This is a guest post by Victor Basta, the managing director of Magister Advisors, a boutique investment bank specialising in the technology sector.
The European Investment Fund (EIF) the EU agency that backs many first time European venture funds, found itself centre stage again last week as the latest ‘casualty’ of Brexit uncertainty. “Europe halts funding for British tech firms” was the headline in The Times, echoing reporting by the FT earlier in the year and signalling the dent EIF withdrawal could make on UK tech funding.
While EIF withdrawal will inevitably reduce funding for UK tech companies, the impact is likely far less than it first seems. The main reason is US investors have been quietly increasing their commitment to UK tech over the past 5-10 years, such that they now constitute the single biggest source of capital for UK tech, far more than for continental European companies.
Welcome the greenback
So far this year, US investors have participated in 30 per cent of UK funding rounds, but those rounds have accounted for an astonishing 80 per cent of total venture investment into British tech, according to data from Pitchbook. 2017 has been far from unique: over the past four years, 40-50 per cent of total UK tech round value featured US investors. While data on the actual sum put to work by US investors is unavailable, our experience in the market is that when American venture funds feature in funding rounds they are contributing a significant portion of the cash.
Interestingly, US investors also participate in nearly all large ‘unicorn-making’ rounds in the UK. As the data shows, UK tech’s evolution is fundamentally underpinned by, and dependent on, US funds. Since EIF money only flows to European VCs, the EIF has no influence in this trend.
Americans love Britain more than Europe (at least in tech)
What’s more, the proportion of US involvement is far greater in the UK than elsewhere in Europe. While US investors participated in 30 per cent of UK rounds this year, according to Pitchbook, the equivalent number for continental Europe is around 20 per cent. Simply put, US investors have committed far more, and far more consistently, to UK tech than anywhere else in Europe — about 50 per cent more according to my calculations. Drill down further, and US investors also have an unusually strong taste for early stage British companies (the biggest at-risk group from the loss of EIF funding, in my view).
This broad-based commitment, even to the smallest UK companies, is built over years of engagement, and is unlikely to be derailed anytime soon. It is an enduring counter-weight to the drying up of EIF funding.
The special relationship in action perhaps, where and when most needed.
EIF withdrawal will hurt in the morning, but there is a cure
Despite all this, the EIF has had a big impact. In the absence of government action, the biggest losers from EIF withdrawal will likely be smaller first time funds and the earliest stage companies which rely on small amounts from these small funds to get going. The obvious cure, advocated by the British Venture Capital Association, is significant UK government backing to VC funds generally, and first timers specifically. This could pass through the British Business Bank or similar vehicle, but the sooner it is clarified the more confidence UK tech will have. Even if that doesn’t happen, US investor commitments will cushion any eventual blow.
A note of caution
All of the above misses one big point. Economic uncertainty is the ‘silent killer’ here. While we are seeing US involvement deepen, UK funding activity is simply down overall over the past two years according to Pitchbook, and shows no signs of rebounding. Since Brexit, with the exception of one very large round for Improbable ($500m commitment by SoftBank), UK funding has headed in only one direction.
So let’s not worry about the EIF. A combination of inward investment and a government alternative can take care of that effectively, and rapidly. Two to five years of economic uncertainty may sound like an acceptably short period of time, and generally it would be. But in tech, two years is a lifetime of damage. There will be several billions of pounds of tech company value created or destroyed just in the next two years depending on the level of economic uncertainty in the UK. And that is a far, far higher price than anything EIF withdrawal would cost.