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UK software fundraising heats up as venture capital fuels pandemic boom

Venture capital funds have poured money into U.K. software companies this year, spurred by the pandemic upending working habits and institutional investors' greater willingness to put money into the sector.

Funds have invested at least £313.3 million into U.K. software developers in 2021, versus £273.3 million for the whole of 2020, according to S&P Global Market Intelligence data.

The biggest deal by far for a U.K. software company this year to date was for e-commerce company The Ltd., which raised £1.6 billion in May from SB Management Ltd., a wholly owned subsidiary of SoftBank Corp. The second biggest was tech investor KLAR Partners Ltd.'s £600 million funding round in March.

The funding boom comes as coronavirus restrictions supercharge the growth of remote work, online shopping and the use of technology in previously laggard sectors, such as construction. Venture capitalists also have more money to work with as the COVID-19 tech boom and continued low interest rates are boosting institutional investors' interest in nascent developers.

"Clearly software and tech companies have gained an attractiveness as a result of COVID and as a result of rethinking the way we work, the way we live and the way we engage in the digital world," said Raphael Mukomilow, partner and head of growth at early-stage technology investment firm Picus Capital.

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Ably Real-Time Ltd. is one example of a U.K. software company that benefited from COVID-19-driven growth. Ably, which provides software that powers real-time notifications on apps, found itself unexpectedly benefiting from a surge in businesses spending on digitalization during pandemic-related lockdowns. "They found themselves in rude health," said Matt Bradley, partner and CFO at early-stage venture fund Forward Partners. In late June, Ably raised £50.6 million in a series B funding round led by U.S. venture capital firm Insight, alongside Forward Partners.

Capital invested in U.K. series B and C reached an all-time high in 2020, with €1.19 billion invested in series B rounds and €870 million in series C rounds, according to the latest data compiled by technology investment bank Silverpeak. Both figures are well above the amount of capital invested in 2019.

Importantly, growth in the later rounds has not been at the expense of earlier-stage fundraising, Bradley said. "This isn’t like a whoopee cushion where money moves from one bit of the market to the other. This is very much a rising tide."

The gains have been driven in part by the introduction of investors with institutional heft. "In this super low interest rate environment, more and more institutional money comes to play in slightly riskier asset classes, which describes a lot of the Series B and C mega rounds that you see going on, of which there have been … an increasing amount," said Picus Capital's Mukomilow.

Even a small change in institutional fund managers' allocations can make a big difference. Where once these types of investors may have historically allocated 5% or 10% of their fund into higher-risk asset classes such as venture capital, they may now be considering moving closer to 20%, according to Nick Kingsbury, a partner at Amadeus Capital. This has a big knock-on effect on early-stage companies going through fundraising rounds, he said.

"The adjustment of that little percentage in your spreadsheet as a fund manager then doubles the amount of capital going into this area," Kingsbury said.

Corporates are getting involved in these investments, too, Kingsbury said. "We have a number of corporates invested in our own funds." Corporates can struggle to attain the deep sector knowledge required to make successful early-stage investments, meaning they instead turn to a venture capital fund with expertise and a wide network in that space, Kingsbury said.

This influx of cash from institutional investors has had a disproportionate effect on the later rounds in part because there is less risk involved in those rounds than earlier funding stages, but also because traditional investors do not necessarily have the capabilities to spot promising investments at the early stages.

"To deploy the same amount of money in early stages, you would need to look at a lot of different companies, a lot of different investments and have a very … granular approach to due diligence," Mukomilow said.

Venture capital's increasing attractiveness for a range of investors owes a lot to tech and software, Mukomilow said. "This has been the most attractive segment, definitely. COVID has obviously been an accelerator."