The first half of 2020 has seen significant economic uncertainty and volatility. We are an early stage venture capital business – so what has happened to our business and in our market during this tumultuous time? DSW Angels Partner, Keith Benson, takes a look at what we at DSW Angels have been doing and at the market using our proprietary Mid-Market VC Tracker.
Our focus is on regional early-stage companies – even in good times this is a high-risk asset class. The seizing-up of the economy as lockdown began hit smaller businesses hard – our portfolio was no exception. Consumers focused their spend on food and other very specific categories which, in the early days of lockdown in particular, did not include organising an event on Poptop or buying skinny outdoor trousers from ACAI. The B2B space was also affected by companies cost saving and cash preservation measures.
I’m delighted to say that all our portfolio companies have dealt with the pandemic, stabilised their businesses and in some cases substantially grown. Our founders, many of whom have never seen a major economic crisis during their careers, have calmly held their businesses and teams together. As with many senior leaders in the UK, they will come out of the first half of the year maybe a little careworn but with some great crisis-management experience.
What has happened to investor sentiment?
Whilst the economic fallout from the crisis will inevitably be long lasting, we do not believe that the fundamental drivers of value will change. Technology will continue to solve problems and disrupt markets, and consumers will continue to buy stuff. Maybe this crisis was the trigger point which makes investors think more carefully about business fundamentals and valuations (see David Smith’s excellent blog on assessing value) – time will tell. Judging by some of the indicative valuations we have seen recently, it has not yet changed founders’ views on value.
We, as investors (we put our own money in on all of our deals), feel strongly that what makes a good business in the long-term has not changed. There is a tendency for businesses seeking investment to look through the lens of Covid-19 and find relevance to now – this is a questionable investment thesis at best. We just don’t know how long Covid-19 will be with us – and any investment predicated solely on the pandemic is probably not a viable long-term investment.
In late April we canvassed our investors to assess their sentiment – there was an interesting balance in the majority between continuing as before and a tendency towards increased caution – even into the longer term. However, the overall response looks positive for early stage businesses – two-thirds of our investors said that they would continue to allocate similar amounts to EIS investments in the next six months, increasing to over 80% in the long-term.
We were initially disappointed to see the Future Fund excluding pure equity investments (a requirement for EIS). This effectively eliminates any further government support beyond EIS for the smallest and earliest-stage companies in our economy – particularly as “undertaking in difficulty” rules preclude eligibility for CBILS loans.
British Business Investments (the commercial arm of the British Business Bank) has increased its commitment with us and continues to support early-stage venture capital in the UK regions with the rollout of its Regional Angels Programme.
Our deals during H1 2020
Both of our EIS investments in the first half of 2020 have been during the lockdown period – our first was the £1.7 million investment into One Utility Bill and the second we completed last week – into a very exciting Manchester-based martech business. We will be announcing in early August.
Both these venture deals gave our investors an opportunity to “put their money where their mouth is.” One Utility Bill is our largest investment to date – £1 million of a £1.7 million raise; and our martech deal was fully funded in less than seven hours. We are very fortunate to have such a supportive group of investors who clearly perceive long-term value in investing in good regional UK early stage businesses – particularly with the benefits of EIS.
Maybe the tax breaks for EIS are sufficient to investment in early-stage businesses going. On reflection, perhaps Rishi Sunak was right in designing the Future Fund for later-stage venture capital.