Early-stage tech companies seeking investment to fund their growth plans may never have had it so good, as venture capitalists demonstrate their willingness to pump more cash into first-time funding rounds. But are they making the most of the fundraising opportunity?
According to the latest report from London & Partners and Dealroom Co, London startup investment reached a record high in 2021 of $25.5 billion. The Capital ranks fourth globally for investment raised in 2021 and created 20 new unicorns, the most of any year to date.
The vast majority of tech sector investment was directed to fintech companies, and there was a significant increase in the number of so-called mega-rounds, which raised funding of more than $100 million. Among the largest fundraising deals reported in the UK last year were the $800 million funding round for Revolut and the $600 million funding round for Monzo.
The significant increase in the volume and value of funding rounds for UK-based tech companies over the past year is due to an overabundance of capital in venture capital markets and venture capital trust markets. The dip in investment activity during the pandemic has created pent up demand for funding opportunities. As a result, venture capitalists are increasingly showing an interest in startup or seed-stage tech businesses.
Another factor that is driving investor interest in the tech sector is the acceleration of technological innovation during the pandemic in response to the rapid growth in online activity. In particular, the groundswell of interest in the development of the metaverse and trending markets for ‘non-fungible tokens’ or NFTs, are creating hype around certain technologies such as blockchain and augmented and virtual reality. News reports about much-sought-after digital assets coming to market for the first time and attracting large sums of money, are further highlighting the value that can be achieved.
With more capital investment filtering through to early-stage tech companies – those at seed series A, B and C – there is a real opportunity to secure growth strategies and fast track investment for the development of new market-ready products. In the past, startups and seed businesses may have struggled to attract large sums of funding due to their lack of track record, but now anything seems possible.
The key to attracting funding often comes down to personality. Investors like to get to know the entrepreneurs behind the business before backing their business plan. It also helps if the business has a clear ‘roadmap to revenue’ in order to demonstrate the point at which it will become EBITDA positive. Depending on the nature of the business, this roadmap to revenue should set out a series of strategic milestones, such as the number of users and paying customers. A strong understanding of the marketplace, and access to experienced advisers or business angels, can also help to inspire investor confidence.
For tech entrepreneurs seeking funding in 2022, it is important to avoid rushing into anything and giving too much equity away. Instead of agreeing to the first funding offer that is made, regardless of how tempting it might be to do so, they should bide their time and wait for the right deal that they will be happy with further down the line. Equally, it is important not to opt for the highest amount of funding on offer without considering compatibility and the value that investors may be able bring to the business. By working with trusted advisers with a sound knowledge of the tech funding marketplace, it should be possible to line up a number of potential investors, with the aim of securing the best deal possible.
By Stephen Hemmings, Partner, and Alexander Duffy, Corporate Finance Director, at accountancy firm, Menzies LLP. Both are tech sector specialists at the firm.
