Pockets of optimism emerge as VC investment in the UK more than doubles

• UK sees rebound on strength of series of mega deals.
• VC investment in the UK reaches $9.8 billion in first half of 2024.
• UK accounted for nearly 40% of the total VC investment made into Europe during Q2 24.
• AI investment continues to soar globally.

Venture Capital (VC) investment into UK startups saw the first signs of recovery in Q2 24, with the amount raised more than doubling the amount raised in Q1 24, according to the latest KPMG Venture Pulse report.

After a dismal opening to the year, which saw just $3 billion in VC funding raised by UK businesses — the lowest amount seen in twenty-two quarters, activity picked up dramatically in Q2 24 with $6.9 billion raised. This was also up year-on-year on the $4.7 billion raised in Q2 23 as investor sentiment started to become more positive, according to the data supplied by PitchBook.

More than $9.8billion has been raised so far this year by UK businesses, ahead of the $8.7 billion raised in the first half of 2023. Three-quarters of the VC funds invested into the UK in the last quarter flowed into London-based businesses, with more than $5.3 billion raised, up significantly on the $1.6 billion raised in London in the opening quarter of the year. The largest deals of Q2’24 included Wayve’s $1 billion raise and two large deals in the fintech space — a $999.6 million raise by Abound and a $621 million raise by Monzo.

Whilst deal value was up in Q2 24, the number of deals completed was down both year-on-year and quarter-on-quarter, mirroring the ongoing challenges faced by the VC market, including the high interest rate environment and geopolitical uncertainties. While many later stage companies in the UK found it challenging to raise money and close deals in Q2’24, the increasing number of mega-deals over the latter half of the quarter was viewed as a positive sign. Pre-seed and seed stage deals in the UK continued to see robust interest from VC investors, with median deal sizes increasing quite substantially. This growth likely reflects both a growing appetite for making investments in early-stage companies as the market in the UK begins to pick up, and a desire on the part of VC investors to de-risk their portfolios, the Venture Pulse report found.

After falling to a fifteen-quarter low of $13.9 billion in Q1’24, VC investment in Europe rose to $17.8 billion in Q2’24. The UK accounted for nearly 40% of the total VC investment made into Europe during Q2 24 and half of the region’s top ten largest deals, including a $250 million raise by sustainable housing company HarperCrewe. AI remained a very hot area of accounting for over half of the ten largest funding rounds globally during Q2’24 as VC investors continued to pour money into the space. In addition to UK-based Wayve and France-based Mistral AI, Germany-based AI language translation company DeepL raised $300 million, and France based AI automation company H Company raised $220 million. VC investment in AI remained quite broad in Europe, with investments going to both companies focused on developing core AI technologies and those focused on leveraging AI to help companies improve different aspects of their business models, such as the customer experience or product development.

VC investment in energy and cleantech, including everything from alternative energy, energy storage, and carbon capture technologies, to software aimed at helping companies manage their compliance obligations continued to attract attention, although investment in the sector was overshadowed by investment in AI by a fair margin. Alternative energy and cleantech attracted sizeable funding rounds during Q2’24, including a $381.9 million raise by UK-based energy storage company Highview Power. Given the Carbon Sustainability Reporting Directive (CSRD) — which requires larger companies to report on their sustainability metrics — and other evolving sustainability regulations and climate change commitments, regtechs focused on the sustainability space have also been of interest to investors.

Nicole Lowe, UK Head of KPMG’s Emerging Giants practice, said:

“The fact that the UK was able to close out so many megadeals this quarter is testament to the fact that our scaleup ecosystem has matured to a level it can attract such huge global interest. It’s also important to see that Seed and Series A rounds are improving so that we can support these new businesses and encourage entrepreneurship across the UK. However, when we’re looking at later-stage deals we’re not seeing the same movement and this has been an issue over the last year, in part because there are just not the capital pools available for those size of rounds. In the UK we’re starting to recognise this as a weakness and looking at ways to address it, but that will take time.

“As the UK and Europe have much more ambitious carbon emission and climate change goals than many other global locations and are moving faster on regulation, it is nudging where we see innovation proliferate and is boosting VC interest in our cleantech businesses. We are starting to see more green hydrogen plays and VC investment being made into the infrastructure that is focused on longer term alternative energy. Whilst there is still some anticipated volatility, particularly in high inflation economies that could make monetary policies tighten in the future, activity over the last quarter has shown that there are more pockets of optimism and opportunity around VC investment than we’ve seen in a while”.

Optimism growing for the IPO market in Europe

Across Europe, there was growing optimism that the IPO window could reopen slightly in Q3 24 should economic conditions remain stable, with a growing number of companies beginning to consider and prepare for the possibility of a future IPO. During Q2 24, the London Stock Exchange (LSE) saw some positive activity, with budget computer company Raspberry Pi raising $211 million in its June IPO; the company’s stocks continued to perform well in post-IPO trading. The LSE, in particular, has also undertaken efforts to support startups earlier in their lifecycle; it recently partnered with Floww to create connections between investors and early-stage businesses. It is also undertaking a consultation process on the implementation of a Private Intermittent Securities and Capital Exchange System (PISCES) that would allow for the intermittent trading of shares in private companies.

A hint of optimism heading into Q3’24

Heading into Q3 24, VC investment globally is expected to remain relatively steady, with AI continuing to attract a large share of funding. Energy and cleantech are also expected to remain quite high on the radar of VC investors around the globe. The spate of larger deals could continue as VC funds face increasing pressure from their LPs to make investments. Fundraising activity by VC firms will likely remain very subdued until 2025. Once exit activity really picks up, fundraising will likely follow suit.