UK venture industry hits historic low

The post-credit crunch climate has been worse for venture capital in the UK than the dotcom bubble burst, according to a recent study.

Venture capital activity in the UK during 2009 was the lowest this decade, beating even the lulls experienced during the bursting of the dotcom bubble. The National Endowment for Science, Technology and the Arts (NESTA) found that start-up firms in the UK have experienced a 40 percent decline in venture capital activity over the last two years. This represents a drop from €2.14 billion-worth of activity in 2007 to €854 million in 2009.

The study draws information on investments from commercially available databases and examines similarities and differences between the current crisis and the one triggered by the dotcom crash.

The dotcom era was characterised by over-confident assumptions about the growth of the internet market, however, the study indicates different reasons for the low activity this time around, citing low fundraising and a decreased number of exits.

Fundraising activity in 2009 was the lowest in the last decade with a drop of 50 percent from 2008 both in terms of funds raising capital and total amounts raised. Total amounts raised in 2009 averaged £8.1 million –the previous decade-low had been £8.3 million in 2001 during the dotcom era.

NESTA also found there were only 74 exits in the UK in 2009 compared with 111 in 2007 and a peak of 215 in 2006. Also, there were a total of 11 funds raised in the UK during 2009; the lowest number of the decade.

While the study concludes that a 2010 recovery is unlikely due to the low fundraising activity and longer times to exits – currently averaging 7 years worldwide – it does predict that the significant amount of capital invested during 2004 to 2007 may now bear fruit in the form of exits during 2011. NESTA also conclude that the “fundamentals of the UK venture capital market are sound” with 54 percent of all UK exits during the last decade achieving multiples of between 1-5x, 10 percent achieving 5-10x and 9 percent managing 10x or above. In total 73 percent of all UK exits made money.

Data from the European Venture Capital Association (EVCA) show that the UK is the second-largest venture capital market in Europe accounting for 21 percent of all invested amounts.

NESTA is a government-sponsored endowment supporting early stage venture funding for innovative high tech companies in the UK.