Good news and bad from KPMG Private Enterprise’s review of venture capital investment in the UK last year. The positive takeaway from the research is that venture capital backing of fast-growing companies is up overall. Less happily, early-stage and seed-stage businesses do not appear to be sharing in the good times.
Overall, there were some 1,648 completed venture capital investments made in the UK during 2019 totalling just over £9bn, with nearly £2bn of investment made in scale-up businesses during the last three months of the year alone. The headline data on deal values, compiled by Pitchfork for KPMG’s Global Venture Pulse Survey, represents a 22% increase on the previous years.
Much of the money went into a handful of sectors, KPMG reports, with financial services, biotech and healthcare businesses accounting for the majority of deals completed. However, it is the polarity between the ease with which later-stage companies are raising money and the challenges faced by their less mature counterparts that catches the eye. On the one hand, you have the likes of Deliveroo, which pulled off a whopping $575m financing round last year; on the other, you have a far shorter tail of smaller transactions in previous years.
Some of that bifurcation may reflect short-term factors. It is noticeable that the number of venture capital deals in the UK during the final quarter of last year fell below 150, the least active three-month period for seven years; there were almost 300 deals in quarter four of 2018, by contrast. The remarkable volatility of the UK’s political environment during this period amid an election campaign and the ongoing uncertainties of Brexit no doubt played a part in that sharp decline.
Still, even before the political crisis reached its height, deal numbers were falling back more quickly than deal values, suggesting that while venture capital firms were continuing to make larger investments, they had become more cautious elsewhere.
Tim Kay, a KPMG Private Enterprise director, agrees with this analysis. “Despite the political uncertainties, entrepreneurs had no problem closing mega-deals, as venture capital investors focused on later stage companies in sectors in which the UK is seen as world leading,” he says. “There was, however, a continued decline in early and seed stage deals.”
That could have serious implications. “Access to funding is a foundation for growth, and domestic innovation could be impacted if our next wave of entrepreneurs fail to attract the capital they need to grow now,” Kay warns. “At best, it will slow their growth; at worst, it will make them uncompetitive on a global stage, leading them to relocate or become unsustainable.”
Clearly, we’re not at that stage yet. With Brexit anxiety receding, 2020 may now see investors become less risk-averse. Venture capital firms may once again feel confident enough to put their cash into less mature businesses, particularly given the fierce competition in the sector.
“The large amount of dry powder that VC investors have available suggests there could be a significant amount of capital deployed quickly now that there is greater political certainty in the UK,” Kay adds. “[However], whether or not early stage deals make a comeback this year remains to be seen as we may be seeing a fundamental shift in investor appetite.”