Early-stage companies score 33% compound annual growth rate – compared to 5% for London Stock Exchange main market companies.
It’s widely known that investing in early-stage businesses is very high risk. While online investment platforms offering individual investors the chance to back the latest startup have been gaining speed these past few years, not enough time had elapsed to generate an idea of what such investments could be worth. Until now.
Last week at the event An evening with Jim Mellon we released our latest industry-defining investment report, Rise of the growth hunters, which collated investment data from the past five years as well as investor sentiments in the UK. We commissioned two agencies to source the data for the report: Beauhurst, an independent research firm, and FTI, a global consultancy firm.
Beauhurst analysed the five-year change in valuation of a wide portfolio of 578 early-stage UK companies that received equity investment via seed or venture capital in 2011. The results are startling.
In 2011 the cohort of 578 companies was valued at £1.8bn, with an average valuation of £3m. (The individual valuations were actually very wide ranging, the lowest being £18,000 and the highest, £138m.)
By September 2016, the portfolio value had risen to £7.98bn.
This means an investment of £10,000 in early-stage companies in 2011 would now be worth about £45,000.
Performance of the early-stage cohort 2011–16
This 2011–16 data puts the compound annual growth rate (CAGR) for early-stage companies at 33% – a notable feat given that, for the same period, companies listed on the London Stock Exchange’s main market saw CAGR of about 5%. The AIM index, which lists for smaller, faster growing companies, saw a similar CAGR over that period.
Among the early-stage cohort, technology was the best-performing sector, demonstrating a CAGR of 34%.
Approximately 10% of the companies in the cohort have exited since receiving equity investment in 2011 at the seed or venture stage. In 2011 the total value of this segment was £208m; now it is worth £2bn in 2011–16, representing a CAGR of 54%.
We calculate that £2.01bn of the fair value of the entire cohort in 2016 is accounted for by ‘exited’ companies, meaning that the value of those companies is either realised or realisable to the people who made the original investment.
Further findings as well as the methodology used for obtaining these results may be found in Rise of the growth hunters, the complete PDF of which is available free to download here. We hope you find it both insightful and, in this uncertain economic climate, inspiring. And remember: we’d love to hear what you think.