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Venture Capital investment in UK innovators soars in Q1 2020 but foreshadows COVID-19 impact in Q2

Venture Capital investment in UK innovators soars in Q1

Tim Kay, Director in KPMG Private Enterprise Emerging Giants team, comments on VC investments in Q1 2020.

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Also on home.kpmg

  • Global Q1’20 Venture Capital (VC) investment recap shows “calm before the storm”
  • 53% increase in VC investment in UK scale ups in first three months of 2020
  • UK VC investment hits £2.6bn ($3.2 billion) in Q1’20
  • Deal volumes continue to decline while investment value increases

The Global Venture Pulse Survey by KPMG Private Enterprise, with data compiled by PitchBook, reveals a 53% increase in the amount of money invested in UK fast growth businesses in Q1 2020 versus Q4 2019 figures.

Venture Capital investment in UK scale ups in Q1’20 was £2.6bn compared to £2.69bn in the record-setting Q1’19. The volume of deals dropped from 558 to 301 over the same period.

The UK continued to see strong VC investment in Q1’20, including the raising of $100 million+ funding rounds by LumiraDx, GraphCore, and Starling Bank.

Corporate VC-affiliated investment rose 9% to £1.1bn in the first three months of 2020 from £650m in Q4’19. The number of completed investments during this time dropped from 63 to 55.

VC investments in angel and seed stage businesses, particularly in the software, commercial services and pharma & biotech, drove the vast majority of deals completed.

Commenting on the findings, Tim Kay, Director in KPMG Private Enterprise Emerging Giants team, said:

“The first quarter saw VC investors continue to recognise the strength of the UK’s innovative and expanding scale up ecosystem, and a strong base of maturing scale ups, which is particularly evident in areas like fintech and biotech, as we navigate the current situation.

“Deal volumes continue to drop; a continuation of the trend we’ve been seeing since Q1’19 as investors are writing a smaller number of bigger cheques into later-stage businesses. While this quarter’s figures didn’t quite match those of this time last year, given Q1’19 was the best quarter on record, the levels of VC investment in Q1 is encouraging.

“It will be interesting to see how the Corporate VC investors react to the COVID-19 fallout over the coming quarters as their parent companies potentially move to protect their own balance sheets and cash reserves.”

VC investment in Europe rises, driven by strong geographic diversity

While the number of VC deals in Europe dropped from 1,262 in Q4’19 to 923 in Q1’20, VC investment in the region rose from $7.9 billion to $8.8 billion. Europe’s strength continues to be driven by the growing geographic diversity of investment.

The UK VC investment surged to $3.2 billion in Q1’20, Germany-based VC investment increased nominally to $1.37 billion, and France had its second strongest quarter of VC investment on record with $1.36 billion.

The UK-based Revolut ($500m) was largest of the top five deals in Q1’20 across the region with others including Germany’s Lilium ($240m), Israel’s AppsFlyer ($210m), Sweden’s Klarna ($200m), and France-based Colonies ($197m).

Looking ahead in 2020

In Q2’20, Europe’s VC market will likely face a tough quarter due to COVID-19, although digital services, edtech, health and biotech companies, and certain B2B and B2C companies should remain attractive even during the crisis given their applicability and long-term relevance.

The recent commitment by the UK government to invest £1.25bn into initiatives to support innovative businesses may be a key factor in maintaining investor sentiment in Q2’20 and beyond.

While the short-term economic outlook is highly uncertain, the pandemic could lead to an increasing acceptance for digital solutions. This could bode well for VC investment over the longer term as both traditional companies and consumers will have required and become accustomed to their use, a process that might have been more difficult to achieve under normal circumstances.

Tim Kay concludes:

“The global COVID-19 pandemic and associated restrictions will likely have a significantly adverse impact on global VC investment in Q2 and beyond. While investments will continue to be made, we can expect a significant slowdown in volume and a potential resetting of valuations.

“What happens in the medium and long term remains to be seen. Investors may well look to rebalance portfolios with companies that they expect to thrive in a recovering post COVID-19 world - ranging from edtech to pharmaceuticals.

“Many will be monitoring whether the pandemic has permanently shifted the views of larger corporates towards innovative and disruptive technologies. If it has, you can expect even more investment into those B2B companies providing business resilience, mobility and collaboration tools as that market opportunity increases.

“Similarly, many will be looking at what their sector and market look like in the long term – possibly leading to a spate of M&A activity as they try to leapfrog the competition in a post COVID-19 world.”

-ENDS-

Media Contact :

Jo Ogunleye, KPMG Press Office, +44 (0) 73 4188 7015, jennifer.ogunleye@kpmg.co.uk

Notes to Editors:

A scaleup as defined in this research is a business that has received at least one round of institutional / Series A investment which will be used to grow the business.

About KPMG in the UK

KPMG LLP, a UK limited liability partnership, operates from 22 offices across the UK with approximately 17,600 partners and staff. The UK firm recorded a revenue of £2.40 billion in the year ended 30 September 2019. KPMG is a global network of professional firms providing Audit, Tax, and Advisory services. It operates in 147 countries and territories and has more than 219,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. Each KPMG firm is a legally distinct and separate entity and describes itself as such.

KPMG uses PitchBook as the provider of venture data for the Venture Pulse report.

Figures supplied are a snapshot of deals data available as of 6th January 2020. 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.

© 2020 KPMG LLP a UK limited liability partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

For more detail about the structure of the KPMG global organisation please visit https://home.kpmg/governance.

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