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Signatures On Shareholders Agreements And Term Sheets
Data Apr 20, 2020 6 min read

SeedLegals data reveals coronavirus effect on UK startup funding rounds

Hugo Cheyne
Hugo Cheyne

Since the coronavirus outbreak there’s been a lot of talk about investors pulling out of funding rounds, investors calling to say they’re halving the valuation, and funding rounds falling apart. So, what really is happening?

More UK funding rounds take place on SeedLegals than anywhere else, giving us a unique insight into funding round patterns.

Most funding round statistics make use of Companies House data to provide insight into rounds that have already closed and been filed with Companies House, but only SeedLegals is able to provide not just a leading indicator of rounds in progress, but also look at patterns of investors being added and removed to rounds in the months or weeks leading up to the round closing. Or not closing.

Our dataset is based on rounds done on SeedLegals. There are of course a lot more Angel and Seed rounds than Series A rounds, and our dataset reflects that, being primarily angel / seed rounds that have multiple angel and/or early stage fund investors. That’s important, because if there are a dozen investors in a round and 3 pull out, the round can proceed without them, whereas if there’s one VC in the round and they pull out, that’s it.

So, on to our findings:

More funding rounds are closing, fast

More companies than ever closed investments (including SeedFAST advance subscription agreements, funding rounds and Instant Investment top-ups) on SeedLegals in March:

  • 164 companies closed investments in the 30 days to April 5,
  • 103 in the last 15 days of that alone.

That’s a big 40% increase on our February numbers – much more than the 15% increase we witnessed between the two periods last year.

Clearly there are two events which came together to drive this increase:

  • As always at the end of the tax year, there’s a rush for founders and investors wanting to close rounds before the April 5 tax year to get investors their SEIS/ EIS relief in this tax year.
  • Coronavirus has made getting money in a priority. Our Instant Investment / rolling close feature makes it easy for companies to close a round now and top up later. Founders are leveraging that to close committed investors ASAP, then top up later as they find additional investors.

Companies are raising less now, planning to top up later

As a result of getting money in the bank fast and topping up later, the amount raised per round is decreasing. In the 30 days to April 5, rounds on SeedLegals have closed at a median £160k raised compared to a median of £250k previously, and with fewer rounds above £1m.

Valuations remain the same

We’ve seen reports of valuations halving – but that’s not supported by our data, where we saw the £1.7m median valuation remain unchanged. That’s good news for startups, at least at angel/seed round stage.

Sector by Sector analysis

Across the 20 sectors into which we categorise companies on SeedLegals, there is little discernible change in sector by sector investment in the last month.

Our data shows no big influx of MedTech, EdTech and CleanTech startups receiving funding – which is understandable given the time lag on funding rounds. However it is also noticeable however that no sector has fallen off a cliff. Investors know that a startup is an investment in the future and are less likely to panic than many expect.

Sector By Sector Investment On Seedlegals V2

Existing Shareholders are not having to step in

We’ve seen reports that new investors are pulling out, leaving existing investors having to step in to keep their portfolio companies afloat. Our data doesn’t support that hypothesis, we see no significant increase in existing vs. new investors in a round.

Percentage Of Investment From Pre Existing Shareholders

Investment from existing investors is hovering around historic averages of 25%. As has been the case historically, bridging investments (SeedFAST/ASAs and convertible notes) are more likely to come from existing investors (25% of investments), as are Instant Investment top-ups (35%), compared to funding rounds, where an average of 10% of investment comes from existing shareholders.

Document signature rates show near-term trends

Using SeedLegals data, we see can look under the hood to the lifecycle of a funding round:

  1. Term Sheet issued
  2. Term Sheet signatures come in
  3. Shareholders Agreement signatures come in
  4. Round closed

That then maps to these timings:

  • Companies closing funding rounds now were probably pitching to investors in January and February, and so amounts closed today are representative of how easy it was to raise money then.
  • Companies getting Shareholders Agreements signed now are likely to be at the heart of their negotiations.
  • Companies getting Term Sheets signed now are in the middle of pitching to investors, and the number of signatures on these indicates how the fundraising landscape is looking right now.

As of the 24th March when we first looked, the number of investors who had signed Shareholders Agreements in the previous 15 days was down 21% on the average of the previous 2 months (sample size of over 1500 signatures), and the number of signatures on Term Sheets down 28%. These numbers were in line with the broader narrative we were hearing, and the numbers themselves were in fact published in various media outlets.

However as of two weeks later (8th April) we have seen a resurgence in Term Sheet signatures back to the same level as at the start of February, and Shareholders Agreements to 20% above historical averages. Shareholders Agreement signatures going up is perhaps unsurprising as the last few rounds were squeezed into the tax year – however Term Sheets returning to historical averages is a particularly encouraging indicator of early stage investors not disappearing as much as many have feared.

Signatures On Shareholders Agreements And Term Sheets

Looking ahead

So far we’ve been looking at funding rounds that have been started… What it we could look into the future, to funding rounds that haven’t even been started yet… and, amazingly, we can do that.

Companies looking to raise SEIS/EIS funds from UK angel investors and SEIS/EIS funds typically apply for SEIS/EIS Advance Assurance a couple of months before they start their round. It takes typically 2-5 weeks for HMRC to approve these applications, so companies usually get these in place before starting their rounds.

Around 1 in 8 of all SEIS/EIS applications in the UK are now done through SeedLegals so we have excellent visibility on these.

And here the news is not good – the rate of new SEIS/EIS Advance Assurance applications has halved… and if that’s a leading indicator of funding rounds two months from now, that’s definitely not a good sign.

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In summary

The good news is that for companies doing their funding rounds on SeedLegals, the vast majority were able to close their rounds, albeit raising less, using the SeedLegals platform’s rolling close feature to close with the investment that they could, and top up the rest later.

Despite what you may have read, it seems that investors aren’t yet abandoning startups in droves.

The less good news is that if SEIS/EIS Advance Assurance applications are an indicator of things to come, in a couple of months we can see a 50% reduction in new funding rounds.

Our advice for companies looking to raise

If you’re looking to raise, here’s our advice:

  • Close smaller rounds fast, rather than waiting for your dream set of investors to fill out a larger round.
  • Use SeedFASTs to raise from individual investors, to convert at a valuation to be determined later, in your next round.
  • Contact your existing investors to top up their investments, they have skin in the game and want to see the business survive.
  • Update your business plan to show the company spending less and surviving longer on the cash you raise (and on your existing cash, of course).

Use Furlough Leave to reduce your burn rate and extend your runway

And, if you’re unable to raise, Furlough Leave helps you cut your burn rate to stay alive until you can.

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