Venture capital investment into UK businesses fell by almost a third (30%) in 2022, as global economic turmoil forced investors to take a more cautious approach, according to KPMG’s latest Venture Pulse report.

Following a strong year of fundraising in 2021, which saw over £29.5 billion raised by UK businesses, the first half of 2022 continued to see high levels of investment with more than £14.7bn raised. 

However, levels began to tail off in the latter half of the year as the ongoing conflict in Ukraine, rapidly rising interest rates, high levels of inflation, and concerns about a global recession all combined to drive VC investment down.

The year ended with £22.7bn being raised by UK businesses. However, this is the second highest level since the report began.  Over £3bn was raised in the final quarter of the year, down on the £7.5bn raised in the closing quarter of 2021.

This represented the lowest level of quarterly VC investment seen since Q220.  Deal volume also fell, with the number of deals completed in 2022 (3213) down by 19% on the 3830 deals completed in 2021.

London continued to attract the lion’s share of VC investment flowing into the UK last year, with over £16.4bn raised across 1,770 deals. Deal value into the UK regions fell by £3bn year-on-year, with £6.2bn raised over 1,443 deals in 2022. 

Although many sectors saw VC investment fall, the UK saw several pockets of strong activity, including sustainability, gaming, and health and biotech. A number of fintech subsectors also continued to attract VC investors and corporates — including regtech, cybersecurity, and B2B solutions — while others, like BNPL (buy now pay later), struggled.

Warren Middleton lead partner for KPMG’s emerging giant centre of excellence said : “VC investment into UK businesses remains well above pre-pandemic levels, and as we look ahead to 2023 it is likely that we’re about to enter a period of “new normal” in terms of valuations and M&A. 

“Dry powder is still being deployed — what’s changing is the way it’s being invested. Soaring energy costs sparked a significant uptick in VC investment in new energy alternatives, electric vehicles, and cleantech.

“Heading into 2023, the acceleration of investment in energy alternatives is particularly exciting as such investment is critical for meeting the world’s climate change targets.

“There is some sense that IPO activity could make a broad return in the second half of the year, with some pockets of activity even before that.

“ESG businesses could be particularly compelling; while we might not see IPOs in the space right away, we could start to see companies beginning the work required to become IPO ready.”

Comment: Resilience will save us from the gloom