2018 Venture Capital investment in UK takes a breather after a bumper 2017

shutterstock/Petr Kratochvil

Venture Capital (VC) investment in the UK slowed in the first quarter of 2018, following a huge Q4’17, which saw over 2.8 billion USD invested according to Venture Pulse Q1 2018, a quarterly report on global VC trends published by KPMG Enterprise.

Following a blockbuster year of over 8 billion USD invested within the UK bolstered significantly by multiple mega-rounds, – 2018 still managed to achieve a healthy start, with one $100 million round pushing the nation’s tally over 1 billion USD. The UK played host to seven of the top 10 European deals in the last quarter of 2017, but managed to scrape just one of the 10 in the first quarter of 2018. Four of the ten biggest European deals done in the first three months of 2018 were located in Germany.

Globally 49.3 USD billion of venture capital investment raised across 2,661 deals in Q1, just shy of the global record for a single quarter.  A record-breaking 29.4 USD billion of investment in the Americas – including 28.2 billion USD in the US alone – combined with high investment in Asia helped fuel the strong VC market. Europe saw 5.2 USD billion in VC investment in Q1’18. The number of European VC deals continued its sharp decline, falling to 548, less than half of the number of deals seen during the same quarter last year. Strong activity outside the UK helped keep European VC investment high. Ireland saw investment increasing strongly quarter-over-quarter to $162 million.

A near-record final quarter of 2017 helped London secure a second consecutive quarter of growth in VC invested to close last year, testifying to the impact of outlier financings such as those of Deliveroo. 2018 has yet to observe such largesse, yet multiple notable businesses such as Made.com, Gousto, Kano and EToro still raised considerable sums.

Commenting on the results, Patrick Imbach, Head of KPMG’s Innovative startup practice said: “Globally, there continued to be a significant amount of dry powder in the market during Q1’18, with VC investors feeling under pressure to deploy funds. This continued to drive bigger deals and higher valuations. Despite the trend in the number of deals in the UK continuing to drop, we can see that investors are clearly focused on making a smaller number of later stage deals.”

While Brexit uncertainties may have contributed to some of the decline, the strong fundraising in the previous two years and the availability of dry powder might also have also been responsible for the pause. Foreign investors continued to be involved in the biggest investments in Europe – a trend expected to stay through 2018.

Fintech remains a key focus for VCs this quarter, with London based Social Trading and Investing Network eToro raising 100 million USD in order to fuel growth. The fintech market in general has matured substantially with more companies focusing on profitability over customer acquisition. Early fintech leaders such as Funding Circle are considering exits – which could make the remainder of 2018 exciting for this segment of the market.

Patrick Imbach observed:As the UK startup ecosystem has matured, a lot of later stage startups have shifted their focus from growth to profitability, particularly in the fintech space. Now we are seeing some fintechs succeeding; they are delivering on profitability objectives and positioning themselves for potential exit over the next 1-2 years.”

VC investment in deeptech, particularly in AI-related technologies, is expected to increase, in addition to autotech and blockchain. Cryptocurrencies are expected to gain more attention in the near-term, with some regulators likely to move forward with regulatory rules to govern Initial Coin Offerings (ICOs). The IPO market is also expected to see increasing activity, with Funding Circle planning an exit and others considering their options. Over the longer-term, digital health is likely to get a lot of attention, particularly in the UK where the NHS has recently released a new digital roadmap to accelerate the uptake of digital patient services.

The report highlights that deals that have been done so far this year tackle distinctly different segments, testifying to the size of the market in the UK and its ability to host and exhibit diversity when it comes to sectors.