Q3 2020 venture funding: Global and UK analysis

In the face of concerns related to COVID-19, geopolitical tensions, and a potential hard Brexit, our latest Venture Pulse survey reveals that the volume of UK Q3 deals dropped by almost a half (46%) compared to Q3 2019. This reflects a decline from 549 to 294 deals while the value of these deals has dropped by almost 18% from £2.8 billion ($3.6) to £2.3 billion ($3.0) over the same period.

Corporate VC (CVC) affiliated investment has dropped by 53% since this time last year from £1.3billion ($1.7) to £600 million ($800). The number of completed investments during this time dropped from 77 to 53. A similar more marked trend is seen in the 60% decline from Q2’20 where the data stood at £1.5billion ($1.9) secured from 74 deals.

The key focus areas for UK VCs are future of health and biotech, fintech and future of work.

Bina Mehta

Chair

KPMG in the UK

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The UK continues to attract large rounds

Fintech was a key area of investment with digital bank Revolut raising $580 million and cloud-based banking platform Thought Machine raising $125 million. London-based kitchen startup Karma Kitchen also made news with a $314 million raise this quarter.

During the quarter, the UK Government continued to focus on supporting recovery initiatives – announcing a £2 billion Kickstart Scheme focused on providing young people with job placements for six months. The program could enable startups to find and retain talented young people.

With more than 50% of funding coming from outside of Europe, low interest rates combined with the current exchange rate makes UK assets good value for global investors at a time when the UK has a strong global reputation for building innovative and disruptive businesses.

While the UK has recorded a significant decline in deals, the businesses that have been able to secure funding stimulus throughout this period show there is plenty of capital to be deployed for later stage firms, with investors demonstrating a strong preference for well-established businesses with long track records.

As CVCs expand their reach and product offering it will be interesting to see where trends begin to emerge – likely around deeptech which we are seeing early signs of across Europe.

Although the pandemic has overshadowed Brexit negotiations in recent months, concerns over the possibility of a hard Brexit as of 31 December 2020 are growing, making it a critical area to watch heading into the last quarter of the year.

Record levels of VC investment in Germany, Israel and Nordics

VC investment in Europe reached a new record high of $12.1 billion across 1,024 deals in Q3’20, led by a $650 million raise by Klarna and a $600 million raise by Northvolt in Sweden, a $633 million raise by Germany-based CureVac and a $580 million raise by Revolut in the UK.

The Nordic region ($2.2 billion), Germany ($2 billion), and Israel ($1.5 billion) all saw record levels of VC investment this quarter. Despite a quarter-over-quarter decline from $3.8 billion in Q2’20 to $3 billion in Q3’20, the UK continued to account for the largest share of VC investment in Europe.

Pharma and biotech very hot in Q3’20

VC investment in pharma and biotech remained very hot in Q3’20, at the end of the quarter, total year-to-date investment in the sector was $31 billion – already well above the total of $27.1 billion seen during all of 2019.

Heading into the final quarter of 2020

VC investment is expected to remain quite steady heading into Q4’20. Late stage deals are expected to remain a top priority for VC investors, which will likely continue to make it difficult for early stage companies to attract investment. On a sector basis, fintech, business productivity, edtech, healthtech and biotech are all expected to remain very attractive.

Scaling business leaders must remind themselves that venture funds do have money to deploy and CVCs will continue to look for opportunities, particularly in the digital market, not least so that they can accelerate their own transformations.

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 October 2020.