The majority of UK institutional investors who provide financial backing to VCs plan to increase their capital allocations in 2023, sending a signal to startups that there will still be sufficient funding despite market turbulence that has rocked the tech industry.
This year UK tech investment plummeted 22% as challenging economic headwinds brought a period of cheap capital and soaring valuations to an end.
Overall UK tech investment fell to $27.9bn in 2022, down from the record $36bn raised last year, according to Atomico’s State of European Tech 2022 report.
This has sparked concerns that startups will face a challenging funding environment next year.
However, a survey of 250 UK-based investment decision-makers at limited partners, family offices and asset managers – the institutions that supply capital to venture capitalists – has painted a different picture.
Some 56% of respondents said they plan to increase their VC allocation in 2023, with one in five planning to increase their capital deployments “significantly”.
The survey, conducted by European VC fund Digital Horizon, also found that 62% of UK-based investors plan to increase their average VC cheque size next year.
Combined with the estimated $84bn that’s waiting to be deployed by venture and growth funds across Europe, the research suggests that there will still be plenty of cash available for startups to fund growth.
VCs look to early-stage startups in 2023
This year notable companies, such as Swedish fintech Klarna, have been forced to slash valuations in downrounds when raising new capital.
However, the sentiment among VCs has been that there are still good value investments to be made, particularly at the earlier stage.
A consensus among investors has been emerging that while there is still plenty of dry powder ready to be deployed, due diligence will become more of a priority and the “fear of missing out” that gripped some VCs during the 2021 funding boom.
In a sign that investors remain wary of inflated valuations at later-stage companies, 54% said that their portfolio would be mostly early-stage startups.
This idea is reinforced by the 58% of investors said that changes in startup valuations have affected their investment strategies.
Just 18% said their portfolio would be multi-stage.
Manchester-based early-stage VC Praetura Ventures told UKTN that its investment approach remains “unchanged” for 2023.
“Everyone knows the investment landscape suffered an anomaly in 2021, but we always planned to increase our total investments in 2023 against 2022,” said Dave Foreman, managing director of Praetura Ventures.
Biggest factors impacting VC investment this year
Rising interest rates and soaring inflation were cited by 61% of investors as having an impact on investment strategies – the highest-ranking factor.
Entrepreneurs have bemoaned the chaos caused by Liz Truss’s controversial mini-budget. This year’s revolving door in Downing Street has added to political instability, causing 56% of investors to cite it as a macro event that affected their investment decisions.
“Against the backdrop of tumbling tech valuations, political upheaval, and an impending recession, it’s incredibly encouraging to see that institutional investors retain a strong appetite for venture capital,” said Alan Vaksman, founder and managing partner at Digital Horizon.
“As we enter 2023, there is a clear desire among LPs to increase VC allocations and a demonstrated preference for early-stage investments, with the majority stating they envisage their portfolio being mostly early-stage next year. Whilst the UK has faced an exceptionally challenging year, economically and politically, there’s a strong sense that optimism in the region remains.”
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