Why a wall of money is flowing into Britain’s tech companies

One of the many unintended consequences of the pandemic is that there is a wall of money – some would say hot money – chasing tech start-ups and other young growth companies here in the UK and across the globe. Wealthy investors have more money, thanks to the crisis measures used by central banks, and they are looking for exciting places to deploy their capital.

The wall is so vast that one Cambridge-based corporate financier cum investor, who specialises in tech and healthcare companies, tells me he has completed more transactions involving start-ups and second round investments in the last year than in the previous decade. Other business angels, syndicates and VC investors are reporting similar stories: one golden triangle investor says that such is the appetite for new growth opportunities that companies are now charging investors to see their presentations and listen to their pitches.

It’s not only companies in the wealthier south-eastern golden triangle of London, Cambridge and Oxford benefitting  from this fresh capital; money is also pouring into companies across the country from Manchester to Bristol. Dublin is another hotspot.

New analysis by Dealroom.com, sponsored by Tech Nation and the Department of Digital, Media, Culture and Sport, shows that investors have put up more than $30 billion of new capital into British start-ups and other young companies for the first-half this year, more than the whole of last year. At the same time, VCs raised a record $7.1 billion of new funds – otherwise known as dry powder capital, as much as was raised in 2020.

Investment in start-ups – mainly in the software to ecommerce space – alone grew 2.8 times in the first half of this year, raising $18 billion across 1,700 companies and helping support thousands of new jobs from back office to techies. 

What’s interesting is that funds are going bigger and bolder, taking more of the Silicon Valley approach to investing: more than half of the the total investment was in mega-rounds of $100 million plus going to bigger companies such as Revolut, Starling Bank and Hopin, a virtual musical events company.

Otherwise the balance was spread across all venture capital investment rounds such as seed, series A, B, C, late stage, and growth equity rounds and excludes debt or other non-equity finance.

For those who want to bang the “despite Brexit” drum, there was good news too as leaving the EU does not appear to have had any knock-on effect dampening demand for smart UK companies. Indeed, dealroom.com – a Dutch company – reports that the UK attracts more VC money than Germany and France combined, and four times the amount going into Israel.

The UK now has 100 tech unicorns – companies with a value of more than $1 billion – the third highest after the US and China and more than Germany, France and Sweden combined. What’s more, the report zeroes in on another 153 companies valued at $250 million or more which are growing fast and have the potential to be unicorns.

At the latest tally, the UK’s tech unicorns are now valued at $592 billion with Revolut – the fintech banking group – now worth a whopping $33 billion.

Perhaps of more interest to investors is that so far this year a staggering $80 billion of “enterprise value” has been made either through IPOs via Deliveroo, Wise, Darktrace, SPACs with Cazoo, Babylon, Arrival and the sale of Depop. Not bad returns.

With luck, much of the income earned on these share sales will find its way back into helping fund the next generation of start-ups and growth companies. 

It’s not hard to see why there is so much money sloshing around the system despite the devastation that the last 18 months of the pandemic has wrecked across the economy and had such a hard impact on so many hard-pressed families.

As usual, the super rich have in many cases become richer as a consequence of the changes and disruptions to the economy that we have witnessed over the last 18 months. But they too need somewhere to invest their wealth, particularly now when interest rates are still historically low, inflation threatens to eat away at savings and taxes are bound to rise again in the UK.

As the Cambridge tech specialist points out, many of these investors – who already benefit from the various EIS schemes – will have been investing like crazy over the last year in case the Chancellor cuts the relief or tightens up the tax breaks in the coming Budgets.

You hear a similar whooshing of money sloshing across the Atlantic where figures from the Federal Reserve show that over the last year the $5 trillion in wealth now held by 745 billionaires is two-thirds more than the $3 trillion in wealth held by the bottom 50 percent of U.S. households.

That’s quite a gap opening up. No wonder IPO activity on Nasdaq is off the charts. In the first three quarters of 2021, there have been 560 listings either through the traditional IPOs, SPACs and direct listings raising some $136 billion. In the last third quarter, there were 147 listings, raising more than $29 billion. That compares to two years ago when Nasdaq had 124 IPOs raising $24 billion. Some of these companies are the more worrying SPACS but there have also been some solid operating companies such as Robinhood, Sovos Brands, Sportradar and Amplitude.

The Nasdaq bosses also report that the pipeline for joining the market is healthy, with a long list of technology, biotech and retail companies getting ready to come to list because there is so much capital floating around. 

At first glance, this sounds wholly positive. But is it too good to be true? Are we approaching “tulip bulb” mania territory? After billions spent by the central banks on quantitative easing, money is cheap and it is chasing fast-growth companies, many of which will fail in the end, and maybe soon. It is encouraging that new businesses are emerging. But tech investors should watch out.