Despite volatile start to 2022 UK scaleups attracting strong volumes of VC investment

Fast-growth businesses in the UK continue to attract huge volumes of Venture Capital (VC) investment, despite the uncertain geopolitical and macroeconomic environment, according to new figures.

UK scaleups saw 745 deals completed in the first three months of this year, raising over £6.9 billion ($9 billion), including the $1 billion megadeal for Checkout.com, according to KPMG’s Global Venture Pulse survey.

The report found that a major convergence of factors has helped to continue to energise the UK’s VC market, including a rise in corporate-backed VC, private equity funds looking for better returns, and increasing fundraising focused on earlier stage companies in order to achieve higher returns.

Whilst the bulk of VC investment continues to flow into London (£5.2/$6.8 billion), the rest of the UK saw buoyant levels of VC investment, with over £1.7 billion ($2.2 billion) invested across 334 deals, according to the data compiled by PitchBook.  VC investment in UK innovators based outside of London has more than doubled since the pandemic (+59% from £3.3 billion invested in 2019). Standout deals completed in the first quarter of the year included the £142 million raise by Nottingham-based Oakbrook Finance, the £94million Series C raise by Edinburgh games developer Everywhere and the £51 million Series B funding for Cambridge-based biotech Microbiotica.

CVC-affiliated investment into UK scaleup businesses accelerated in the opening quarter of this year, accounting for half of the deals closed in Q122 (£3.4/$4.5billion from 133 deals).  With disruptive technology, digitisation and innovation continuing to dominate boardroom priorities following the pandemic, CVC-affiliated investment in fast-growth businesses is expected to grow throughout 2022.

Warren Middleton, Lead Partner for KPMG’s Emerging Giant Centre of Excellence commented: “Despite concerns around the uncertainty in the economy, and with interest rates rising, the UK continues to demonstrate resilience and adaptability in attracting VC investment and is the jewel in the crown for innovation in Europe.  Fintech, B2B-focused services and healthtech remain top areas of investment, while interest in cybersecurity and defence-focused solutions grew considerably in the opening months of the year.

“Fintech remains a very hot area of investment as the payments space has continued to grow. Buy-now-pay-later (BNPL) has become very attractive in the eyes of investors – not only direct BNPL companies but also other businesses diversifying into offering BNPL options. Recently, the FCA announced its intent to regulate the space in the near future, which could drive consolidation in the space moving forward.

“The power of our disruptive businesses to deliver impact on a global scale is more important than it’s ever been, and our UK innovators are a real success story. The diversity of the UK scaleup ecosystem and our ability to nurture growing networks in cities up and down the country is playing an increasing role in our success in attracting global VC investment.

“It’s great to see large investments being made in key hubs such as the Midlands, North and Scotland in addition to the powerhouse of London. Continuing to nurture fast-growth businesses is an important part of our levelling-up agenda to help regions develop their own infrastructure to support growth, investment and employment.”

Hot sectors for 2022 as IPO activity slows

The Ukraine crisis has driven a significant amount of attention to defence-related technologies, particularly in the wake of many European countries announcing increases in their defence spending. This could drive investment across a broad range of areas such as drone technologies, or anti-missile defence technologies.  Whilst it is expected the majority of investments will likely be into government entities, there could be increased investment in adjacent technologies such as communications.

Some of the largest funding rounds seen in Q1’22 were seen in healthtech, energy, fintech, e-commerce and cybersecurity, which is likely to continue throughout the rest of this year.

In Q2’22 VC investors will likely also be keeping a close watch on capital markets as the level of volatility continues.  With the IPO window closing, companies could reconsider their exit plans and strategies. UK exit activity in Q1’22 was down significantly on every quarter of 2021. £2.8 billion ($3.6 billion) was raised through 56 exits in the first quarter of 2022, reflecting a huge decline on the £11.9 billion ($15.5 billion) across 68 deals in the same quarter in 2021.

Given the significant level of global uncertainty driven by a number of different factors, it is difficult to predict how the VC market will respond over the long term, the report found. The significant amount of dry powder available in the market, however, signals that VC investment is expected to remain relatively steady heading into Q2’22.

Jonathan Boyers, UK Head of Corporate Finance and Vice-Chair at KPMG observed: “Given some of the geopolitical and macroeconomic uncertainties at the moment, we are seeing deal speed starting to slow as VC investors conduct more due diligence related to potential deals. We are already starting to see IPO levels decline, and we would expect activity to remain subdued in Q2’22 with the ongoing volatility in the capital markets. The closure of the IPO window could drive interest back to traditional M&A and the downward pressure on valuations could mean companies taking a wait-and-see approach with the hope that valuations bounce back.

“With uncertainty in economies across the globe, VC investors will likely also renew their focus on late-stage deals to de-risk their portfolio.VC investors – particularly alternative investors like family offices that have entered the market more recently, will be hesitant to invest in early-stage deals, which could create challenges for businesses looking to attract seed investments. Access to funding is the foundation for growth, and if VC investors do choose to dial back early-stage activity, it could impact the future attractiveness of the UK if our next wave of unicorns fail to attract the capital they need to grow now.”