What trends should scaling businesses expect from the investment market in 2024?

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Article by Scott Preece and Chris Dyson of Ashfords.

Ashfords is a partner for Growth Forge 2024, a business acceleration programme for ambitious tech companies. Learn more here.

If you have raised, tried to raise, or considered raising funding over the past few years you will no doubt be aware that the investment market in the UK has been through some interesting times. It is almost becoming unfashionable to reference the COVID pandemic, but the fact remains that the pandemic led to a whirlwind of activity in both investment and M&A markets across the globe, with unprecedented levels of activity.

This article takes a look at predictions for 2024 and highlights four key trends that are likely to impact on the investment market this year, with added insight from several VC funds we have worked alongside.

What did 2023 look like?

Generally speaking, 2023 saw more of a return to normality from prior years, with many commentators noting that levels of investment throughout 2023 were similar to pre-COVID levels. Pitchbook data suggests that funding for venture-backed startups dipped by more than 40% from the prior year, and Pitchbook have commented in articles that last year was “challenging”, noting that “deal-making, valuations and exit activity were all down in 2023 with many investors sitting on the sidelines instead of deploying capital1. Though there were signs of increased activity in the latter part of the year.2

Looking at our own activity, the Ashfords’ Technology team continued to be extremely busy last year, seeing an increase in tech deals overall – particularly M&A transactions. We also completed a large number of investment deals acting for both our VC fund clients and for growing businesses.

Of course we also had plenty of conversations with clients who hadn’t quite secured the funding they were looking for, who were stretching out cash runway a little further than hoped, or who were being asked to accept lower valuations than planned. Similarly some funds did not raise the amount of capital they had originally intended to raise. However, these conversations happen every year and aren’t necessarily bespoke to 2023.

If we were looking purely at our own exposure to the market we would take a positive view overall, and we continue to invest in expansion in our team.

What might we see in 2024?

As a starting point, and on a less positive note, the British Venture Capital Association (BVCA) recently published a podcast titled “The outlook for venture capital & tech in 2024 – growing pains”, where they spoke to a number of experts on their view for the year ahead. One of the take-aways from this discussion was the following rather sobering bullet point:

Survive to ’25 – for those founders and companies that have enough cash to get through in 2024 they should then look to come back to the market next year.”3

We appreciate the sentiment of this message, although it does give a very gloomy view of anticipated activity over the next 12 months. We were keen to find out whether this view was unanimous, or if there was still scope for optimism from those in the market.

Parkwalk are the UK’s most active investor in the university spin-out sector, with over £500m of assets under management, and we turned to them to ask for their outlook on 2024:

Parkwalk are cautiously optimistic that 2024 will see an improvement in the UK venture ecosystem. Other than the apparent ending of the interest rate cycle (particularly in the US) we see strong, cross-party, national commitment to the sector with various beneficial reforms being enacted. EIS and VCT continue to see strong inflows of capital and this will lead to further investment, particularly in the second half of the year. We remain active in our sectors: AI, life sciences (and where they converge), med-tech, digital health, semis and other sectors of national importance.“

Moray Wright, CEO of Parkwalk

Which trends will have an impact on the investment market in 2024?

Like Parkwalk, many investors will be looking ahead to 2024 in a positive light, and will be actively looking to support exciting businesses who meet their sector criteria.

To delve into a little more detail, we identified four headline trends which we believe are likely to impact on the investment market this year. We didn’t even use ChatGPT to come up with these for us!

1 – Increase in activity

As noted above, some commentators have accused investors of “sitting on the sidelines” last year. The general view for 2024 appears to be that an increased amount of activity is expected.

As with every year, investors are incentivised to get out there and deploy their capital. If it is true that investors have “dry powder” from 2023 then this will be increasingly the case this year.

The Fintech Times interviewed a number of experts in a recent article4 and many of the commentators seem to share this view. Comments include “Following a challenging period of uncertainty, it does look like the growth mindset is coming back”, and “This coming phase could well be the best time for startups and VC investors in a long time”.

Substantial national investors such as Mercia Asset Management have also indicated that they are looking to increase activity. In a recent interview for Business Insider5, Mercia stated that it is “planning to “step up” its investment activity after a record 2023 for value and volume of transactions”.

To expand on Mercia’s view of the market, we spoke to Adam Watts, Investment Manager at Mercia Ventures:

2023 was one of the gloomiest years in venture in recent memory, from “AI or nothing” reports, rising interest rates to reports of start up’s shutting up shop. Our view hasn’t changed though, people and businesses buy products and services that solve their problems. We continued to be active and with over £200m cash available to invest, in 2024 we remain committed to backing great management teams across our key sectors of Software, Life Sciences, DeepTech and Consumer.

The “growth at all costs” days of 2021 are firmly behind us, hence founders across all sectors will likely find focus on sustainable growth, capital efficiency and profitability will increase the probability of fundraising success in 2024.”

Adam Watts, Investment Manager at Mercia Ventures

2 – Politics

We all know that a general election is looming, with polls set to open later this year. The uncertainty of an election can very often add turbulence and uncertainty to markets.

Interestingly, none of the investors we spoke with specifically identified the upcoming election as a significant factor in their thinking this year. Wider commentary also suggests that the general election isn’t as concerning a factor as it might have been in the past – the Financial Times recently published an article titled “What can investors expect from 2024?” in which they acknowledge that a change in Government may be likely this year, but the more moderate leanings of a Government led by Sir Keir Starmer would be “unlikely to startle investors”.6

Longer term, last year’s proposals to direct funding from major pension funds into startups / scaleups should also help to deepen the opportunities available, though we would not expect to see the impact of this immediately – possibly not until 2025 onwards.

For those businesses who are at Series A stage and above, the upcoming US election may perhaps be more concerning on the availability of funding from US VCs. Unpredictability here seems higher, though the positive angle with US investors is that high levels of capital are often available and either political candidate is unlikely to want to damage availability of capital to scaling businesses or to materially impact US-UK relationships.

Broader geopolitical and economic factors can also come into play – in an article by the CBI from June 2023 they pointed to a number of global conflicts as having an impact on economic outlook, as well as acknowledging that “the UK’s GDP is persistently “scarred” from the COVID-19 pandemic. At the end of next year, the economy will be around 7% smaller compared to its pre-Covid trend7. Though we are all sadly becoming more used to these factors and it is difficult to suggest that they should be accounted for when planning investment strategy this year.

The CBI also stated in the same article that “business investment is expected to return to its pre-COVID level by the end of 2024 (rising by 1.9% in 2024)”.

3 – Sector Focus

Many VCs we work with have a strong sector focus, and in times of uncertainty investors can tend to lean more heavily into their specialisms and areas of expertise.

Much of the focus in recent times has been around AI and CleanTech, with HealthTech also maintaining a strong appeal, and many commentators expect this to continue into 20248.

Kevin Chong, co-head of Outward VC, is quoted in The FinTech Times as stating: “This coming phase will see leaner, more resilient start-ups matched with leaner, more resilient investors. We will see the drivers of innovation shift from mobile and cloud computing to data and profound advances in AI. We will see a convergence of sectors where start-ups are built on the intersection of climate, education, financial services, and health9.

We spoke to Richard Haycock, CEO of South-West based fund QantX, who invest in businesses throughout the region from early Pre-seed stage through to Series A. He acknowledged that strong sectors are key to QantX’s investment strategy, and noted the strengths we have in the region:

At QantX we have always believed in the quality of IP in the South West region – we have exceptional research tackling global challenges in modern healthcare and sustainability. Early stage funding and strong commercial guidance is essential to bringing this opportunity forward and we are continuing to see strong demand in these sectors.”

Richard Haycock, CEO of QantX

Adam Watts at Mercia was also keen to highlight the importance of sector focus, and was equally praising of the scene in the South West:

Consumer is home to one third of the UK’s unicorns, however with less than 20% of active UK VC firms investing in the sector and UK household disposable income on the rise since May-2023 (Asda income tracker), we believe the sector has been overlooked. More locally in the South West, we continue to be impressed with the quality of IP-led businesses being spun out of the thriving local university ecosystem.”

Adam Watts, Investment Manager at Mercia Ventures

4 – ESG

Environmental, social and governance (ESG) criteria have become increasingly important to investors over the past few years. We now very often see ESG reporting requirements and compliance undertakings baked into investment documentation, and many VCs will track and evaluate these metrics when assessing opportunities. This is likely to continue into 2024, particularly if new Government incentives to achieve net zero and other similar objectives are implemented.

The CBI have strong feelings in this area, stating “we need to make sure the UK gets behind green growth. We don’t have a second to lose, as firms clearly have a will to invest in green technologies and decarbonisation. There are major export markets to be won – and we have a huge opportunity to secure significant investment from abroad, strengthening the UK’s economic prospects10.

Outlook Summary

Although there are a few negative indicators it seems to us that the view of the market as a whole could be summed up as cautiously optimistic and this will hopefully drive a healthier, more sustainable approach to growth. Though of course, no one is suggesting that 2024 is going to be an easy ride. Obtaining the right amount of funding, at the right valuation, from the right backers, has always been and will continue to be a lot of hard work.

Many founders and management teams of scaling businesses will already be very aware of the need to exercise caution and it would certainly be sensible for this to continue. Cashflow and other projections should be considered extremely carefully, proposed valuations and timings for capital injections should be questioned and rigorously planned, and objectives for the year should be realistic and focused on those things you absolutely need to achieve.

We spoke with Frog Capital, specialists at investing in UK and European software scale-ups, who echoed recommendations for a cautious and sustainable approach:

The team at Frog Capital has seen a distinct shift from investor backed businesses pursuing growth at all costs to balancing sustainable growth with profitability. This balance has long been one of Frog’s key focus areas. Frog invests in purpose-driven European software companies at the scale-up stage, with product-market fit, sustainable unit economics, strong growth and between £3m-£10m ARR. When businesses are ‘default alive’ or on the path to profitability with the funding they already have, they have much greater optionality. Although the recent shift towards profitability has been driven by market conditions, it is the basis for resilient business regardless of the economy. It may be exciting to be drawn in by stories of unicorns, but robust, sustainable businesses are the foundations to Europe’s economy and its chances to compete with other global markets.”

Sabina Pasha, Investor, Frog Capital

The need for caution and sustainable growth noted, there remains plenty to be positive about and we know from our work with a wide range of VCs that there continues to be appetite for businesses which solve real commercial and consumer needs. New regional funds (such as the South West Investment Fund) will also add to the opportunities available over the next year.

Beyond VC, the M&A market remains buoyant and there are many big players in Tech, Pharma and Energy in particular who have built up sizable war-chests over the past few years. If the VC market were to weaken, these larger players can look to take advantage of market conditions in order to acquire promising businesses, teams and IP at lower valuations.

Tips for scaling businesses

Whether it is an investment offer, an acquisition or a commercial opportunity, to ensure you can take advantage of opportunities when they arise we would always advise the following:

  • Have your documents and data in good order – keep all company documentation in an organised (ideally indexed) data room / file sharing system. This will enable quick sharing with investors and others, and easy referencing when needed.
  • Set reasonable timescales – in uncertain times investors will often dig deeper into the detail of your business when carrying out due diligence. The decision-making process should be expected to take longer, and processing times (particularly for Government entities such as HMRC, who you may need to provide tax clearances or similar confirmations) have been extended for some time now.
  • Line up suitable advisors in good time – it is never too early to form a relationship with legal, accountancy and other professional advisors. Take time to find the advisors who are right for you, and who have plenty of experience working with scaling businesses to help you plan for the future.

The Ashfords Technology Team would be pleased to discuss any of the themes of this article in more detail, or to discuss any strategic queries you may have on an upcoming investment round or exit process.

The Ashfords Business Scale-Up Hub also contains a large number of FAQs and other useful resources for scaling businesses, all freely accessible.

  1. https://pitchbook.com/news/articles/2024-europe-vc-predictions
  2. See the interesting report by Dealroom and HSBC titled “UK innovation 2024 forward look” (https://dealroom.co/uploaded/2024/01/Dealroom-HINV-UK-2024-forward-look.pdf?x26981) which refers to investment being “up 46% in the second half of 2023”. Also see comments from the very well-respected and active BGF, who have stated (in https://www.eastmidlandsbusinesslink.co.uk/mag/news/2024-business-predictions-seb-saywood-investor-at-bgf/) that “momentum really picked up in the final quarter of 2023”.
  3. https://www.bvca.co.uk/insights/thought-leadership/details/The-outlook-for-venture-capital-and-tech-in-2024-growing-pains
  4. https://thefintechtimes.com/fintech-trends-2023-and-2024-predictions-with-outwardvc-bud-percent-smallchange/
  5. https://www.insidermedia.com/news/coronavirus/mercia-looks-to-step-up-investment-activity 
  6. https://www.ft.com/content/de72b573-d735-47fa-bb42-30a39c863089
  7. https://www.cbi.org.uk/media-centre/articles/uk-economy-set-to-grow-and-business-investment-to-rise-following-brush-with-recession-cbi-economic-forecast/
  8. https://www.linkedin.com/pulse/eight-private-equity-trends-expect-continue-well/ and https://www.businessinsider.com/2024-tech-trends-predictions-top-vcs?r=US&IR=T 
  9. https://thefintechtimes.com/fintech-trends-2023-and-2024-predictions-with-outwardvc-bud-percent-smallchange/
  10. https://www.cbi.org.uk/media-centre/articles/uk-economy-set-to-grow-and-business-investment-to-rise-following-brush-with-recession-cbi-economic-forecast/ 

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