By Jonny Blausten, CEO and co-founder of Sprout
KPMG’s latest report revealed that British venture capital deal volumes are at their lowest rate since 2016. But what does this actually mean?
At face value, this drop may be perceived as a problem – the reality is more nuanced and reflects a more considered, disciplined approach to investing that is emerging.
As in many other asset classes, the broader macroeconomic conditions have prompted a ‘flight to quality’ – investors are more focused on identifying the best assets to invest in, and are increasingly learning from mistakes of recent years.
Venture capital remains a lucrative option for private investors if past performance is anything to go by – as one of the highest performing asset classes of the last 15-20 years (via Pitchbook) – yet accessibility issues remain.
The high minimum investment requirements prove a barrier between eligible private investors and high-performing VC funds, preventing individuals from diversifying their investment portfolios, and VCs from accessing an untapped pool of capital.
It’s time for this to change.
The latest VC trends
The drop in deal volumes is representative of the increasingly high bar VC funds require to make an investment. Indeed, the era of loss-making businesses receiving VC funding in perpetuity is over. Investors are focusing on companies which demonstrate more proven fundamentals (clearer paths to revenue and profitability), whilst still searching for the material upside that start-ups offer to early investors.
Fundamentally strong and innovative businesses are top priority for VC funds. Whilst many are adopting a ‘sit and wait’ approach, household names such as Uber, AirBnB and PureGym were founded and funded in the last recession; investors who find today’s equivalent of these will benefit as VC funds identify the startups at the forefront of the next wave of innovation.
I couldn’t invest even if I wanted to…
Whilst understanding the benefits of investing in private companies, many errantly turn to angel investing. Despite best intentions and the merits that investing in private companies can bring, private investors must ask themselves whether they have the ability to identify and access the best possible opportunities. Indeed, VC funds are exclusively focused on sourcing and executing the best possible deals.
For many private investors who seek to add VC funds to their investment portfolio, the entry ticket is still far too high.
From an eligibility perspective, individuals must qualify as Professional Investors, High Net Worth Individuals (e.g. earning over a certain threshold – usually £100k, or have assets outside their primary residence above £250k), or Sophisticated Investors (e.g. working in finance and be actively investing in some capacity). However, many top funds have their own minimum requirements (usually for admin reasons) in excess of £1m+, and in many cases over £10m+. This means that many investors who are eligible to invest in VC are still unable to access the best funds.
Frustratingly for this group of investors, VC funds have long been recognised as one of the top performing asset classes; top quartile funds have returned more than 35% annually for over a decade (via Pitchbook).
As a result, some ambitious investors seek out unproven high risk, experimental assets such as cryptocurrency. These are often highly volatile, for obvious reasons. Investors shouldn’t need to explore unproven asset classes; they deserve fair access to previously unreachable, high performing asset classes like venture capital.
Changing the face of venture capital
There’s much to be gained by providing greater access to VC.
Aside from accessing one of the top performing asset classes, private investors can diversify their portfolios. Traditional asset classes, such as pensions and ISAs, are inherently linked to the stock market; a public market decline will result in many private investors nursing losses for years. Extending their investments into private markets with VC funds would leave investors with healthier, diversified portfolios.
For the VC funds, facilitating access offers a greater pool of capital from ambitious and enthusiastic private investors, also providing a wealth of relevant industry knowledge.
By unlocking access to VC funds Sprout is levelling the playing field and helping investors in the process.