The amount of venture capital investment in the UK slumped 45 per cent in 2023, according to new data.
KPMG’s quarterly Venture Pulse report shows that VC investment sank to its lowest levels since 2016 “amidst a backdrop of geopolitical and macroeconomic challenges and a parched exit environment.”
According to the data, the value of VC investment across the UK fell from $36.8bn (£29.1bn) across 3,832 deals in 2022 to $20.3bn (£16bn) across 2,658 deals in 2023.
According to the report, the lack of uncertainty due to the upcoming UK general election has eroded the confidence of VC investors that recovery is forthcoming and has led many investors to hold onto their cash and focus investments on companies with proven market traction and recurring revenue.
London attracted the lion’s share of UK VC investment in 2023, at S13.6bn (£10.7bn) across 1,495 deals. However, this was significantly down on the $28.4bn (£22.4bn) raised by London businesses across 2,086 deals in 2022.
Businesses based in the capital accounted for five of the 10 largest European fundraises in the final quarter of 2023, including the $1bn (£760m) raised by communications firm DAZN, while the $179.7m (£142m) raise by Manchester-based Castore also made it to the top 10 largest deals in Europe.
Nicole Lowe, UK head of KPMG UK’s emerging giants practice, said: “Fast growth businesses in the UK have been fairly resilient to the global downturn in VC investment, with fundraising levels continuing on a positive trajectory, and above pre-pandemic years.
“Whilst there is a real craving for normalcy and a period of stability this year to help boost the environment for fundraising, it is unlikely that the conditions improve much over the next 12 months.
“With the headwinds remaining challenging, UK businesses looking to raise funds will need to ensure they have really strong business models and management teams in order to attract VC investment.
“Given the global economic climate, VC is shifting from a ‘growth at all costs’ model to prioritising innovative companies with robust unit economics.
“This new focus on strong gross margins and effective customer acquisition strategies underscores a balanced approach in risk management and value creation, favouring sustainable growth and financial stability over rapid cash burn and scale.”
The situation in Europe
According to the report, VC investment into European businesses fell by over 20 per cent in the final quarter of 2023, particularly from US investors who pulled back from making major investments in the region.
While total VC investment in Europe for 2023 was down dramatically when compared to the outlier years seen in 2021 and 2022, it remained on par with the level of investment seen in 2020 — and well ahead of investment in all prior years.
KPMG added that VC investment in the region is expected to remain “relatively soft” in the first quarter of 2024 with investors expected to continue to focus on ensuring companies have a strong path to profitability so that they are better positioned to return capital to their limited partners.
Trends for 2024
The report also states that VC investment globally is expected to remain “relatively depressed” given the ongoing conflicts in the Ukraine and the Middle East, the “stubbornly high” inflation and interest rates, and the expectation of three major elections during 2024, including the European Union parliamentary election, the US presidential election, and the UK general election.
It also highlights that any signs of stability could lead to a “sudden shift” in investor sentiment while AI is likely to remain the biggest ticket for VC investors globally, followed by cleantech, healthtech and ESG-related innovation.
The IPO market
KPMG said: “There was some hope that the three major IPOs that occurred in the US during Q3 23—including US-based companies Instacart and Klaviyo, in addition to UK-based Arm—would lead to additional companies making IPO exits globally in Q4 23.
“The IPO and post-IPO performance of these companies, however, was not enough to start even a trickle of additional IPO activity.
“This result cast a significant pall on expectations of a recovery in the IPO market during the first half of 2024; despite companies working to improve their IPO readiness and the possibility of one or two major IPO exits, it is more likely that any significant reopening of the US IPO market will likely occur in the latter half of 2024.
“The IPOs, however, did provide a stronger indicator for private company valuations, particularly in the US; this contributed, during Q4 23 to a growing alignment between the expectations of founders and investors as to the true valuation of private companies. This could potentially foster additional deal making heading into Q1 24.”