2005.
- Nasdaq was up 6% in 1Q05, but is down 7% in 2Q06 to date.
According to the British Venture Capital Association’s (BVCA) May 15, 2006 Report on Investment Activity and Performance Measurement, UK private equity firms have continued to increase investment activity and performance throughout 2005. The Investment Activity report shows that worldwide investment by UK private equity firms has increased by 21% in 2005 to £11.7 billion, mirroring continuing market confidence among both investors and fund providers.
The Report on Investment Activity highlights that investment in the UK increased by 28% in 2005 to £6.8 billion from £5.3 billion in 2004. The UK now represents 58% of the total amount invested, up from 55% in 2004. UK private equity firms have also maintained a strong global focus with their investments in overseas companies rising by 12% in 2005 to £4.9 billion. The Performance Measurement Survey again highlighted the UK private equity industry outperforming comparable asset classes over three, five and ten year periods. The net returns raised by private equity measured 16.4% over a ten year period; 11.9% over five years and 21.1% over three years. The overall long-term return to investors since inception now stands at 14.4% p.a. on funds raised between 1980 and 2001.
Overall, whether looking at angel investment or VC and Private Equity activity, things are very encouraging and the rest of 2006 looks like it will be a solid year. World markets are a little shaky at the time of writing this article but when traditional markets start to scare us, this can add fuel to the alternative and equity investment markets.
