๐Ÿ‘‹๐Ÿพ Hi friends!

European summer is on, and, whilst the trope goes that everyone is off for the next couple of months, that certainly hasnโ€™t been my experience over the last few years!

Iโ€™ve had more meetings packed into the diary over the next few weeks than I have in a while, and despite the fact that the last year or so seems to have been a slow grind, something feels like it has been unlocked over the last few weeks. Maybe as the election drew to a close, confidence was picking up, or maybe itโ€™s just that all the dry powder out there is flowing a bit more freely.

Whatever it is, the UK feels like itโ€™s back in business! So to celebrate, todayโ€™s post is a bit of a dig into what are the trends in the UK ecosystem in 2024 ๐Ÿš€

Iโ€™m well underway writing about all the things Iโ€™ve learned from the last couple of decades as founder, CFO and CEO, so sign up for early access to Off Balance – The Book and feel free to share with anyone else you think might enjoy it ๐Ÿ˜„.

Now letโ€™s get down to businessโ€ฆ

In this weeks Off Balance:

๐ŸŽ™๏ธ Edward Kliphuis, Partner at Sofinnova Partners on Nothing Ventured
๐Ÿ‡ฌ๐Ÿ‡ง UK Venture in 2024

๐—ช๐—ต๐˜† ๐˜๐—ต๐—ฒ ๐—ฐ๐—ผ๐—ป๐˜ƒ๐—ฒ๐—ฟ๐—ด๐—ฒ๐—ป๐—ฐ๐—ฒ ๐—ผ๐—ณ ๐—ฐ๐—ผ๐—บ๐—ฝ๐˜‚๐˜๐—ฎ๐˜๐—ถ๐—ผ๐—ป ๐—ฎ๐—ป๐—ฑ ๐—ต๐—ฒ๐—ฎ๐—น๐˜๐—ต๐—ฐ๐—ฎ๐—ฟ๐—ฒ ๐˜„๐—ถ๐—น๐—น ๐—ฏ๐—ฒ ๐˜๐—ฟ๐—ฎ๐—ป๐˜€๐—ณ๐—ผ๐—ฟ๐—บ๐—ฎ๐˜๐—ถ๐—ผ๐—ป๐—ฎ๐—น

In this week’s epsiode of Nothing Ventured, Aarish sat down with Edward Kliphuis, Partner at Sofinnova Partners, a leading European venture capital firm in life sciences, specializing in healthcare and sustainability.

Based in Paris, London and Milan, the firm brings together a team of professionals from all over the world with strong scientific, medical and business expertise.

Prior to joining Sofinnova Partners, Edward spent close to a decade in venture with Amadeus Capital Partners and M Ventures.

My top takes:

1๏ธโƒฃ ๐—–๐—ผ๐—ป๐˜ƒ๐—ฒ๐—ฟ๐—ด๐—ฒ๐—ป๐—ฐ๐—ฒ ๐—ผ๐—ณ ๐——๐—ฎ๐˜๐—ฎ ๐—ฎ๐—ป๐—ฑ ๐—–๐—ผ๐—บ๐—ฝ๐˜‚๐˜๐—ฎ๐˜๐—ถ๐—ผ๐—ป: Edward highlighted the significance of the convergence of data and computation in healthcare. Large biology models, akin to large language models, are revolutionising our understanding of biology. By capturing individual variability and isolating cause and effect, we are moving towards personalized and tailored medicine.

2๏ธโƒฃ ๐—–๐—ต๐—ฎ๐—น๐—น๐—ฒ๐—ป๐—ด๐—ฒ๐˜€ ๐—ถ๐—ป ๐—›๐—ฒ๐—ฎ๐—น๐˜๐—ต๐—ฐ๐—ฎ๐—ฟ๐—ฒ ๐—ฆ๐˜†๐˜€๐˜๐—ฒ๐—บ๐˜€: We discussed the challenges faced by healthcare systems globally, including rising costs, demographic changes, and a shortage of practitioners. Edward highlighted the need for innovation to address these systemic issues and ensure accessible and affordable healthcare for all.

3๏ธโƒฃ ๐—ง๐—ฟ๐˜‚๐˜€๐˜ ๐—ฎ๐—ป๐—ฑ ๐—œ๐—ป๐—ณ๐—ผ๐—ฟ๐—บ๐—ฎ๐˜๐—ถ๐—ผ๐—ป ๐—ถ๐—ป ๐—›๐—ฒ๐—ฎ๐—น๐˜๐—ต๐—ฐ๐—ฎ๐—ฟ๐—ฒ: The conversation also touched upon the importance of trust and information in healthcare. With the proliferation of information and misinformation, coupled with the rapid pace of innovation, maintaining trust and delivering accurate information to patients is crucial for the future of healthcare.

We also talked about:

๐Ÿ”Žย Life sciences through the lens of three strategies – existing tech through new channels, new tech through existing channels and new tech through a new channel.
๐Ÿ”ฌ Taking healthcare to the individual level.
๐Ÿฆ  Large biology models as a parallel to large language models.

Listen on YouTube, Spotify, Apple or wherever you get your podcasts!

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Now letโ€™s get into it.

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Off Balance

Last time I wrote about what the various political parties policies might mean for the UK venture ecosystem, sticking with the UK theme, this week I explored what are the 2024 trends that are worth keeping an eye on over here.

Whilst headlines often focus on broad trends, this deep dive reveals some of the less obvious, albeit highly impactful shifts in the UK’s VC ecosystem.

Itโ€™ll be interested to see how these continue to play out and what impact they might have on as the tech sector continues to grow.

UK Venture Capital in 2024: Trends and Opportunities for Tech Founders and CFOs

UK’s Resilience Amid Global Slowdown

Despite global venture capital having experienced significant contractions, the UK market has shown some strong resilience.

From 2019 to 2023, UK VC investment grew by 19%, outperforming both the United States (-7%) and China (-25%).

This growth trajectory shows the UK’s strong position in the global VC landscape and its ability to attract capital even in challenging economic conditions – though it is worth remembering that the volume of capital deployed here is still a mere fraction of the cash floating around the US and China.

What does this mean for founders and CFOs?

Confidence in the UK market remains high, providing a solid foundation for fundraising efforts.

The UK’s outperformance suggests a maturing ecosystem that can weather global economic storms more effectively.

Startups should leverage this positive sentiment in their pitches to both domestic and international investors to maximise their chance of success.

Seed Stage Momentum

A really interesting trend is starting to show at seed with UK startups. The median deal size for seed companies is rising, reflecting both escalating startup ambitions and increased investor confidence in ‘hot’ sectors. This trend is particularly of note as it suggests a shift in how early-stage companies are being valued and funded.

Key takeaways:

Founders should be prepared to articulate more ambitious visions and growth plans, even at the seed stage.

CFOs need to adjust their financial models and fundraising strategies to align with these higher expectations.

There’s an opportunity for startups to secure more substantial seed funding, potentially extending their runway and accelerating growth, especially as later stage fundings remain depressed.

US Funds Entering UK Seed Stage

In a significant shift, US VC firms are rapidly increasing their presence in early-stage UK deals, particularly in the tech and life sciences sectors. This trend is reshaping the competitive landscape for both startups and local VCs.

Implications:

UK startups now have access to a broader pool of capital and potentially valuable US market connections.

Competition for top deals is intensifying, which could lead to more founder-friendly terms – though this is not guaranteed as I am seeing in live term sheets today.

Founders and CFOs should familiarize themselves with US VC expectations and practices, as differ from UK norms, as does the style of approach and directness of some firms on that side of the Atlantic.

Corporate VC Stability

Despite the overall funding decline in the UK, corporate venture capital has maintained a steady 20% share of all UK equity funding in 2023. This stability in corporate VC participation is a testament to the strategic value that startups can offer to established companies. Iโ€™ll be talking to Alokik Advani from Fidelity International Strategic Investors to discuss this later in the year.

Opportunities to explore:

Startups should actively consider corporate VC as part of their fundraising strategy, especially if there are potential strategic alignments.

CFOs can leverage corporate VC relationships for more than just capital, including market access, technical expertise, and potential exit opportunities.

Founders should be prepared to articulate how their product suite or customer base can add value to a corporate partner’s existing business or future strategy.

Impact Investing Growth

The UK is witnessing a burgeoning community of impact investors, often overlapping with traditional VC in supporting startups that effect positive societal change. This trend reflects a growing alignment between financial returns and social / environmental impact. I have spoken to a number of guests on Nothing Ventured about how they approach this and how companies should think about measuring their impact.

What it means for startups:

There’s an opportunity to tap into a new pool of capital by emphasising the positive impact of your business model.

Startups should consider integrating impact metrics into their KPIs and reporting, making them more attractive to this growing investor segment.

CFOs should be prepared to demonstrate both financial returns and impact outcomes in their projections and reports and crucially, create a narrative that shows how one positively drives the other.

Sector-Specific Trends

While broad market trends are important, here are some sector-specific insights that might provide a more nuanced understanding of where the opportunities are in the UK market right now:

AI: Unprecedented Appetite

The enthusiasm for AI startups in the UK has reached absolute fever pitch, with some investors prioritising first meetings over detailed traction for AI-focused companies. This presents both opportunities and challenges for founders in the space.

โžก๏ธ Opportunity: Easier access to initial meetings and potential funding for AI startups.
โžก๏ธ Challenge: Increased competition and potential for inflated valuations that may be hard to justify in later rounds.
โžก๏ธ Action item: AI startups should strike while the iron is hot but also focus on building sustainable business models that can withstand future scrutiny.

Digital Health: Gaining Momentum

The UK’s healthcare staff shortages have created a fertile ground for digital health startups. Investors are increasingly interested in solutions that can address these systemic challenges as well as wider interest in the medical and life sciences space.

โžก๏ธ Opportunity: Alignment with a clear market need and potential for public sector contracts.
โžก๏ธ Challenge: Navigating the complex regulatory landscape of healthcare technology.
โžก๏ธ Action item: Digital health startups should emphasise how their solutions specifically address UK healthcare challenges in their pitches.

Climate Tech: Sustained Interest

Climate technology continues to attract significant interest from UK investors, reflecting both global trends and the UK’s commitment to net-zero targets.

โžก๏ธ Opportunity: Access to both dedicated climate funds and generalist VCs with climate mandates.
โžก๏ธ Challenge: Demonstrating scalability and profitability in what can be capital-intensive sectors.
โžก๏ธ Action item: Climate tech startups should focus on clearly articulating their path to profitability alongside their environmental impact.

Geographic Neutrality

Contrary to popular belief, UK VCs are actively investing across Europe, focusing more on talent quality and future potential than company location. This trend is breaking down geographical barriers and creating a more integrated European startup ecosystem – though as I argue on the pod constantly, more needs to be done to unlock even more opportunity, especially at the later stages.

What it means for founders:

UK-based startups should be prepared for increased competition from European counterparts for UK VC attention.

Startups based elsewhere in Europe shouldn’t rule out UK VCs and should actively include them in their fundraising strategies if theyโ€™re not already.

The ability to attract and retain top talent, regardless of location, is becoming increasingly crucial in VC assessments.

Billion-Dollar Deals Driving Growth

In May 2024, two ยฃ1B+ deals contributed to a 1.6% YOY increase in total VC funding, despite a 17.3% decrease in deal volume. This concentration of capital in mega-rounds is creating a bit of a bifurcated market.

Implications for the ecosystem:

While headline numbers may look positive, the reality for most startups may be more challenging.

There’s a potential for a “barbell effect” where very early-stage and very late-stage companies find funding, while those in the middle face a tougher environment as we have been seeing for much of the last 12 months.

CFOs need to be prepared for a potentially longer and more challenging path to mega-rounds, focusing on milestone-based fundraising strategies.

Wrapping it all up

The UK venture capital landscape in 2024 still presents a complex but opportunity-rich environment for startups. Understanding these trends and adapting strategies accordingly, founders and CFOs might find it easier to position their companies for success as the ecosystem continues to evolve.

As we navigate these changes, it’s clear that the most successful startups will be those that can align with emerging investor priorities, demonstrate clear value propositions, and build sustainable, impactful businesses – whilst still satisfying the normal VC growth requirements. The challenge for founders and CFOs is to balance short-term opportunities with long-term viability – this is a difficult needle to thread, especially in the current environment where rounds are taking longer to close and runways are needing to be stretched constantly.

As always, would love to hear what youโ€™re seeing out in the market yourselves, just reply to this email and let me know your thoughts.

Sources: Chambers and Partners, Carta, Insider

Gif by metofficeofficial on Giphy

As always, my office hours are open, if youโ€™d like to chat about this or anything else, just grab some time ๐Ÿ˜Š.

I hope you found Off Balance #43 useful. As always, Iโ€™d love to get your feedback and understand the sort of topics you would love to hear about.

Just hit reply to this mail or drop me a line at hello@emergeone.co.uk and let me know ๐Ÿ˜Š

๐Ÿš€And thatโ€™s a wrap for this edition of Off Balance – Iโ€™d appreciate your feedback so just reply to this email if youโ€™ve got something youโ€™d like to say.

๐Ÿ“จ And if you think someone else might love this, please forward it on to them,

๐ŸŽง Finally, if youโ€™re a fan of the Nothing Ventured podcast, please donโ€™t forget to like, rate and subscribe wherever you get your pods – it really helps us spread the word.

Thatโ€™s it from me so until next timeโ€ฆ

Stay liquid ๐Ÿ™‚

Aarish

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