The UK’s most promising tech start-ups are falling prey to American investors on the prowl at record levels this year. Cash-hungry start-ups, particularly those in later stages of growth and in need of larger sums, are struggling to secure funding from domestically-based venture capital or private equity funds. But the weaker pound and deep pockets of investors from across the pond are stepping in to pick up the slack.
The tech start-ups themselves won’t be overly concerned about the nationality of their investors but the trend could be considered an unfavourably one in the long term from the UK’s perspective. The future profits generated by the most successful British tech companies will, inevitably, be repatriated by their American owners. Or capital gains if they eventually sell their equity on.
But the trend is a clear one. Start-up investment researcher PitchBook says that over the first ten months of 2019, U.S. investors have spent $4.4 billion (£3.4 billion) buying part or all of British start-ups. That compares to $4 billion over the entirety of 2018 and is the highest sum on record with 2 months of the year still to go.
The data was published by PitchBook as part of the ‘Silicon Valley Comes to the UK’ (SVC2UK) series of annual start-up events designed to put the U.S.’s big tech sector investors in touch with the UK’s growth companies seeking further investment.
While the ownership of the cream of the UK’s tech scene falling into overseas hands may not universally seen as positive, it does show that we are producing high quality companies that are attractive to some of the world’s biggest investors. Among the biggest deals include a U.S.-led $114 funding round by online bank Monzo and $200 million injected into data privacy software OneTrust, which was also led by American investors.
U.S. investors are stepping in to bridge a funding gap for later stage start-ups. Strong start-ups have little problem attracting British investors when it comes to smaller, earlier rounds. But once they hit a certain size and valuation, they encounter a limited pool of domestic investors wealthy enough to meet their needs. That’s when the big boys from Silicon Valley are increasingly stepping in.
Sherry Coutu, co-founder of SVC2UK and herself an experienced investor who bought into the likes of LinkedIn and Lovefilm in their early days commented:
“We should be excited that they’re over here, but a little bit nervous as well. If the cash comes from the US, often that will increase the likelihood of [the company] being redomiciled and floated in a different country.”
“It is a problem for the economy. If a large amount of the cash goes in at a later stage because we don’t follow on in our investing, and you get a tremendous return, then that money doesn’t go into UK pockets and it’s less likely it will get reinvested here.”
The British tech start-up circuit is the favourite European destination for U.S. venture capital, attracting $17.8 billion on investment over the past five years. Germany is in a distant second place, with U.S. VC funds investing $10.5 billion in German start-ups. In third spot but again some way behind Germany, is France, which attracted $5 billion from U.S. VC investors.
Within the UK, London-based tech start-up unsurprisingly took the lion’s share of U.S. VC investment – $3.5 billion so far this year. That’s much more than companies from any other European city. Oxford and Cambridge also made the top 10 list of European cities for hosting start-ups that attracted American investment.
James Wise of Balderton Capital, a London-based VC that was an early investor in Revolut, another online-online banking and financial services app that is one of the UK’s most prominent fintech ‘unicorns’ commented:
“For the UK to punch above its weight in tech globally, we have to attract capital from across the world. While obviously it would be even better if more UK companies grew to be large and profitable . . . in their own right, foreign investment and acquisitions ultimately still create jobs, provide training and develop software that can have radical benefits to everyone in the UK, irrespective of where those funds originate.”