AI remains robust as venture capital slumps
Venture capital investment into Scotland’s start-ups has dropped significantly in the second quarter in line with a slowdown in the global deals market, according to KPMG’s latest Venture Pulse report.
Artificial intelligence is now one of the few resilient sectors continuing to attract a steady flow of investment.
North of the border there were 28 VC deals worth £63m, marking an 80% drop compared with the same period last year when £325m was invested across 45 deals.
The total for the first half of 2023 now stands at £133m – sharply down on H1 totals for 2021 (£332m) and 2022 (£506m), when the market was extraordinarily busy following the pandemic.
Standout deals in Scotland during the quarter include Manus Neurodynamica, which develops and markets products and technologies for neuromotor assessment. The company closed a £2.6m funding round to support the commercialisation of its NeuroMotor Pen – a medical device to aid diagnosis and monitoring of neuromotor disorders including Parkinson’s disease.
The quarter’s largest VC investment went to Glasgow-based Chemistry pioneer Chemify which secured £16m in later stage funding to develop its technology to make complex molecules on demand.
Graeme Williams, head of corporate finance M&A for Scotland at KPMG UK, said: “There’s been a visible slowdown in venture capital fundraising globally, and Scotland is no different.
“After two years of exceptional activity, the market has reached a more stable point. However, there is a noticeable sense of caution prevailing, with VC investors more wary about committing to bigger deals. The smaller investments in seed, angel, and series A stages are holding steady.
“Looking ahead, it’s likely that venture capital investment will maintain its stability in the third quarter of 2023. Despite ample funds, well known challenges including geopolitical complexities, and the potential for further interest rate rises will persistently influence the volume of deals taking place.”
Amy Burnett, head of KPMG Private Enterprise Access at KPMG UK, said: “Despite the slightly downbeat figures for Q2, we continue to see promising businesses in Scotland secure investment and attention both home and abroad.
“This is especially true in the tech and MedTech sectors, where we’re seeing robust growth. Investment in AI and generative AI remain one of the few resilient areas of investment in the current market. As is always the case, those with a proven product, market fit, strong customer data, and clear paths to profitability will continue to gain attention from seed and series A investors.”
VC investment into the UK remained stable. During April to June, £3.2 billion was invested in UK businesses, with 551 deals completed during that period. Whilst investment was down £0.3bn on the opening quarter (£3.62bn), the number of deals completed fell by 23% from 715 in Q1 23.
More than half of the VC investment made into the UK during Q2 23 flowed into London, with £2.2bn raised by London based businesses across 288 completed deals during the period.
Standout deals included the £129m Series E funding round for Quantexa and £105 million raise forAscend Gene & Cell Therapies for its gene therapy manufacturing technology.
Mega deals slide as vital early-stage investment holds steady
With no end in sight to market challenges, VC investors globally continued to hold back from making large mega-deals and late-stage deals in the quarter. More broadly, the steep decline in late-stage deal value and number of deals — particularly for Series D+ deals — continued in Q2’23. This continued pullback was not a surprise given ongoing investor concerns about valuations and a lack of exit opportunities the report found.
US-based payments company Stripe’s $6.9bn raise was by far the largest VC round of the quarter globally. After Stripe, Singapore-based online marketplace startup Shein raised the next largest deal ($2 billion), followed by US artificial intelligence startup Inflection ($1.3bn) and India-based educational technology company Byju’s ($700m).
Eyewear retailer Lenskart, also based in India, rounded out the largest 5 deals with a $600m round. Overall, the top 10 deals globally were spread among eight countries.
In the UK, more than 60% of completed deals in the first half of 2023 were at seed, early and series A stage, showing that innovative, high-growth potential businesses are appealing to investors.