Venture capital placing bigger bets on fewer scale-ups

Total amount of VC money invested in Britain rises by 37pc to £4.4bn over the first six months, according to KPMG

Venture capitalists are shying away from investing in early-stage UK startups in favour of placing bigger, fewer bets on scale-ups.

The total amount of VC money invested in Britain rose by 37pc to £4.4bn over the first six months of this year, according to a KPMG survey.

However, investors are not quite as confident on smaller prospects, and are reining the pace seen in 2018, instead investing in companies deemed “less risky”. This continues a trend that started in 2017, prompting KPMG to ask, “Who is funding the aspiring unicorns?”

Tim Kay, director innovative startups, KPMG UK, said: “Whilst it is great to see investors continuing to plough premium values into our larger scale-up businesses, the stagnation in investment levels for our early stage startups is concerning. Just $26.9m [£21.5m] of angel and seed investment was made to UK businesses in the last three months and so we have to ask who is funding the innovators of the future?

Next wave of unicorns

“Unicorns do not just appear overnight: most are around four to six years old before they hit the big time and it is worrying to see this steady decline in early stage funding, which has been ongoing for the last few years. Access to funding is the foundation for growth and UK innovation could be impacted if our next wave of unicorns fail to attract the capital they need to grow now.”

UK VC investment fell by 14pc between April and June to £2bn compared with £2.4bn in Q1 2019. Deal volume for Q2 was also down with 279 deals completed in Q2 compared with 324 in Q1.

However, the £2bn invested in April-June was still up 3pc on Q2 2018.

Artificial intelligence reamins the hot ticket for what VC investors are looking for. Compared to other technologies, AI is seen as a true game changer in terms of disruption it poses for industries and verticals the world over — including healthcare and financial services. However, some companies are seen to be tacking on talk of AI innovation in their pitch decks in order to secure VC funding, when the reality is they hardly use any AI or machine-learning at all.

Kay said: “AI is the hot ticket at the moment with VC firms, corporate investors and even a number of governments investing in AI innovations … there is a great deal to be gained for the country that can iwn the race for AI dominance.”

Overall, the number of VC deals across Europe continued to decline; however, the total VC investment remained strong at well over $8bn.

Further reading

How to pitch to a venture capitalist – a Growth Business guide

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