The volume of Venture Capital (VC) investments made in the UK slowed in the first three months of 2019 due to ongoing Brexit uncertainty.
The volume of Venture Capital (VC) investments made in the UK slowed in the first three months of 2019 due to ongoing Brexit uncertainty, according to Venture Pulse, a quarterly report on global trends published today by KPMG Enterprise.
However, VC investors were willing to pay premium value for innovative UK businesses. More than £1.19 billion ($1.56 billion) was invested in the first three months of the year, around the same level as seen in the first three months of last year. This was raised across 161 deals which was down 57% on the same period in 2018.
Germany saw a fall in investment levels over the first quarter of this year to £1 billion, whilst France continued to build a strong innovation ecosystem and saw its largest quarter of investment to date, with £760 million ($1 billion) invested in its growing startup community.
Prominent deals for the quarter were diverse on a sector basis, reflecting some of the strengths of the UK’s innovation ecosystem. The most significant funds went to late stage UK enterprises, including a £150 million fundraise for fintech Iwoca. Other notable deals included the £58 million Series E funding for GoCardless to expand the company's presence overseas, whilst corporate VC investment in the UK remained steady with Mitsubishi Corporation investing over £215 million in Bristol based OvoEnergy – a company focused on electric vehicle charging and energy storage.
Fintech, biotech, and healthtech continued to drive a significant amount of the VC investment, highlighting the resilience of these industries and the strength of the UK’s innovation ecosystem.
Commenting on the data, Tim Kay, Director, Innovative Startups, KPMG UK said:
“VC investment globally was down by almost 13 percent ($7.8 billion) compared to the same period last year, as numerous economic uncertainties caused some VC investors to pull back, at least in the short-term. The rapid approach of the Brexit deadline, a perceived economic slowdown in China, and heightening trade wars between the US and other regions all caused some concern to VC investors in the UK.
“The UK has a robust startup ecosystem due mostly to its diversity – which keeps investors coming back. Whilst large volumes of VC investment are pumped into established startup hubs in London and Cambridge, it was great to see the largest UK deal so far this year was in Bristol, for OvoEnergy ($281.6 million). This diversity has helped keep overall VC investment in the UK strong until now and will hopefully continue once the uncertainty of Brexit has been resolved.
“The strengths of the UK in AI, biotech and fintech will continue to drive deals in the traditional hubs of London, Oxford and Cambridge. However with valuations rising, and in many cases being out of reach for all but the top tier of VC firms, we expect to see more funds look across the UK ecosystem in 2019 for deal flow. Providing Brexit uncertainty can be curtailed, deal volumes should rebound as VC investors won’t want to sit on unspent cash and the UK still remains an attractive investment location for innovative businesses.”
Digital banks see very strong investment
Digital banking was a big winner of VC investment globally, with Chime in the US raising $200 million in a round that won it unicorn status and Germany-based N26 raising $300 million. In the first quarter of the year, the Capability and Innovation Fund, an EU-mandated package to boost competition in the UK’s business banking sector, awarded more than £280 million in funding to Starling Bank, ClearBank, and Metro Bank.
A number of European challenger banks also voiced plans to enter the US in the first quarter of the year, including UK-based Revolut and Starling Bank. Germany’s N26 also raised funds in this year, in part to fund a US expansion, while Israel’s Bank Leumiis is reportedly talking to potential partners about launching its digital Pepper offering in the US.
Tim Kay concluded:
“Part of the attractiveness of digital banks has been their flexibility, the evolution of their business model and, in some cases, their ability to package and sell their technologies to more traditional banks in a white label form.
“A number of these digital and challenger banks are now well-established in their home markets and are now eyeing opportunities to grow both regionally and internationally. The US is a big target of many of the European challenger banks, with several big names looking at expanding into the North American market.”
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KPMG uses PitchBook as the provider of venture data for the Venture Pulse report.
The Venture Pulse does not contain any transactions that are tracked as private equity growth by PitchBook. As such rounds are often conflated with late-stage venture capital in media coverage, there can be confusion regarding specific rounds of financing. The key difference is that PitchBook defines a PE growth round as a financial investment occurring when a PE investor acquires a minority stake in a privately held corporation. Thus, if the investor is classified as PE by PitchBook, and it is the sole participant in the recipient company’s financing, then such a round will usually be classified as PE growth, and not included in the Venture Pulse datasets.
Also, if a company is tagged with any PitchBook vertical, excepting manufacturing and infrastructure, it is kept. Otherwise, the following industries are excluded from growth equity financing calculations: buildings and property, thrifts and mortgage finance, real estate investment trusts, and oil & gas equipment, utilities, exploration, production and refining. Lastly, the company in question must not have had an M&A event, buyout, or IPO completed prior to the round in question.
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