Despite Brexit, London's unicorns are still attracting foreign money
Despite Brexit uncertainty, foreign VCs are still flocking to the UK: new research published by PitchBook shows that 2019 is so far setting a record for US investment into British businesses.
CXO
The market research company looked at the number and value of venture company deals in the UK so far this year, and found that up to $4.4 billion worth of deals have involved at least one American investor. In 2018, investments from the US amounted to $3.9 billion.
It is in London that VC firms from across the pond have been pouring the most money into Europe. Over the past five years, the UK capital has received over $12.5 billion from US investors – almost twice as much as the second European city, Berlin, which boasts $6.5 billion investments from American VC firms in the same time period.
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Janet Coyle, director of Silicon Valley Comes to the UK (SVC2UK), a company that works to strengthen the relationship between entrepreneurs in Silicon Valley and Europe, told ZDNet that the UK is particularly attractive because it is producing high volumes of scale-up companies.
"London has been able to foster so many of these companies because it is Europe's largest tech hub, a leading global financial centre and has an abundance of world class talent," she said.
The report comes as the UK braces itself for Brexit, and as concern grows that leaving the European Union will slow down the growth of businesses.
Analysts have stressed the possibility that Brexit will limit the ability to hire European talent, especially software developers; and that foreign VC firms may be discouraged from investing in UK businesses if they see the country as being in decline.
But Matt Clifford, the co-founder of Entrepreneur First, a company that supports individuals as they build technology companies, told ZDNet that Brexit is not enough to reverse the macro-trend that has been building for some years: that UK businesses want to compete globally.
"Brexit is a short-term factor, and it will be very difficult for it to disrupt that macro-trend," he said. "US firms are seeing that there are opportunities in the UK, and they don't want to miss out."
Many such opportunities have emerged in fintech. In London, 114 fintech deals were signed this year – more than in any other city in the world.
They included major investments such as a $175 million Series D deal for WorldRemit involving Accel Partners and a $144 million Series F funding round for Monzo, led by Silicon Valley investment firm Y Combinator.
Some experts have suggested the ongoing deal spree could be the result of a weakening pound, which could be drawing investors by making deals now because companies valued in sterling are cheaper to foreign investors than they once were.
But Both Coyle and Clifford expressed doubts that the slide in sterling was the reason that American VC firms are turning their attention to UK startups.
"We are talking about the kind of deals where VCs are asking themselves if a given company will return up to 10 times the money invested," said Clifford. "Whether they are buying at $1.10 or $1.15 doesn't make much of a difference."
Coyle added that more than changing currency values, US investors are turning their heads at the financial returns generated by UK companies.
SEE: Investments in UK tech startups hit record levels in 2019, despite looming Brexit
A recent report showed that VC firms in the UK have outperformed their US counterparts in recent years, generating higher fund returns relative to the capital invested.
The report said that early-stage investments in software and technology companies, where the UK's science and technical base is "internationally competitive", have created a basis for strong financial performance.
Clifford explained that this is because the nature of successful companies is changing. Nowadays, it is this "science and technical base" that is the main driver of success.
This was not the case a decade ago, when companies were largely consumer-focused, and the potential to scale up a startup depended more on the ability to reach a wide domestic market from the outset.
"That represented a structural disadvantage for the UK, compared to the US," he observed. "But the next wave of growth will come from deep tech. In this scenario, the size of the domestic market is irrelevant."
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What will make a difference, according to Clifford, is having skilled researchers and engineers – an area where the UK scores well.
And so, as the UK continues to produce unicorn companies, American investors want to get involved – "Brexit or no Brexit," added Coyle.
She highlighted that some UK-specific strengths will remain unaffected by the country's departure from the EU.
"The English language, a strong culture of creativity and entrepreneurship and a favourable time zone for doing business across multiple markets in one day are all going to remain," she said.
All of which are fundamental assets that the UK will have to leverage in the future, however Brexit turns out. When in doubt, go back to the basics.