How Covid-19 has impacted investment into start-ups and scale-up businesses

By Oliver Woolley, Envestors

Sectors to escape the pandemic unscathed are few. However, some have fared much worse than others, the obvious being leisure, hospitality, transport operators and retail. Research firm Beauhurst, which tracks Covid-19 impact in high growth businesses, put eHealth and EdTech as those sectors who have benefitted most with ranked 34% ‘Potentially Positive’, from the pandemic. While the tech sector largely sat in the middle with 54% of companies experiencing a ‘low impact’, only 13% were able to capitalise on the situation. While the vaccine has brightened the outlook, the challenges of a national rollout and the lingering uncertainty over the impact of Brexit will likely continue to fuel feelings of uncertainty for the near future.

The biggest losers

As uncertainty hit the market, investors began favouring later stage deals. A lot of investment activity was focused on follow-on funding for existing portfolio companies, in order to help see them through the impact of COVID-19. On top of that trend, weary of risk, investors shied away from earlier stage deals and backed more mature business.

This left seed-stage businesses out in the cold. Whilst the number of seed investments was steady between Q4 2019 and Q2 2020, they fell by 20% between Q2 and Q3 2020. The number of newly registered businesses remained fairly stable up to and including Q2 2020. In Q3 2020, however, the number fell 32%.

This spells trouble for the next generation of growth businesses. Without the capital they need to move from the concept state, many great ideas will never get off the ground – and that is a shame for the UK who holds a strong international reputation for innovation.

A helping hand

The government has rolled out several programmes to help early stage businesses. Designed for growth business, the Future Fund received a lot of attention and applications when it was launched.

While the scheme allows eligible companies to apply for a convertible loan from £125,000 to £5 million, the eligibility criteria ruled it out for many businesses – particularly those seed stage businesses which were already facing hardship in raising investment.

Three requirements were problematic. First, funding had to be matched by private investment. Second, since investment needed to be structured as a Convertible Loan Note (CLN) it was not compatible with the Enterprise Investment Scheme (EIS) which made it less attractive to UK private investors.  Thirdly, the business had to have raised £250,000 within the past five years. This requirement left a large number of entrepreneurs out of the equation.

In addition to this high-profile programme, the government made available a number of grants and loan schemes for businesses, including its Coronavirus Business Interruption Loan Scheme, The Small Business Grant Fund and the Coronavirus Job Retention Scheme (furlough), which have no doubt prolonged the life of many high-potential businesses.

Winning sectors

COVID-19 has inevitably had an impact on where investors are choosing to channel their funds. As The Times emphasises, there has been a shift towards investment in healthcare, in part due to the disastrous impact COVID-19 has had on even the most developed nations, highlighting the importance of innovation in healthcare.

Beauhurst has identified four areas which, for private companies, have seen rising investment as a result of the pandemic, the first being video conferencing. Whilst newer services, such as Hopin (an online platform which allows hosting of live events at a large scale), have seen some investment – Hopin has recently received a $2.1 billion valuation, just 8 months since its founding – established companies such as Zoom have remained dominant in the market. eHealth and EdTech have, unsurprisingly, seen increased investment. This rise has been stronger in eHealth, which has seen 11 and 15 deals monitored by Beauhurst in Q2 and Q3 respectively.

EdTech on the other hand has not seen as large an increase as expected – possibly due to reopening of schools, resulting in less home learning – with 12 deals at a combined value of £14.4 million in Q2 and 8 at a combined value of £7.2 million in Q3, compared to 10 in Q3 2019. 

Finally, companies that facilitate ‘community sharing’ have seen increased investment – Farmdrop, a business allowing consumers to buy food directly from its source, received £6 million in equity fundraising in June. This trend, according to Beauhurst, likely came as a result of stockpiling at the start of the pandemic, resulting in “calls for people to become more community-minded”.

With the vaccinations being rolled out, change is on the horizon – good news for all private businesses, however, expect to see continued caution by investors.

ABOUT THE AUTHOR

Oliver Woolley is CEO and co-founder of Envestors. Envestors’ digital investment platform brings together entrepreneurs and investors across geographies, communities and sectors – creating the single marketplace for early stage investment in the UK.

Envestors partners with accelerators, incubators and angel networks to provide a white-label platform empowering them to promote deals, engage investors and connect to other networks.

Founded in 2004, Envestors has helped more than 200 high growth businesses raise more than £100m through its own private investment club.

Envestors is authorised and regulated by the Financial Conduct Authority.

Web: https://www.envestors.co.uk/

LinkedIn: https://www.linkedin.com/company/envestors-llp/

Twitter: @EnvestorsLondon

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