Despite the “doom and gloom” narrative and post-Budget fears looming over the UK’s start-up ecosystem, the country still holds its ground at the forefront of global innovation.
At least that is the view of Ashish Patel, managing director at Houlihan Lokey’s Capital Market Group, who says that a rise of international investment into UK start-ups this year is indeed a sign of good fortune.
While referencing the success of “landmark deals” across a variety of sectors this year, including AI firm Wayve’s $1bn (£787m) raise for self-driving cars, biotech start-up Nuclera’s $75m (£59m) for protein discoveries, and fintech Monzo’s additional raise of $430m (£338m), Patel’s argument becomes clear.
“Following the global investment declines of 2022, investment in UK-based businesses is picking up,” Patel says.
“It’s clear that international investors continue to see the UK as a fertile ground for building globally significant businesses across a variety of sectors.”
US investors now contribute 33.8 per cent of capital to UK start-ups, according to a 2023 report by the British Venture Capital Association (BVCA), with an additional “increasing interest from the Middle East.”
Patel adds: “A number of factors drive this kind of attention, including a growing pool of high-quality companies that, having raised early-stage venture capital, are now reaching break-out scale and becoming global businesses.
“Other supporting factors include unique IP coming from UK research institutes, ease of doing business with clear regulations and company law, and the presence of multiple professional services firms that can ease the friction of international trade.”
Global attraction
Patel argues that foreign direct investment (FDI) has long-enabled British start-ups to compete at a global scale, providing access to international expertise and expansion into new markets.
As long as the country takes pre-caution to the dangers of relying too heavily on it, that is.
The main challenge with an overt reliance on foreign capital for venture funds is the risk that the centre of gravity for these early-stage companies may shift to the US due to shareholder pressure.
“The main challenge with an overt reliance on foreign capital for venture funds is the risk that the centre of gravity for these early-stage companies may shift to the US due to shareholder pressure,” he says.
“However, numerous success stories in the UK demonstrate that this is not always the case, and global businesses can be built in the UK using non-UK capital.”
According to Big Four accountancy firm EY’s annual European FDI rankings this year, the UK was the only country in the top three to see numbers increase year-on-year.
In 2023, the UK recorded 985 new FDI projects, which is a six per cent jump from 2022.
Ranking second in Europe, the UK also secured 27 per cent of all European tech projects last year.
London, which saw a 20 per cent uptick in FDI investment, was one of the biggest drivers in investment growth across both technology and financial services. The nation’s capital has also became the leading region for investment in Europe.
“We’re also seeing certain sub-sectors where the UK is starting to stand out, with deeper expertise than other startup hubs – particularly in deeptech, biotech, AI and climate tech,” Ashish says.
“Specialism like this attracts interest from high quality business-builders, driving the ecosystem and bolstering investor belief that globally significant companies can be grown in the UK.”
Are domestic investors missing out?
Some industry bodies, however, are worried UK-based investors might be “missing out on the great returns”.
A new annual report by the BVCA had recently argued the UK is not attracting enough funding from domestic investors compared with the likes of France and Germany.
The paper, called Venture Capital in the UK, revealed that over the long-term average, only about 40 per cent of capital raised by UK funds come from domestic venture capital (VC) investors, compared to over 70 per cent in both France and Germany.
“British start-ups often have an easier time attracting scale-up capital from abroad due to the increased risk appetite of international investors, and domestic investors are currently missing out on the great returns that UK start-ups can provide,” Michael Moore, BVCA chief executive, says.
More than 300 companies received funding rounds of over £50m from the years 2019 to 2023, he adds, with nearly 90 per cent of that funding coming from overseas investors.
Moore also argues that the numbers prove the need for venture capital to be enveloped into the package of pension reforms announced by Chancellor Rachel Reeves in her Mansion House speech earlier this month.
“The lack of capital at the later funding stages is something we need to fix,” he adds.
“It’s important that the very promising reforms to the UK pensions system outlined by the Chancellor… [to] increase the amount of domestic funding being channelled into the venture and growth stage of businesses.”
As a result, Moore says, it would “allow for pension savers to benefit from investing in our vibrant venture capital and growth capital sectors.”