Investors cautious

Pace of VC investment likely to be slower

Amy Burnett
Amy Burnett: investor behaviour is changing

Venture capital investment into fast-growth businesses in Scotland looks likely to exceed last year’s tally though there are signs of a slowdown in the months ahead.

The first six months of 2022 saw deals worth £506 million which compares £626m raised in the whole of 2021.

However, KPMG suggest that a strong first half this year may not be replicated in the second half as investors become increasingly cautious, with investment levels dipping across the UK as a whole and globally during Q2.

The lion’s share of deals in Q2 2022 involved businesses in Edinburgh (24), followed by Glasgow (7), Aberdeen (3) and Dundee (2).

Amy Burnett, KPMG private enterprise senior manager in Scotland, said: “The value of investment in Scottish businesses continued at a healthy pace in Q2, despite global levels stalling.

“That’s great news for Scotland as we continue to see hot sectors such as fintech and healthtech attract the biggest investments, but we need to be mindful that investor behaviour is likely to change in the second half of the year.

“Companies that may have attracted funding from optimistic investors in the past, will likely face more challenges and require stronger business cases and paths to profitability to attract funding over the next few quarters.

“There are already some red flags on the horizon as the volume of UK deals being done in the first half of 2022 is down more than 11% year on year.

Graeme Williams, M&A director, KPMG UK, explains: “The drop off at a UK level is a strong indicator that there continues to be a reasonable amount of dry powder in the market, with investors poised to spend.

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“With our burgeoning tech and life sciences markets, Scotland offers attractive alternative options for investors looking to diversify their portfolios given global uncertainty.

“And As VC firms start to take a more cautious investment approach, activity from non-traditional investors could increase in niche areas of investment.

“Heading into Q3 22, we could see some high-net-worth individual investors stepping in to help fund Series A and Series B deals that might have been funded by institutional money in previous quarters.”

KPMG’s Venture Pulse report found that UK businesses attracted £7.2 billion in VC investment during April – July 2022, down on the £8.5bn raised in the opening quarter of the year.

More than £15.7bn of VC funding has been invested in UK businesses in the first half of 2022, up on the £14.6bn raised in the first half of last year.

However, deal volumes were down significantly, with 667 deals completed in the latest quarter – the lowest volume of UK VC deals recorded by the report since Q2 18.

Overall, the volume of VC deals completed in the UK in the first half of 2022 is down by over 11% on the first half of last year (1768 versus 1568) as increasingly cautious VC investors renew their focus on late-stage deals and take longer to conduct due diligence on their investments.

Fintech remained the UK’s hottest area of investment in the April – July period, led by a £522m raise by SumUp and a £260m raise by GoCardless.

Health and biotech also continued to attract attention, in part because of their resilience to inflation compared to other sectors, whilst those businesses championing ESG continue to whet investor appetite including the £266m raise by cleantech firm Newcleo.

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