The era of growth at all costs is over. Bear markets require patient capital

Patient Capital

This year has been defined by economic turbulence. With rising inflation, interest rates and energy costs, the outlook appears to be at best uncertain. The public market has been suffering, with tech stocks in particular experiencing significant and consistent valuation drops since the start of the year.

The private market, thus far, seems to be holding up. But how long this will continue is one of the key questions exercising the minds of investors across the UK and the world.

On the face of it, private capital has enjoyed a strong 2022. Pitchbook data reveals company valuations in the first half of 2022 are above those of 2021, and both deal activity and investment levels remain at historically high levels. So far, so good.

However, despite the inevitable time lag between the public and private markets, data for Q3 and Q4 will likely give a far better indication of where the venture and growth capital market is heading.

And where it is heading is likely to look rather different than the last decade. Since the financial crisis, one of the defining themes of venture capital has been ever-increasing round sizes. Mega-rounds – where companies raised $100m or more – became commonplace. There has been a ‘growth at all costs’ mindset: businesses raise more money, leading to rapid growth, leading to more money being raised and so on.

As the economic cycle turns and equity funding becomes more scare, this approach needs to evolve. We are already seeing some of the investors that contributed to the rise of the mega-rounds reduce their activity. Exit activity has dropped, and valuation multiples for those VC-backed companies that have managed to list has fallen dramatically.

VCs go back to basics with patient capital

There are potentially some very challenging times ahead. Some companies will struggle to raise further capital. Many could well make cutbacks, resulting in layoffs. A not insignificant number will sadly fold. Yet for all those that fail, many will succeed, emerging more resilient and well-positioned for growth when the economy rebounds.

Investors will need to adapt to changing market conditions, and it is within this context that the role of patient capital becomes more pronounced. It will be less about scaling rapidly, and more about prioritising profitability and sustainable growth.

It is absolutely critical for the UK’s long-term growth that we continue to invest in and support innovative businesses. Nowhere will this be more true than in the life sciences and deeptech sectors, where companies often struggle to attract capital as these are sectors which typically have a longer lead time to product commercialisation.

Indeed, this funding challenge is precisely the reason why British Patient Capital launched two new programmes last year: Future Fund: Breakthrough, aimed at UK R&D intensive companies, and the Life Sciences Investment Programme, focused on life sciences venture growth funds.

In a very real sense, a renewed emphasis on profitability and sustainable growth is simply venture capital going back to its roots. The ability and willingness to invest over the long term gets to the very core of the venture and growth capital model. Indeed, some of the most successful businesses in history have started during or near a recession, including the likes of Microsoft, Google and Meta.

Closer to home, the success of the UK startup scene is one of the great stories of the last decade. It is now the most vibrant, innovative, well-funded innovation ecosystem outside of Silicon Valley.

‘Bread and butter of the ecosystem’

Our underlying portfolio at British Patients Capital is full of fantastic businesses that have been funded over the long term by some of the country’s leading VC firms. Not all of these companies are going to be household names.

A lot of them will be leaders in what some might say are ‘unglamorous’ sectors like enterprise software or big data, but they have become the bread and butter of the ecosystem and are prime examples of what can be achieved with a patient capital approach.

This is not to say there are not potentially hard times ahead. The macroeconomic conditions suggest there almost certainly are, and we will likely soon see the impact on the private markets, if we are not doing so already. Equity funding will become increasingly scarce for young businesses.

But now is not the moment to lose faith in these kinds of companies. In the face of a potential bear market, investors still need to focus on the long-term opportunity and be patient rather than tilt capital away from companies that could provide a solid platform for future returns. That is exactly what we at British Patient Capital are continuing to do.


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