Venture capital activity worse than dotcom era

08/07/2010
'There is positive news to emerge from our research. Funds made good returns on exits in the middle of the recession so with a peak of investment activity between 2004 and 2007 many funds will be able to harvest their portfolio. Hopefully, this will coincide with economic growth and renewed M&A activity'.

UK start ups saw a 40 per cent decline in venture capital activity in the past two years according to new research by the National Endowment for Science, Technology and the Arts (NESTA). The number of exits has fallen by 40 per cent and fundraising dropped by over 50 per cent both in terms of the number of funds raising new capital and total amounts raised.

'Venture Capital: now and after the Dotcom Crash' also compares today's venture activity trends with the dotcom crash, and finds this crisis compounded by the challenges already facing technology entrepreneurs since 2002. In particular, two new trends affect today's market:

· The time taken to successfully exit, through a floatation or takeover, is getting longer. Across the world this averages almost seven and a half years, the longest period seen over the past two decades. This global trend is reflected in the UK market and has a knock on impact on a fund's ability to attract further investment.  

· Both the dotcom and financial crises resulted in a significant reduction in the number of new venture capital funds established. However current fundraising activity is considerably lower than levels seen after the dotcom crash and consequently the lowest level seen in the last decade.

Amid this market gloom however there are some promising signs. The fundamentals of the UK Venture Capital market appear sound, with evidence of funds exiting companies and making good returns[1]. Further, with significant amounts of capital invested in new companies between 2004 and 2007, a large number are expected to bear fruit over the next few years.

Mike Lynch, Chairman of NESTA's Investment Fund says: 'High growth technology start-ups will be critical to the UK's recovery. Our ambition to rebalance the economy must take into account the difficulties of early stage investment'.

2009 saw the lowest venture capital investment activity in recent history with the number of investments down by 17 per cent on 2008, and a drop of 27 per cent on the total amount invested (£677million compared to £930million).

Matthew Mead, Managing Director of NESTA Investments explains: 'There is positive news to emerge from our research. Funds made good returns on exits in the middle of the recession so with a peak of investment activity between 2004 and 2007 many funds will be able to harvest their portfolio. Hopefully, this will coincide with economic growth and renewed M&A activity'.  

High growth, innovative companies are disproportionately important for the UK's economic growth with only a small minority of these businesses providing more than half of UK employment between 2002 and 2008[2]. These businesses are dependent on venture capital as a source of pre-revenue finance.

Notes to editors

For further information, please contact Chani Hirsch, Chani.hirsch@nesta.org.uk 020 7438 2601 or Jan Singleton, Jan.singleton@nesta.org.uk 020 7438 2606. 

About NESTA
NESTA is a major source of early stage venture funding for innovative high tech companies in the UK. As an independent body, its mission is to make the UK more innovative to drive economic growth and to solve some of the UK's major social challenges. Our endowment status means we operate at no cost to the UK taxpayer.

NESTA is a world leader in its field and is in a unique position to support innovation through a blend of practical programmes, policy and research and investment in early-stage companies.

About the Report
'Venture Capital: Now and After the Dotcom Crash' provides an update on the venture capital market in 2009 and 2008, and examines the similarities and differences between the current crisis and the one triggered by the dotcom crash in 2002. It also considers prospects for a recovery.

[1] In the last decade, 54% of UK exits recovered between one and five times the amount invested; 10% of exits returned five to ten times their invested capital and 9% made more than ten times the investment. 27% of exits returned less capital than was initially invested.

[2] NESTA's Vital 6% report, 2009: Only 6% of high growth innovative firms were responsible for over half of the UK's employment between 2002-2008.