Raising Equity Finance: Spotlight on Software

Between 2016 and 2018, there were 15,970 seed or venture equity investment deals made in the UK, amounting to £22.8bn.

With the broad range of businesses included in these statistics, it can be difficult to take away anything useful. So, at Envestors, we’re running a sector-specific blog series on what’s happening in fundraising and, crucially, what you as an entrepreneur should do about it.

Our first area of focus is software, which accounts for 46% (7,311) of the total deals within this cohort, demonstrating the importance of software to the UK economy.

Trends in software fundraising

The total annual value of fundraises in the software sector has experienced strong growth over the last three years, from £1.9bn in 2016 to £4.1bn in 2018, an increase of 116%. This is not surprising, as the UK is internationally recognised as the global leader of tech innovation. It is also good news for young software start-ups, as it reflects strong investor interest.

What’s interesting to note is that over the same period, the average round size has increased significantly from £0.87m to £1.65m. In line with this, pre-money valuations have also increased, on average from £3.14m in 2016 to £5.52m in 2018.   This increase, however, has been somewhat inflated by some companies opting for larger venture rounds. During this time period, 38 deals (0.6%) of the sample raised over £30m each, including Graphcore ($200m), MoneyFarm (£40m) and Cazoo (£30m). Regardless of these outliers, the current trend of larger raises and valuations in software remains, meaning that businesses are raising bigger rounds than they used to. This trend could be down to a few factors, one of which is the current uncertainty and instability surrounding the UK economy. Quite simply, it’s harder to raise equity finance in the UK when investors are wary about the future, so it takes longer and requires more legwork. This could explain why companies are raising larger rounds – they need enough funds to avoid having to do a subsequent raise within the short term. The second – and perhaps more likely – answer behind this trend is activity in the M&A (Mergers and Acquisitions) market, which has seen the volume of acquisitions and their exit multiples in the software space increase in the last five years.  Ultimately, it’s possible that early stage companies may be raising their valuations to reflect their exit aspirations.

Looking across the UK, 56% (4,107) of fundraises came from London, whilst only 8% (605) came from North Ireland (95), Wales (154) and Scotland (356) combined. The remaining 36% came from other regions within England.

 

Success stories and horror stories in software fundraising

6% (435) of the companies – which raised during this period – have ceased trading, with only 1.9% (138) having successfully exited (hopefully more to follow).

42% of the 138 companies – which ceased trading – did so within six months of their last raise. A high-profile case was eMoov, which raised c.£2m on Crowdcube just a few months before they collapsed, leading to over 32 formal complaints by their investors.  

However, there’s also no shortage of success stories in this space and two recent examples from our own portfolio include:

Booking Tek: An enterprise grade SaaS business, that has cracked the code selling software into the largest hotel groups in the world, acquiring five of the top ten groups. They raised c.£1.4m of their initial £0.85m target.

PowerX Limited: An AI software platform, designed to monitor power usage and help mobile network operators save money and increase energy efficiency by using the most effective power source available, they raised c.£0.75m of their £0.7m target.

How can software companies appeal to investors?

 There is no one answer for this, but below are our tips on how to give yourself the best chance:

Show traction: You should have a large number of customers, a steadily growing customer base or a few key customers/partners

As many of the businesses in this space are B2B, quality can be just as important as quantity. Don’t worry if you don’t have a large number of customers; if you have 1-2 market-leading brands who have committed to your product, that is strong evidence of its potential. Partnerships can have the same impact – just make sure you have actual signed agreements. If you only have a meeting in the diary or are involved in a multi-staged procurement process, don’t pretend they’re already locked in.

 how potential: You should have a market opportunity that is big enough for investors to get excited about

Trends and market size are common elements in any pitch deck. Investors look for software businesses which can scale and where there is a strong opportunity to disrupt existing markets. Ensure that you clearly explain what the problem is that you are solving, how trends support that and be realistic about how much market share you are going to win over and how long it will take.

 how experience: You need a strong management team with a depth of experience

Investors like companies which are led by seasoned entrepreneurs who have previously scaled and exited a business. If you haven’t done this, then consider how you can bolster your team with experienced advisors.

 Likewise, the best management teams have a genuine balance. As one of our investors put it, ‘when you have a restaurant, you need someone who is strong in the front of house and a chef who is technical in the kitchen’.

 how realistic results and forecasts: You should have current and forecast data ready covering key metrics

While KPIs are unique to each business, there is a generally expected set for software – particularly for SaaS businesses. Make sure you understand these and their drivers inside out and that you’re being absolutely realistic in your predictions, as inflated and fantastical figures are a sure way to put off investors. Key software metrics include: life-time value, churn rate, customer acquisition cost and monthly and annual recurring revenue – all of which will help demonstrate to your investors that the business is able to scale.

Are you a software business planning a fundraise? Click here to find out how we can help you set a realistic valuation, create a compelling investment opportunity and meet investors.