UK Venture Capital Slump Gives Angels their Wings

(MoneyWatch)  Venture capital funding in the UK has hit a low not seen since the dotcom bust, with the recession leaving a large dent in fundraising activity going forward, according to new research.

While start ups have been held up as vital to the UK's economic recovery, the reality is that venture funding has fallen off a cliff in the past two years, according to NESTA's report, "Venture Capital: Now and After the Dotcom Crash".

Looking at the past year in venture funding, it found:

• Less capital invested: VC funds invested ?£677m in UK companies in 2009, whereas the year before it had been ?£930m. Even publicly backed funds -- which have been stable for several years -- were less active in 2009.
• Fewer new funds, less fundraising: Only 11 funds (of which nine were new) successfully raised capital in 2009, compared to double that figure the year before.
• Less first-round funding: Whereas in good years, first-round funding would account for the majority (60 or 70 percent) of deals, it accounted for only 42 percent in 2009 -- the lowest level since 2003.
• Longer time to exit: Time from inception to exit has hit "an historic high" of over seven years, with companies opting for smaller rounds of funding more often -- an average of ?£8m in four blocks.

All of this makes for worrying signs longer term: fundraising activity should be rising as we climb out of recession so that VCs can re-fill their dwindling coffers in anticipation of business opportunities. Instead, VC funds are focusing on the health of their existing portfolio and are much slower to exit. NESTA report author Yiannis Pierrakis has hopes for the UK Innovation Investment Fund, but it's the private sector's contribution that matters.

This may be an opportunity for business angels to at last realise the big wins from high-growth start-ups, which are traditionally scooped up by VCs at a later stage.

The number of angels (wealthy individual investors) has swelled in the past 10 years, even if 2009 was a slow year for deal-making. VCs still invest more overall (with tech ventures taking the lion's share), but angels have been more generous in some industries (energy , consumer and business) than the public funds.

Could the dearth of VC deals benefit angels -- who might be able to both invest less and hold onto high-growth companies for longer? Should the government incentivise high net-worth individuals or angel consortia to encourage them to keep taking risks with new ventures?

A little recognition wouldn't go amiss, argues Mike Lynch of (angel-backed) Autonomy and chairman of NESTA's investment fund, especially given the additional personal support most angels provide along with financing. He talks to the Daily Telegraph's Richard Tyler here about the benefits of offering angel investors a little more support: