๐๐พ Hi friends!
Weโre coming up to the end of this season of Nothing Ventured, this week we have Nicola Sinclair, Founding Partner at Twin Track Ventures on the pod, but check out who weโre bringing on for the last episode of the season in a few weeks ๐คฏ๐๐พ
None other than Piers Linney – ex Dragon on the BBCs Dragons’ Den but more importantly massive advocate for SMEs, tech, startups and good governance from the government all the way down.
Be sure to subscribe so you donโt miss out on this absolute banger of an episode ๐ช๐พ
Iโm taking my annual trip down to Italy later this week, keep your fingers crossed that the olโ Tesla doesnโt conk out on me – I already had to replace 2 of the tyres this last week which wasnโt a particularly pleasant thing to have had to do.
But for now, letโs settle in for another dive into the world of venture capital โจ
Iโm well underway writing about all the things Iโve 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 ๐.
Now letโs get down to businessโฆ
In this weeks Off Balance:
๐๏ธ Nicola Sinclair, Founder of Twin Track Ventures on Nothing Ventured
๐ HSBC Innovation Banking’s 2024 Venture Capital Term Sheet Guide: Key Insights for Founders and Investors
๐๐๐ซ๐ ๐ฌ๐ ๐ง๐๐๐๐๐๐ ๐ฅ๐๐๐ ๐๐ง๐ค๐ฃ๐?
In the latest episode of Nothing Ventured, I sat down with Nicola Sinclair – Founder and General Partner of Twin Track Ventures, a dual use venture capital firm based in London backing founders raising pre-seed and seed rounds with a focus on teams building deeptech solutions for critical challenges.
Prior to Twin Track, Nicola was fund manager of the Air Innovation Fund having spent close to two decades as an officer in the Royal Air Force.
My top takes:
โก๏ธ ๐ง๐ต๐ฒ ๐๐๐ผ๐น๐๐๐ถ๐ผ๐ป ๐ผ๐ณ ๐ ๐ถ๐น๐ถ๐๐ฎ๐ฟ๐ ๐๐ป๐ป๐ผ๐๐ฎ๐๐ถ๐ผ๐ป
Nicola shared her firsthand experience of the transformation in military technology from the dark ages of defense services to the present day. She highlighted the shift from outdated communication methods, like pen and paper, to the integration of advanced technologies like drones and AI in defense operations. This evolution underscores the importance of embracing innovation to enhance military capabilities and efficiency.
โก๏ธ ๐๐๐ฎ๐น-๐จ๐๐ฒ ๐ง๐ฒ๐ฐ๐ต๐ป๐ผ๐น๐ผ๐ด๐ถ๐ฒ๐
We explored the concept of dual-use technologies, which are commercial technologies with applications in both civilian and defense sectors. Nicola noted the significance of investing in technologies that not only benefit national security but also have broader societal impacts. By focusing on dual-use technologies, businesses can drive innovation while addressing critical challenges in various industries.
โก๏ธ ๐๐ป๐๐ฒ๐ฟ๐ป๐ฎ๐๐ถ๐ผ๐ป๐ฎ๐น ๐๐ผ๐น๐น๐ฎ๐ฏ๐ผ๐ฟ๐ฎ๐๐ถ๐ผ๐ป ๐ฎ๐ป๐ฑ ๐ฅ๐ฒ๐ด๐๐น๐ฎ๐๐ผ๐ฟ๐ ๐๐บ๐ฝ๐ฎ๐ฐ๐
The discussion also touched upon the ITAR exemptions and the implications for businesses in the UK and Europe. With the AUKUS pact and the focus on emerging technologies, there is a growing need for streamlined regulations to facilitate collaboration between nations and enhance technological advancements in defense. This regulatory shift is crucial for companies looking to engage with the US Department of Defense and expand their market reach.
We also talked about:
๐ป Living through the dark ages of the defence when 8 people would use one laptop.
๐ซ What do you do when you get sent a drone with a gun on it?
๐จ๏ธ Printing aircraft parts at the point of use to bring time to repair down by weeks.
๐ค Countries have different priorities, how to leverage interoperability whilst maintaining a point of difference.
๐ฌ The role of science within defence.
๐ How to reconnect disconnected communities.
๐ต๐ฟโโ๏ธ How there arenโt many people who have worn a uniform but also understand how to fund innovation.
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Off Balance
HSBC Innovation Banking has released its second annual Venture Capital Term Sheet Guide, offering valuable insights into the current state of VC term sheets and market trends. This report, based on an analysis of 426 final and completed term sheets from 2023, is a comprehensive guide to the complex world of VC equity terms for founders and provides a benchmark for investors.
And I read it so you wouldnโt have to ๐ย
HSBC Innovation Banking’s 2024 Venture Capital Term Sheet Guide: Key Insights for Founders and Investors
Market Context and Investment Trends
Despite the challenging economic climate, European VC investment activity stabilised during 2023. While there was a decline in overall investment value compared to 2022, 2023 still emerged as the third-largest European VC investment year on record.
Some initial observations:
Investment volume declined less than investment value (25% vs 38% respectively), indicating a shift towards smaller, earlier-stage transactions.
The second half of 2023 saw an 18% increase in investment value compared to the first half, suggesting a gradual recovery in investor confidence.
ClimateTech and AI investments gained significant traction, increasing their combined share of total term sheets from ~9% in 2022 to ~20% in 2023. This trend was also reflected in the broader market, with these sectors representing ~40% of total European VC investment in 2023.
There was a notable uptick in seed-stage investments (<ยฃ2m) between 2021-2023, demonstrating the resilience of early-stage funding – in sharp contrast to later stage fundraises.
Later-stage UK venture-backed businesses continued to seek funding from international investors, particularly from the US and Europe, as they focused on larger funding sizes and scaling opportunities.
Term Sheet Analysis – Key Findings
The report’s analysis of 426 term sheets, representing an aggregate investment value of ยฃ4.5 billion, revealed a number of important trends:
Valuation Shift, Not Structural Change: Surprisingly, despite market uncertainties, term sheets did not become significantly more investor-friendly in 2023. Key clauses remained broadly in line with 2022 standards. It will be interesting to see how this trend continues in 2024, anecdotally, they certainly seem to have hardened with investors looking for both better economics as well as more control.
Liquidation Preference: A 1x non-participating liquidation preference continues to be the standard preference share type, which is considered the most founder-friendly option and almost guaranteed for any company taking on VC funding.
Board Representation: Control and oversight remain crucial, with 79% of term sheets including an investor board appointment (86% if including observer-only seats). This delicate balance between investor control and founder autonomy is something that, in 2024, will continue to skew towards investors where, again anecdotally, we are seeing investors wanting to influence the direction of their portfolio companies in ways that would not have been considered normal a few years ago.
Company Warranties: The survey confirmed an increasing market norm of company-only warranties, present in ~80% of term sheets reviewed. This aligns with the new BVCA model form documents.
Founder Warranties: There was a significant decrease in founder warranties, declining by 25 percentage points to 44% of term sheets in 2023.
Anti-Dilution: These terms saw a decrease across the total survey, primarily due to the increased proportion of seed-stage investments, where such terms are typically less prevalent. But, again, this is one that founders should be looking out for in 2024 as they can have significant impact on the cap table in future rounds.
Investor Landscape and Geographic Trends
The report provides insights into the geographic distribution of investors and companies:
Company Headquarters: 95% of the companies in the surveyed term sheets were headquartered in the UK, with the remaining 5% in Europe. This is on trend with the UKs prominence in the venture ecosystem outside of the US and China.
Lead Investor Location: The mix was more diverse in terms of where investors were based, with 58% from the UK, 22% from Europe, 15% from the US, and 5% from other regions (Middle East, Africa, and Asia).
Seed Investment: This stage was dominated by UK domestic investors.
Later-Stage Funding: UK venture-backed businesses continued to seek funding from international investors, particularly for larger rounds and scaling opportunities. This is something that we have discussed a great deal on Nothing Ventured, the paucity of later stage capital in Europe โforcesโ founders to look overseas – typically the USA – when trying to secure rounds post Series B.
Venture Debt Insights
While the primary focus of the report is on equity term sheets, it also touches on venture debt, recognising its growing importance as founders seek to minimise dilution while extending cash runways. The guide includes a summary of key structural and economic terms of venture debt agreements based on market experience.
2024 Outlook
The report offers several predictions for the VC landscape in 2024:
Gradual Recovery: European VC investment levels are expected to steadily recover as investors return to new deal activity.
Early-Stage Momentum: Continued strong interest in early-stage investments is anticipated.
Late-Stage Market Bifurcation: High-performing companies may see climbing valuations based on public market reference points, while others may struggle with recaps and down rounds.
Increased Cross-Border Investment: More US VC investors are expected to invest in UK and European companies.
US Market Focus: Increased focus from UK and European companies on scaling into the US market.
Conclusion
The stability in term sheet structures, despite market uncertainties, suggests a maturing VC ecosystem that values founder-friendly terms. However, the shift towards earlier-stage investments and the growing importance of sectors like ClimateTech and AI indicate evolving priorities in the VC world.
As the VC landscape continues to change in 2024, this guide serves as an useful resource for understanding the complexities of fundraising and investment.
But as the report is โbackwards lookingโ we will only understand the true nature of the fundraising landscape in 2024 well into the next year.
What me and the CFOs in my team are seeing in the market suggests that not only has fundraising continued to be difficult for founders especially post seed, but also that the valuation and terms on offer show a significant shift towards investors looking to protect – and exert their protection over – their investments. Whilst this may seem an obvious choice, one of the realities of venture investing has been to incentivise and empower founders to go out and build big.
The expectation seems to be in 2024 that they should go out and build big, but with much tighter scruitiny from their investors at the same time.
Gif by ifc on Giphy
As always, my office hours are open, if youโd like to chat about this or anything else, just grab some time ๐.
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Thatโs it from me so until next timeโฆ
Stay liquid ๐
Aarish
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