Venture Capital (VC) investment in UK scaleup businesses reached record levels in the first three months of the year, as investors looked to deploy a significant amount of dry powder in late-stage deals, according to new research.
Venture Pulse – a quarterly report published by KPMG Private Enterprise, recorded more than £5.1billion of VC investment into fast-growth UK businesses in Q1 21, up 25% on the previous high of £3.9billion raised in Q4 20. Despite the challenging economic conditions, fast-growth businesses in the UK attracted nearly double the £2.7bn raised in the same quarter last year.
Whilst Germany, the Nordics, Spain and Israel also recorded new investment highs, the UK attracted the lion’s share of large deals, accounting for seven of the top 10 financings taking place in Europe in the opening quarter of the year. A total of £15.1billion was raised across Europe in the first quarter of the year, with the UK accounting for over a third.
Commenting on the findings, Bina Mehta, Chair of KPMG UK and head of the KPMG’s Emerging Giants practice said: “The UK continues to be the powerhouse of Europe when it comes to attracting investment in fast-growth innovative companies. Whilst the number of deals taking place in the first quarter of the year was down by 23% on Q4 20, it was our ability to grow and nurture large innovative businesses that attracted VC investors from across the globe. Average deal size is larger, continuing a trend in later-stage investment.
“The fact that the amount of VC investment coming into the UK from overseas increased in this post-Brexit environment is encouraging, as was the continued strength of Corporate VC investment. The UK continues to be an attractive investment destination, particularly for US and Asian VC investors who have a strong appetite for our fast growth, innovative businesses.
“There is a huge amount of capital still available for businesses with strong management teams and proven growth plans. Following the global pandemic, the global VC market moved at an incredible pace, with £92bn invested in innovative companies globally. Continuing to focus on enhancing our competitiveness post Brexit is key, but supporting our disruptors, particularly early-stage businesses will be crucial in order to continue to develop our ecosystem and maintain our global position as leaders in innovation. “
The fintech sector powers mega deals
Interest and valuations for fintech businesses continued to accelerate in Q1 21, with UK fintechs raising £1.9billion in VC investment.
Three UK based fintechs raised large rounds, including LendInvest (£500 million), Checkout.com (£325 million), and Rapyd (£217 million). With its £11billion valuation, Checkout.com became the most valuable fintech company in Europe in January before Klarna’s raise put it at a £22billion valuation. Interest in B2B was also high as corporates looked to leverage fintechs not only to digitise products and enhance their customer experience but to improve their general operations.
VC and CVC investment in Europe is expected to remain robust in Q2 21, with more megadeals and large acquisitions potentially on the horizon. There is continued interest in IPOs and use of special purpose acquisition company (SPAC) mergers, a phenomenon that has been building in the US in recent quarters. With SPACs becoming increasingly popular, it is an area to watch for the UK which has yet to follow suit – especially to maintain our leading global position in the fintech space.
Mehta commented: “The UK will remain strong for fintech given its forward-thinking approach to regulation, UK-wide expertise and pool of talent. With the outcome of equivalence decisions with the EU yet to be decided it’s important that the Financial Services sector continues to be outward-looking, making our markets more efficient, and competitive, including embracing the new digital capital markets and currencies.
“B2B services is a fast-growing area of VC investment both for VC and CVC investors. Growing numbers of FinTechs are focusing on B2B services –offering everything from financial tools for SMEs to solutions focused on enhancing cash flow or managing accounting requirements. Given the number of local and global financial institutions looking to improve their legacy tech and infrastructure, it is likely that there will continue to be significant investments in this space as we go through 2021.”
The sectors to watch
VC investment in service on-demand companies has increased dramatically within the last 12 months, making it a sector to watch in 2021. With the likes of Deliveroo creating a culture for quick takeaway delivery, it’s no surprise consumers now turn their attention to grocery shopping. In the UK, since the beginning of 2021 five new players have emerged on the market – the speedy grocery delivery sector is young but it’s catching the attention of the VC landscape.
Fintech, B2B services, business productivity, and cybersecurity will likely remain attractive to investors, while ESG is expected to continue to gain traction.
Red flags over seed funding
Whilst the median pre-valuation for deals rose for Series C and Series D+ rounds, seed funding by VCs in the UK fell by 40% in the first quarter of the year compared to Q1 20. Although angel investment in UK businesses has increased over the last 12 months, VCs appear to be particularly attracted to later stage, less risk-averse investments.
There are lots of alternative funding to traditional VC for early-stage businesses in the UK, from accelerator programmes to university spin-outs. The Future Fund launched in May 2020 and the British Business Bank confirmed that around £1.2 billion of loans has been approved for more than 1,200 companies. However, approximately a third of the Future Fund investment has gone to seed stage, meaning the remaining went to venture and growth-stage companies – suggesting more needs to be done to support future entrepreneurs.
Mehta added: “As seed-stage activity falls, it diminishes the pipeline for venture and growth-stage deals in the future. Access to finance is huge for startup businesses and the UK has a plentiful supply of small businesses looking to grow.
“The VC market is performing incredibly well right now and there is little sign that the activity will taper off in the near future. There continues to be a significant amount of dry powder in the market – and that money is looking for a home. If there’s any caution, it’s that deals continue to focus primarily on late-stage companies – driving valuations up – while early-stage deals continue to be more difficult to come by. If our smaller startups can’t attract VC investment, we need to ensure we continue to provide other funding streams or risk losing our global reputation as the pipeline for emerging giants falls away.”