What a difference a year makes. After reaching a peak of over $200bn in the opening three months of last year, global venture capital (VC) funding fell in each subsequent quarter, according to our latest Venture Pulse report.
From January to March this year, total VC investment globally was well under $60bn. With the level of uncertainty in the global market intensifying — from increasing interest rates to domestic and geopolitical challenges, significant economic concerns, war in Ukraine, and concerns about the stability of the global banking system — no region was immune to the shifting market forces.
After slowing down significantly in Q4 2022, VC investment in the UK remained subdued in the opening quarter of this year, particularly when compared to the same period a year ago. Overall, UK businesses completed 402 deals in the quarter, with around £2.9bn flowing into our fast-growth businesses.
London-based businesses continued to attract the lion’s share of VC investment both by value and volume, and the UK remained the jewel in Europe’s crown for attracting VC investment, securing five out of the top 10 largest deals completed in Europe over the quarter.
A $602m raise by fintech player Abound (consumer finance) was the UK’s largest deal of in the first quarter, followed by a $160m raise by B2B-focused fintech the Bank of London, a $149m raise by EV automotive company One Moto, and a $140m raise by autonomous vehicle software firm Oxbotica. Carmoola rounded out the largest of deals with a $126m series A deal.
Pandemic shift
As a result of the pandemic, 2021 and early 2022 saw huge appetite for VC investment into UK innovation and fast-growth businesses, and it really was an outlier period.
We are now starting to see VC investment coming back to more normal levels, albeit compounded by a challenging economic environment. It is more of an adjustment than perhaps we would have seen if this had happened in isolation from the economic environment. The dynamic of the two factors together is making the disparity even bigger, but investor sentiment in the UK is starting to turn slightly with some cautious positivity that the worst of the market turbulence might be over.
Both startups and corporates continued to batten down the hatches in the first quarter of this year, prioritising cost-cutting and operational efficiencies to reduce their spend. VC investors also tightened their purse strings, enhancing their scrutiny of potential deals quite significantly. And, with no end in sight to the uncertainty in the market, the second quarter of 2023 is expected to be another tough period for VC funding — although there is some hope for a more positive second half of the year.
What themes can you expect to see in Q2 2023?
· Strong interest in alternative energy and EV solutions
· Continued focus on cost-cutting and finding efficiencies
· The relative resilience of early-stage deals
· A growing focus on generative AI
Entrepreneurship typically flourishes in challenging economic times and, while these market conditions remain difficult, there are still opportunities out there for good-quality businesses with solid growth plans and strong management teams.
Against a challenging economic and geopolitical backdrop, quality businesses with high growth potential are still getting funded, but going to market with confidence and a robust investment narrative is crucial.
If you are a game-changing tech business looking to share your story on the world stage, don’t forget to apply for the KPMG Private Enterprise Tech Innovator in the UK competition.
Warren Middleton is lead partner for KPMG’s Emerging Giant Centre of Excellence.
In partnership with KPMG.
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