The first quarter of 2009 has seen a heavy drop off in technology VC investment in UK, broadly back to levels last seen in 2005. Both the absolute number and size of deals have dropped by over half from last year. Average deal size is now typically £2-3m, down from £5m. Government supported regional funds and business angels have continued to be active (thank goodness!), accentuating the drop off in activity by the mainstream technology VCs. Why?
Conventional wisdom has it that VCs can and do sit out periods of uncertainty waiting for valuations to settle down to a new (lower) norm. Sufficient time has passed since the valuation bubble burst that the reluctance to invest seems to indicate an inability, rather than a reluctance, to invest, even though many VCs still have an enormous pot of cash to invest, from funds raised in the good times of earlier years. Whilst they do have the money to deploy, it is more constrained than it would seem at first sight and new investments will take a second priority to supporting existing portfolio companies.
When closing a fund VCs receive the commitments of support from Limited Partners in tranches. The General Partners have the right to call for new tranches but in the current climate many Limited Partners, Pension Funds and the like, will be reluctant to receive such calls, and as a General Partner you want to accommodate LPs who will be a critical cornerstone for your next fund.
Secondly the recession is lengthening the cycle time for most existing VC investments. It will take longer for companies to develop their businesses to allow VCs to achieve the return. More time requires more support. More cash will be held back to support existing investments. Where new investments are made they are often to support existing portfolio companies fill-ins.
It will be a while yet before new technology VC investment in the UK will be back to the peak at the start of 2008.