Venture capital investors are driving the creation of startups with unicorn status- those valued at over $1 billion- but institutional investors in the UK are failing to take advantage, according to a new report from the British Business Bank.

Analysis from the government-backed lender showed that equity investment into private smaller companies reached £8.8 billion in 2020, a rise of 9 per cent on 2019 levels.

Of the six UK companies to achieve unicorn status in 2019, five were backed by venture capital.

The average deal size is also growing, primarily driven by a small number of very large deals.

Equity deal sizes increased by 3 per cent in 2020 and the number of deals greater than £10m increased from 173 in 2019 to 176 in 2020.

In addition the time taken for some companies to achieve unicorn status went down in 2020, with Beauhurst estimating the average age of all companies gaining unicorn status was 7 years.

The UK currently has 22 unicorns and two of the new entrants to this list are in British Patient Capital’s underlying portfolio of companies: virtual events platform, Hopin, and used vehicle marketplace Cazoo. Hopin gained unicorn status after only one year and Cazoo after two.

Commenting on the report’s findings, Judith Hartley, chief executive of British Patient Capital, said: “ Despite the global pandemic, equity investors continue to find smaller private UK companies highly attractive.

“The report also shows that the longstanding trend of increasing average deal sizes is continuing, particularly for later stage deals.”

On the progress of Hopin and Cazoo, she said: “These companies are obvious outliers to the norm and are a useful reminder that success in venture capital doesn’t come from the average deal or company but from the few exceptions."

However, she explained:“Notwithstanding this, it would be wrong to think that venture capital is all about unicorn creation. While unicorns are an important indicator of success, they are not the sole objective of a fund. Many exceptionally high-impact and successful companies never achieve unicorn status but are nonetheless of high value within a venture capital investor’s overall portfolio."

"Dragons can be just as important as unicorns and that’s why “Dragon chasing’ remains a priority for many venture capitalists. A dragon is a single company in a venture capital fund portfolio that will, on exit, deliver a return at least equal to the value of the fund. These companies are equally as rare and as valuable as unicorns," she added.

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