UK scale-ups suffer from a lack of well-funded investors willing to support later, larger rounds of funding. As a rule, these Series D or E financing rounds are the penultimate phase before the IPO.
But this week Tech Nation Report said over 80 percent of later-stage VC investment in tech companies in 2020 will come from overseas funds.
This means that either rapidly growing scale-ups are relocating, typically to America, where they are listed on the New York Stock Exchange. This is robbing UK pension funds of the opportunity to invest in fast-growing, high-tech companies that the government wants to promote.
It’s not just a British problem, says Chandratillake, it’s endemic across the continent, both in Paris’ other tech hubs and in Berlin.
Chandratillake says, “What is missing is a lot of money that was spent on the last leg of the trip. It’s not that founders don’t get the money, it’s just that they get it from abroad. We see it in France, Germany and the Nordic countries. Large U.S. pension funds invest in technology before it goes public. We are agitators because we think that has to change. “
Venture capital is at a confusing crossroads in the UK. On the other hand, everyone agrees that investors are afraid of start-ups that want to put their money into later and safer financing rounds, which the founders only have months of cash – “runway” – left to carry on.
“There is some truth in both views,” says Chandratillake. “There is a really strong group of seed and early stage investors in the UK and there is a strong Series A cohort, but the further you go down this chain the less it gets. The reality is that these scale-ups are being picked up by US investors. “
What is Balderton Capital?
Balderton Capital is one of the UK’s most established VC funds, with holdings including Revolut, Citymapper, Darktrace, Nutmeg and The Hut Group.
It currently has over $ 3 billion in funding and has supported 220 companies over the past 20 years.
Balderton is currently invested in more than 90 established companies in 15 European countries.
Balderton typically invests between $ 1 million and $ 20 million in “companies with the potential to revolutionize huge industries and the ambition to scale globally.”
As of early 2018 alone, Balderton’s portfolio companies have raised $ 2 billion in follow-up financing and employed more than 18,000 people in more than 50 countries. During the same period, Balderton invested in 26 new companies.
Balderton Capital has three pillars: the $ 400 million Balderton VII Fund, the $ 145 million
Chandratillake says, “Really, we have one main goal to invest in and support fast growing companies with ambitious European founders. We want to be part of this journey on behalf of our own investors. Once we’re in the room with the entrepreneur, giving them cash is just the beginning. The first parts are the two funds, but the build platform is what we do next. “
The $ 400 million Balderton VII was launched in November 2019 to invest in around a dozen European startups in Serie A each year. Around two-thirds of Balderton VII were used in 20 companies. The aim is to invest in 30 companies by the end of 2021 or 2022.
The average investment is $ 10 million, but Balderton is open to investment in later rounds of funding up to a cap of $ 20 to 25 million.
Balderton sets up a new early-stage investment fund roughly every three years.
So far this year, Badlerton VII has participated in a Series C round for the Insurtech Unicorn Zego, having supported the commercial motor insurance disruptor in the seed phase in 2017; participated in another $ 100 million fundraiser for vertical farming startup Infarm after investing again in Series A in 2018; and participated in a Series A worth $ 50 million for game developer Dream Games.
In October 2018, Liquidity 1 was consumed in the amount of 145 million. Liquidity 1 is now completely used up. The idea was to identify early investors or employees who had stocks and wanted to liquidate their stake. In this way, Liquidity 1 reduces the risk of assisting outsiders as these firms have a track record.
Chandratillake says, “A few years ago we thought is this all we can do, is this all we should be doing? These companies stayed private longer and had very early investors or employees looking to sell their stocks. The company may have done well on paper, but these people are not paying off. Big investors weren’t interested because it wasn’t big enough to buy. These are companies that are still growing but are older, less risky investments. “
So, considering that it’s such a simple and obvious idea, why hasn’t anyone done it before?
“It just takes time for the market to seize the opportunity,” smiles Chandratillake. “It’s a new phenomenon in Europe, but not in the US, where these longer-term start-ups have been around for a while.”
Around 70 founders are members of the Build Portfolio community platform, which offers strategic and practical support and networking opportunities.
Brexit vs. Covid
Chandratillake, who was awarded an OBE for Services to Technology in 2018, says Covid has been generally positive for tech-driven companies as many of Balderton’s consumer and corporate businesses have benefited from people working from home and having a more flexible one Way of working.
The bigger question mark is Brexit. Although Britain’s exit from the European Union in January did not have much of an impact, it will be felt after the borders are reopened. Many Balderton startups rely on the influx of foreign talent, he says. Not having that many people to choose from could hurt UK plc.
Chandratillake refuses to say which technologies Balderton sees as areas of investment – be it Healthtec or, with the UK stifled with bureaucracy between the UK and the EU, Regtech. With Balderton staying invested for seven to nine years, we’re careful about jumping onto the next big thing because it could look very old in a decade.