“The level of investment activity during the pandemic has surprised me,” says Rod Beer, managing director of the UK Business Angel Association. “While some angels have understandably backed off investing altogether or avoided some sectors, they have been replaced by others sensing an opportunity – particularly in sectors that are enabling digitisation.”
Even where interest has dropped off, such as in food-related sectors, there are success stories. Digby Vollrath, CEO and co-founder of Feast It, an online platform linking event hosts with suppliers (for events ranging from weddings to corporate conferences), says: “We had to deal with the question – why would anyone put money into a business dependent on face-to-face gatherings?”
But Feast It did raise money during the pandemic – a £1.2 million funding round in August 2020. Its story shows that investment is available, but to bag it, entrepreneurs have to be agile.
Deal flows recover
Data from SeedLegals1, a digital platform that produces the legal agreements for early-stage funding rounds, shows that deal flow suffered during the pandemic, but has very nearly returned to pre-lockdown levels.
In March, the number of new signed shareholder agreements dropped to 75% of the February level, rose to 120% in April (the usual seasonal tax year-end spike), and then fell off again in May and June to around 60%. Encouragingly, July saw a sharp recovery to a few points off the February level.
Also encouraging, says Nicholas Richards, head of investor partnerships, is that EIS and SEIS advance assurance applications – which are indicative of deal activity two to three months in the future – have recovered steadily since a March drop-off. Applications on the SeedLegal platform fell from around 25 per week to 10 after lockdown, but at the end of July were over 80% of pre-Covid levels at around 20 per week.
Rod does however caution that investments into companies raising money for the first time has remained low. He says: “Angel investing is a very personal thing; you want to look someone in the eye before you write a cheque. That couldn’t happen during lockdown and the opportunity to do that is still limited.”
Different sectors, different stories
Businesses that stand to gain from the pandemic, such as technology companies in the health and education sectors (health-tech and ed-tech), have benefited. The number of health-tech investments in May and June was around five times higher than average pre-Covid levels while the number of ed-tech investments in June was around three times higher. However, activity in both sectors returned to pre-Covid levels in July, so the jury is out on if elevated levels of deals will continue.
Rod also flags continuing strong investor activity in sustainable investments, such as green technologies, and growing interest in ‘deep tech’, which are companies that use highly advanced scientific or engineering innovations such as quantum computing.
Conversely, SeedLegals data shows the number of investments in the food-sector collapsed after lockdown with the number of deals falling by around 60% and remaining low.
Still raising money
But Digby’s experience with Feast It holds some valuable insights.
First, he had to convince investors about longer-term and medium-term prospects. Digby says that while no investor actually believed that Covid would spell the end of events, they needed reminding that Millennials had become the largest customer segment in the events industry, that this segment values experiences over possessions (so are more inclined to spend on events), and they are getting wealthier as they get older, so will probably spend more on higher-value events.
He also suggests that there is likely to be a rapid recovery: “We have had close to 100% cancellations because of the pandemic. But people haven’t reverted to weddings with six guests or weddings over Zoom, they have simply delayed their weddings. Next year is potentially going to be a bumper one.”
So, Feast It was able to present a bullish view over a five-year horizon, with an interesting opportunity over a 12-18-month horizon too.
Second, a dose of realism was important to build credibility. Digby says: “We were openly negative about the very short-term prospects. We projected zero revenue this year. That convinced investors we had thorough plans to survive a worst-case scenario, be ready for the recovery when it comes, and not need to come back to investors in a few months, desperate for money.”
Third, the financial deal had to make sense. Digby says it was almost impossible to value the company in the midst of such uncertainty, so Feast It structured its funding round as a loan, which converts to equity at the next investment round, with investors to be allocated shares based on a 20% discount on the price of that future funding round.
This was done in conjunction with using the government-backed Future Fund which matches private investor funding. This structure, he says, was fair and logical for both parties: “As a founder I am backing my vision and our ability to perform by the time we need to raise money again. If our next round is concluded at a lower valuation, then it really hurts us. But for investors, by coming on board now, they get a better deal in the next round of funding.”
And fourth, fundraising tactics had to be adapted. Digby says: “We started with existing investors. We ran webinars and provided them with detailed and brutally honest documentation on the impact of the pandemic and our plans to deal with it.” Many of these signed up quickly, which inspired confidence in new investors.
Rod thinks the start-up funding scene is relatively strong, but uncertainties remain. He says: “I think investment into digital businesses is very strong, driven in part by the forced adoption of technology by organisations. In other sectors, we don’t know how it will pan out. We’ll only get a clear picture next April, at the end of the tax year, which sees a peak in investment activity to qualify for EIS and SEIS.”
This article is written for the St James’ Place Entrepreneurs Club newsletter. The opinions expressed by third parties are their own are not necessarily shared by St. James’s Place Wealth Management.
1 SeedLegals (4 August 2020)