Venture Capital (VC) investment into UK continues to slump in opening months of 2023

• VC investment into the UK falls to £2.9 billion ($3.6 billion) in opening quarter of 2023
• Number of deals completed falls to lowest since KPMG Venture Pulse report began

The value of and volume of VC investment into UK businesses continued to slump in the opening quarter of 2023 as economic conditions continue make investors nervous, according to KPMG’s Venture Pulse report.

A total of £2.9 billion ($3.6 billion) was raised by UK businesses in the opening three months of the year, according to the report using data compiled by PitchBook, continuing the significant slowdown seen in the end of 2022.  Total VC investment in Q1’23 is the lowest raised by UK businesses in the opening quarter of a year since 2020 and significantly down on the £8.2 billion ($10.2 billion) raised in Q1’21 and £12.3 billion ($15.2 billion) raised in Q1’22.  Deal volumes were also muted with just 402 deals captured in the data.

Two-thirds of VC investment (£1.9 billion/$2.4 billion) coming into UK businesses in the opening quarter of this year flowed into London, with more than half of the deals completed (219) by businesses based in the capital.

A $602 million raise by fintech player Abound (Consumer Finance) was the UK’s largest deal of Q1’23, followed by a $160 million raise by B2B focused fintech the Bank of London, a $149 million raise by EV automotive company One Moto, and a $140 million raise by autonomous vehicle software firm Oxbotica. Carmoola rounded out the largest of deals with a $126 million series A deal according to the data.

From a sector perspective, business services and energy transition continued to attract significant attention from VC investors in Q1’23, while interest in consumer retail and real estate remained dry. Looking forward, B2B technology enablement is likely to remain a key driver of investment, not only in areas like financial and health services but across every sector.

Commenting on the data, Warren Middleton, Lead Partner of the Emerging Giants Centre of Excellence for KPMG in the UK, said:

“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.  What we are starting to see now is VC investment starting to come 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 of 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. While VC investment is expected to remain soft over the next few months, we are expecting that some renewed activity will be seen in the second half of the year. 

“This is not just an issue confined to the UK, as our data shows market uncertainty has seen VC investment plummet globally, with the total seen in Q1’23 less than a third of the total invested during Q1’22 and funds raised in Europe the lowest seen since Q3’18.  As the cost-of-living crisis continues, investors are increasingly turning away from those sectors that rely on consumer spend to drive growth and doubling down on investments in sectors where technology is addressing big macro trends such as health tech and ESG. However, the UK remains the innovation crown jewel of Europe attracting more VC investment than France, Germany and Spain combined in the opening of the year.”

European governments race to become innovation superpowers

Several government-backed initiatives were initiated in Europe during Q1’23 to support startup growth. The Chancellor’s first budget included £3.5 billion to help the country become a scientific and technologic superpower, including funding to support next-gen supercomputing and AI research. The UK also released a whitepaper on the regulation of AI. During the quarter, the German government also launched a €1 billion fund to support growth stage deeptech and climatetech companies, while the European Investment Bank Group and five EU member states announced the European Technology Champions Initiative - a $3.75 billion fund to address funding gaps and support late-stage growth companies in the region.

The global picture

Global VC investment sank from $86 billion across 9,619 deals in Q4’22 to $57.3 billion across 6,030 deals in Q1’23 as the major uncertainties in the market showed no sign of waning.  The protracted war in the Ukraine, increasing interest rates, stubbornly high inflation, domestic and geopolitical challenges, and concerns about the stability of the global banking system all combined to make it a difficult quarter for VC investment across all regions.

The decline in VC investment was particularly stark year-over-year, Every region saw VC investment fall to levels not seen in years during Q1’23. The $33.1 billion raised in the Americas was the lowest level since Q1’18, while the $9.8 billion raised in Europe was the lowest since Q3’18, and the $13.5 billion raised in Asia was the lowest since Q2’15.

US-based payments company Stripe’s $6.5 billion raise was by far the largest VC round of the quarter globally, although it came with a steep cut to the company’s valuation—from $95 billion after its last funding round in Q1’21 to $50 billion in Q1’23. After Stripe, US-based alternative energy infrastructure Generate Capital raised the next largest deal ($800 million), followed by China-based EV automaker Zeekr ($750 million), and US-based cycling and running platform Zwift ($620 million).

Despite the global uncertainty, the alternative energy and cleantech sectors continued to attract significant funding rounds—with companies across regions attracting large deals. During Q1’23, the Americas saw an $800 million raise by low carbon infrastructure company Generate Capital, a $525 million raise by carbon and environmental commodities trading company Xpansiv, and a $300 million raise by battery company One.

Asia attracted a $750 million raise by EV vehicle manufacturer Zeekr, a $442 million raise by solar energy technology company SolarSpace, and a $400 million raise by fossil fuels decarbonization company EcoCeres this quarter, while Europe saw a $228 million raise by Germany-based alternative energy leasing company Enpal and a $148 million raise by UK-based One Moto.

The report concludes that investment in consumer retail and D2C companies will likely remain dry, whereas alternative energy and cleantech, defence, cybersecurity, and B2B services are suggested to be the most resilient areas of global investment, with generative AI as an area that could see a spike in investment.

Rob Baxter, UK Head of Corporate Finance at KPMG concluded :

“It’s likely that the months ahead will continue to be challenging for VC investment across Europe, given ongoing economic uncertainty and recent banking turmoil. Traditional VC investors will remain cautious, scrutinising deals carefully to assess whether business models are resilient, while putting pressure on their portfolio companies to cut costs. Whilst the picture varies by sector, as set out in this report, the overall market for fundraising is likely to be significantly more difficult than in 2021-2022.

“Aside from fundraisings, we are also seeing mainstream M&A volumes are significantly reduced, however each sector varies significantly and certain well-capitalised corporates are viewing the current environment as an opportunity to be bold and make acquisitions. Entrepreneurship typically flourishes in challenging economic times and, if these market conditions remain challenging, governments in Europe could step up their supports for startups.”

ENDS

For Media Enquiries :

Emma Murray

PR Manager for KPMG Emerging Giants

020 7694 6506 / 07920 870 623

emma.murray@kpmg.co.uk

Venture Pulse Methodology

KPMG uses PitchBook as the provider of venture data for the Venture Pulse report.  Data is correct as of 02 April 2023. 

PitchBook defines venture capital funds as pools of capital raised for the purpose of investing in the equity of startup companies. In addition to funds raised by traditional venture capital firms, PitchBook also includes funds raised by any institution with the primary intent stated above. Funds identifying as growth-stage vehicles are classified as PE funds and are not included in this report.

A fund’s location is determined by the country in which the fund is domiciled; if that information is not explicitly known, the HQ country of the fund’s general partner is used. Only funds based in the United States that have held their final close are included in the fundraising numbers. The entirety of a fund’s committed capital is attributed to the year of the final close of the fund. Interim close amounts are not recorded in the year of the interim close. Mega-funds are classified as those of $500 million or more in size for the following fund categories: venture and secondaries.

The Venture Pulse does not contain any transactions that are tracked as private equity growth. PitchBook defines a PE growth round as a financial investment occurring when a PE investor acquires a minority stake in a privately held corporation. Thus, if the investor is classified as PE by PitchBook, and it is the sole participant in the recipient company’s financing, then such a round will usually be classified as PE growth, and not included in the Venture Pulse datasets.

About KPMG UK

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