Venture Capital (VC) investment in UK scaleup businesses reached record levels in the first three months of 2021, as investors looked to deploy a significant amount of dry powder in late stage deals.
Our first Venture Pulse report of the year recorded more than £5.1 billion of VC investment into fast growth UK businesses in Q1 21, up 25 percent on the previous high of £3.9 billion raised in Q4 20. Despite the challenging economic conditions, fast growth businesses in the UK attracted nearly double the £2.7 billion raised in the same quarter last year.
UK maintains European crown
Whilst Germany, the Nordics, Spain and Israel also recorded new investment highs, the UK attracted the lion’s share of large deals representing 7 of the 10 largest deals in the region. A total of £15.1 billion was raised across Europe in the first quarter of the year, with the UK accounting for over a third.
The UK continues to be the powerhouse of Europe when it comes to attracting investment in fast growth innovative companies. 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.
Investment in FinTech accelerates
Interest and valuations for FinTech businesses continued to accelerate in Q1 21, with UK FinTechs raising £1.9 billion in VC investment. Three UK based FinTechs raised large rounds, including LendInvest (£275 million), Checkout.com (£325 million), and Rapyd (£217 million).
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 UK food and beverage companies was up 20 percent in the first quarter of the year after hospitality sectors have been hit hard as a result of the pandemic. Business productivity and software scaleups also saw a 10 percent increase in deals being done compared to the last quarter of 2020, accounting for a third of all deals taking place in Q1 21.
Investment in Service on Demand companies has increased by 270 percent 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 percent in the first quarter of the year compared to Q1 20.
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 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.
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.
About Venture Pulse
KPMG Private Enterprise releases a quarterly report highlighting the key trends, opportunities, and challenges facing the venture capital market globally and in major regions around the world.
KPMG uses PitchBook as the provider of venture data for the Venture Pulse report.
Please note, these figures are accurate as of 21 April 2021.
The UK continues to be the powerhouse of Europe when it comes to attracting investment in fast growth innovative companies.
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.