11 July 2016

The effect of Brexit on venture investing

James Shaw
Partner | UK

The Brexit Referendum has come and gone but has left a legacy of conversation and debate in the UK and around the world. From education and trade issues to tourism and technology, Brexit has been talked about a great deal (probably too much!) over the last two weeks.

As a law firm at the heart of the UK’s thriving technology and life science sectors, we have experienced firsthand the concerns of entrepreneurs and investors alike. We wanted to candidly share our views on what we’re seeing as effects of Brexit vote – and what we therefore might expect to see – in the UK venture community.

The outcome of the Brexit vote has had little noticeable impact on those transactions. Interestingly, if there has been any effect, we’ve seen the lower end of the equity investment spectrum stutter slightly and we’ve seen only two deals abort on that front.

In reality, what’s more likely is that international VCs and buyers are rubbing their hands as their target assets became 10% cheaper overnight.

In a snapshot, here’s what we’re expecting to happen to the growth capital sector in the UK:

•Angels – The immediate fall in the stock markets hit personal equity portfolios (pensions etc) hard and as a result will cause retail/angel investors to think hard about deploying capital into very high risk stock. This will be felt mostly on seed/angel financings and crowd fundings. However, at the end of June, Mark Carney, Governor of the Bank of England, gave a very strong indication that UK interest rates may fall further still and so forcing investors into higher risk assets. But until that happens,I think we’ll see a slight slow-down for angel activity.

•Venture Capital – We have not seen any slow-down here, nor do we expect to. If anything, we’re expecting to see more activity given the new opportunities, particularly from overseas investors. Those funds that invest “off-balance sheet” may also have some pressure to preserve cash and so may be less active until the economic climate has settled.

While UK equity investor Neil Woodford painted a very neutral picture before the vote, I particularly enjoyed reading the post-vote interview with our client, Saul Klein of Local Globe and similarly, the very positive post-vote note from our friends at Balderton Capital. These two articles tend to capture my view on the effect of Brexit on the venture capital sector.

•Corporate investors – Business as usual. I was very encouraged when speaking to an investment arm of a global pharma company last week and hearing the words “opportunity” and “actively looking”. At the end of the day, high risk investors like change because change can create opportunity. If they’re nervous about investing now then they should probably not be investing in venture!

•Public Sector – This will be one of those interesting areas to follow for life science investments. The EU (directly or indirectly) provides a great deal of public sector funding in the UK. Both UK national and UK local governments also provide a great deal of funding for early stage life science companies. But the government will need to work hard to ensure the same levels of funding will be available post Brexit as it was pre-Brexit.

•European Money – And, finally the European Investment Bank is a limited partner in a significant number of UK and Pan-European VC and PE funds. As a result, those funds often have an investment criteria which means the majority of the funds must be deployed within the EU, leaving only a fraction of the funds (eg. 25%) to be deployed outside of the EU. So we’re expecting Brexit to eventually have an affect those funds and venture investing, albeit not immediately.

James Shaw Partner | London, Cambridge

Category: Blog