British scale-ups suffer from the lack of deep-pocketed investors willing to back later, bigger funding rounds. Typically, these Series D or Series E funding rounds are the penultimate stage before going public.
But this week’s Tech Nation report said over 80 per cent of later stage VC investment in tech companies in 2020 comes from overseas money.
This means that either fast-growing scale-ups relocate, typically to America, where they float on the New York Stock Exchange. This robs British pension funds of the chance to invest in fast-growth hi-tech businesses, which the government wants to encourage.
It’s not just a British problem, says Chandratillake, it’s endemic across the Continent, both in the other tech hubs of Paris and Berlin.
Chandratillake says: “What’s missing is a lot of money spent that last stage of the journey. It’s not that founders can’t get the money, it’s just that they’re getting it from abroad. We see it in France, Germany and the Nordics. Large US pension funds invest in tech before it goes public. We’re agitators because we think this is something that needs to change.”
Venture capital is at a confusing crossroads in Britain. On the other hand, the consensus is that investors have taken fright from start-ups, wanting to put their money into later and safer funding rounds, which have left founders with just months of cash left – “runway” – to keep going.
“There’s some truth to both views,” says Chandratillake. “There’s a really strong body of seed and early stage investors in Britain and there’s a strong cohort of Series A but as you go further down that chain, it gets sparser. The reality is that those scale-ups are being picked up by US investors.”
What is Balderton Capital?
Balderton Capital is one of the UK’s most established VC funds, whose investments include Revolut, Citymapper, Darktrace, Nutmeg and The Hut Group.
Currently, it has over $3bn worth of funds having backed 220 companies over the past 20 years.
Currently, Balderton is invested in more than 90 companies founded across 15 European countries.
Balderton typically invests between $1-$20m into “companies with the potential to disrupt huge industries, and the ambition to scale globally”.
Balderton’s portfolio companies have raised $2bn in follow-on funding between them since the start of 2018 alone, employing more than 18,000 across 50-plus countries. Over that same time period, Balderton invested in 26 new companies.
There are three planks to Balderton Capital: the $400m Balderton VII fund, its $145m Liquidity 1 fund and Build, its inhouse networking platform for founders.
Chandratillake says: “Really, we have one main plank, to invest in and support fast-growing companies with ambitious European founders. We want to be part of that journey on behalf of our own investors. Once we’re in the room with the entrepreneur, just giving them cash is just the beginning. The first pieces are the two funds but the Build platform is what we do next.”
The $400m Balderton VII launched in November 2019 to invest in around a dozen European start-ups at Series A each year. Around two thirds of Balderton VII has been deployed into 20 companies. The target to invest in 30 companies by end 2021 or 2022.
Its average investment is $10m but Balderton is open to investing in later funding rounds up to a cap of $20-$25m.
Balderton launches a new early stage investing fund around every three years.
So far this year, Badlerton VII has co-invested in a Series C round for insurtech unicorn Zego, having backed the commercial motor insurance disruptor at seed stage back in 2017; participated in a further $100m fundraise for vertical farming start-up Infarm, again having invested Series A in 2018; and participated in a $50m Series A for games developer Dream Games.
The previous October 2018, the $145m Liquidity 1 launched to buy out angel and early-stage investors is now fast-growing scale-ups. Liquidity 1 is now fully spent. The ideas was to identify early investors or staff who had shares and wanted to liquidate their shareholding. That way, Liquidity 1 reduces the risk of backing outsiders because these firms have a track record.
Chandratillake says: “A few years ago, we thought, is that all we can do, is this all we should do? These companies were staying private for longer and had very early stage investors or employees who wanted to sell their stock. On paper the company may have done well but these people can’t cash out. Big investors weren’t interested because it wasn’t a big enough chunk of stock to buy. These are companies that are still growing but are older, less risky investments.”
So, given it’s such a simple and obvious idea, why hasn’t anybody done it before?
“It just takes time for the market to realise the opportunity,” smiles Chandratillake. “It’s a new phenomenon in Europe but not in the US, where these longer-running start-ups have existed for a while.”
About 70 founders are members of its Build portfolio community platform, which offers strategic and practical support and networking opportunities.
Brexit vs. Covid
Chandratillake, who was honoured with an OBE for services to tech in 2018, says that Covid has been generally a positive for tech-driven companies, with many of Balderton’s consumer and enterprise businesses having benefited from people working from home, adopting a more flexible way of working.
The bigger question mark, he says, is Brexit. Although Britain leaving the European Union in January hasn’t had much of an impact yet, that will be felt once borders reopen. Many of Balderton’s start-ups rely on the inflow of overseas talent, he says. Not having so many people to choose from could hurt UK plc.
Chandratillake demurs from saying which technologies are catching Balderton’s eye as areas to invest in – whether it’s healthtec or, as Britain finds itself strangled with UK-EU red tape, regtech. Because Balderton stays invested for between seven to nine years, he says, we are wary of jumping on the next big thing because it could look very old hat in a decade.
Further reading on Balderton Captital