Venture capital investment into UK and European companies continues as a trend defying broader concerns about international trade tensions, economic growth prospects and, of course, Brexit.
US-based funds show themselves to be vigorously interested in expanding European and UK businesses, while large corporates invest into growth companies as a means of outsourcing R&D and innovation – patterns which are expected to be sustained.
The healthy appetite among VC investors and venture debt providers is particularly evident when it comes to opportunities in technology.
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This looks likely to continue in coming years, as tech-enabled solutions based on artificial intelligence (AI) and blockchain prove increasingly popular.
Life sciences are a big draw for venture funding, especially healthcare technology (healthtech) and personalised medicines.
Growth in this sector is being supported by demographic changes, improved diagnostics and developing regulations around cannabis-based drugs.
Here is a snapshot of some of the specific business activities that are likely to attract the most VC and venture debt in comin years.
Cybersecurity (and fintech)
Much VC attention is being concentrated on cybersecurity, particularly its application in the growing fintech space, payment services and financial services platforms more generally.
Fuelled by a spike in high-profile breaches over the last few years, numerous businesses have set up to provide solutions for thwarting cybercrime and combat the increasingly prevalent risks of fraud, money laundering and terrorist financing activities.
Having advised on a number of financings of cybersecurity businesses, it’s clear that the fast-evolving cyber threat is being taken seriously.
The size of the fines being dished out for cyber breaches since GDPR came into force in May 2018 have prompted many businesses to decide that investing in cybersecurity is worth the cost.
AI (and retail tech)
The far-reaching capabilities of AI and machine learning (ML) mean they are firmly at the top of the priority list for many VC providers.
This is especially noticeable in the retail sector, at the intersection between increasingly enormous reservoirs of customer data and changing consumer behaviour.
E-commerce giants have quickly assumed a dominant presence in the internet retail sector by combining commercial nous with the latest technology – building and constantly updating solutions for working out what to sell, how much to stock and how best to distribute it.
In the last few years, new start-up and growth businesses have begun using AI to develop analytics platforms and planning tools to improve sales performance for smaller retailers.
AI-based retail solutions in particular are being rapidly adopted by the fast-moving consumer goods (FMCG) sector and across both bricks and mortar and online shopping outlets.
With potential to be rolled out across numerous sectors, including pharmaceuticals, consumer electronics and cosmetics, this form of retail tech is likely to attract significant venture investment over the next 12 months.
Edtech
Educational technology (edtech) is gaining momentum as an innovative way of delivering education and training for students and employees.
We see many more developers of next generation learning solutions poised to receive growth funding over the coming 12 months.
Health-tech and med-tech
The life sciences/healthtech sector is one of the broadest churches attracting growing numbers of VC followers.
Companies that leverage opportunities presented by converging personalised healthcare and the use of medical devices for at-home diagnostics and treatment are beginning to pull away from the pack when it comes to VC and venture debt funding, particularly from US sources.
Developments in areas such as surgical devices have attracted significant capital, while the move to digitalise patient data has led to a boom in clinical IT systems.
In the UK and Europe, ageing populations, better diagnostics and a rise in certain medical conditions have spurred the development of improved treatments in parallel with technologies which reduce the cost of operations and treatment plans for healthcare providers.
As the trends driving VC investment in healthtech show no signs of abating, this is an area where we anticipate substantial venture funding growth for the foreseeable future.
Medicinal cannabis treatments
Changing regulations and attitudes around medicinal cannabis treatments have quickly gained an enthusiastic following among life-sciences investors.
Although this is still a nascent area in the UK, VC investors with experience of working with cannabis treatment developers in North America are eagerly watching how this market unfolds in the UK and Europe.
Fieldfisher has in the past advised on a joint venture between a UK think tank and a Canada-listed medicinal cannabis grower – formed to research clinically validated cannabis-based medicines – on a multimillion-pound VC investment from a consortium of investors to further develop its products and protect the IP of its discoveries.
As legislation and public attitudes in this area evolve, many more deals of this nature are likely to be struck.
Moves to safeguard IP will also tick up, as companies seek to protect the results of expensive research and trials.
What to think about when bringing in venture capital finance
One of the key features of VC deals is the freedom to tailor transactions to suit the priorities of both the investor – who is focused on securing maximum returns – and the investee – who does not want to be unduly stifled by obligations to funding providers.
Structuring deals for the maximum benefit of both parties requires sufficient protection for the investor, so that company founders remain aligned with the interests of their backers, while at the same time leaving management with enough flexibility to operate the business day-to-day.
Ideally, investees will engage with their VC backers, so that they can access their network of contacts and tap into their experience of similar businesses. It is therefore usually desirable for both parties that the target company has an active VC investor director on the board, either in an executive, non-executive or at the very least a board observer role.
Prior to receiving VC investment, many companies will have operated on a “bootstrapping basis”, so proper funding gives the company the chance to put things right that may have been glossed over in the early stages of the business, such as GDPR compliance.
We are increasingly seeing VCs inserting subsequent conditions into investment agreements so there is a contractual obligation to improve IP protection, terms and conditions, and public-facing internet statements and privacy policies.
This is not just a legal necessity. It also serves to professionalise the documentation and appearance of the company when engaging in contract negotiations with customers and suppliers.
Tim Bird is a corporate partner and a member of the VC practice at Fieldfisher. The firm advises on VC and venture debt deals.
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