Investment into UK innovators falls by 45% in 2023 but remains above pre-pandemic levels
Outlook for the UK
The final quarter of 2023 has seen both value and volume of VC investment into UK businesses slide. The uncertainty due to the upcoming UK general election, has eroded the confidence of VC investors that a recovery is forthcoming. Amidst this backdrop of geopolitical and macroeconomic challenges and a parched exit environment, investor caution remains.
A total of $4.8 billion was invested into UK businesses during the last quarter on 2023, with 454 deals completed in that period. UK VC deal value and volumes fell significantly from the previous quarter from $6.1bn/630 deals.
London attracted the lion’s share of UK VC investment in 2023, attracting S13.6bn across 1495 deals, however, this was significantly down on the $28.4bn raised by London businesses across 2086 deals in 2022.
London based businesses accounted for five of the 10 largest European fundraises in the final quarter of 2023 including the $1bn raise by communications firm DAZN whilst the $179.7m raise by Manchester based Castore also made it to the top 10 largest deals in Europe.
With the headwinds remaining challenging, UK businesses looking to raise funds will need to ensure they have really strong business models and management teams in order to attract VC investment. Given the global economic climate, VC is shifting from a 'growth at all costs' model to prioritising innovative companies with robust unit economics. This new focus on strong gross margins and effective customer acquisition strategies underscores a balanced approach in risk management and value creation, favouring sustainable growth and financial stability over rapid cash burn and scale.
Outlook for Europe
VC investment into European businesses fell by over 20% in the final quarter of 2023, particularly from US investors who pulled back from making major investments in the region. While total VC investment in Europe for 2023 was down dramatically compared to the outlier years seen in 2021 and 2022, it remained on par with the level of investment seen in 2020 — and well ahead of investment in all prior years.
Collaboration is expected to be top of mind for many participants in the VC market in 2024, particularly between Corporate Venture Capitalists (CVC), existing VCs, and accelerator programmes looking to make headway on their strategic objectives while also managing their costs more effectively. The number of joint CVC funds could also rise as large CVCs look to bolster their ability to invest capital by working in tandem with others.
The amount of funding for ESG and the energy transition needs to climb rapidly if countries are going to meet their net-zero targets. It’s an area under intense scrutiny and pressure—and there are a lot of emerging companies focused on a wide range of different aspects of ESG — from electric vehicles and energy storage to alternative energy and carbon reduction technologies. ESG investing particularly in relation to energy transition will remain a resilient area of investment in 2024 and beyond.
UK trends to watch in 2024
- Despite investor caution AI, cleantech and health and ESG (particularly around the energy transition) are likely to continue to dominate the VC landscape in the UK
- VC is likely to shift from a 'growth at all costs' model to prioritising innovative companies with robust unit economics.
Read more UK and global insights in the Global Venture Pulse Q4 2023 report.
