Is Startup Investment Set To Rise? A Forward Looking Index Says Yes

Launched by London-based venture capital firm AlbionVC with the support of Google Cloud, the newly-minted aVC index is intended to provide a forward-looking assessment of investment prospects. Published on July 17, the index – focusing on the SaaS sector – predicts an upturn in investment activity after a moribund first half.

The thinking behind the aVC Index is simple. When it comes to the timing of their funding rounds, founders are often looking at historical data. So, a startup owner assessing funding prospects today might look at figures from the first half of the year and come to the conclusion that this is not a good time to approach VCs. The problem is that a sharp decline in investment over a particular time period may not provide an accurate guide to activity in the coming months.

Dampened Ambition

And as AlbionVC partner, Robert Whitby-Smith points out, the perception that funding will not be available has had a dampening effect on the ambitions of founders. “There has been a reduction in the number of people starting new businesses,” he says. “Many founders are confident about their business plans but they are not confident about finding the funding.”

Equally, founders who have already secured early-stage capital inevitably have to make decisions about the timing of follow-on rounds. The funding climate plays a crucial role in the timing of these decisions. “They are asking themselves should I press on the accelerator or put my foot on the brake,” says Whitby-Smith. “Historical data doesn’t help.”

With a view to helping startup bosses make more informed decisions, Albion has come up with the aVC index.

A Forward Looking Index

The inspiration was the Purchasing Managers’ Index (PMI), which is widely used as a bellwether of economic trends in the manufacturing and services sector here in the U.K. and in many other economies. Essentially, monthly PMI reports track purchasing and supply chain trends across a range of companies. As such, they provide forward-looking indicators of future activity and output. Balancing negative and positive responses from participants they provide a numerical reading. 50 is the baseline. Anything below that points to contraction. A higher reading signals improvement.

Applying that principle to the VC industry, AlbionVC bases its index on questions sent to around 40 European venture capital firms. Taking into account factors such as term sheets and pipelines, the index builds a picture of what VCs are expecting as regards dealflow and investment activity.

So what does the index tell us?

Investing £2.4 billion

Well, the research suggests that early-stage investors are expecting to step up investment in the second half of the year in both Series A and Seed rounds. In monetary terms, funds are expecting to invest £2.4 billion in European SaaS.

Going back to that question of whether this is a good time to press the accelerator or jump on the brake, Whitby-Smith says the index findings represent good news for founders. “What you have is an index showing VCs have £2.4 billion to invest across 2,600 companies. That gives you confidence,” he says.

So, what accounts for the turnaround? Why the sudden (expected) jump in activity? Well, it’s partly a supply issue. According to Whitby Smith, the problem in the first half of the year was not necessarily a lack of available capital but a shortage of suitable deals. “The money was there in the first half of the year,” but the supply was too low.” That appears to be changing.

Are we looking at recovery? Whitby-Smith believes a corner has been turned and – bringing things a little closer to home – he points to AlbionVC’s experience. “Between January and May, we made no offers,” he says. “Since June, we have made six.”

There are some caveats sitting alongside the general optimism of the report – or to put it another way, some factors that founders should consider. The VCs taking part in the survey expected deals to be more investor-friendly and they also expected valuations to fall. Indeed two fifths investors expect valuations to fall by 20 percent.

Whitby-Smith sees this as a normalization after a period of heavy investment and competition that pushed valuations up. However, he stresses there is nothing in the trends around the terms and pricing of deals that should deter founders from raising capital. “It’s still a very attractive market,” he says.