Quiet year for VC investment into start-ups
Venture capital invested into Scotland’s start-ups picked up in the third quarter, but 2023 will be significantly quieter than the last two years.
There were 28 deals in Q3 worth a combined £202 million, the highest value quarter in Scotland since Q2 2022 when £325m was recorded involving 45 deals.
However, the first nine months of this year have seen deals valued at just £335m, well down on the same periods for 2021 (£529m) and 2022 (£623m), when the market was extraordinarily busy following the pandemic.
Standout deals in Q3 noted in KPMG’s latest Venture Pulse report include alternative meat start-up Enough which raised €40m in equity to help bring more plant-based chicken, mince and dairy products to supermarkets and fast-food chains.
Elsewhere, Glasgow-based chemistry pioneer Chemify secured £36m of Series A funding to develop its technology to make complex molecules on demand. And Oban-based Oceanium secured $2.6m in funding to scale up its technology to meet market demand for its seaweed material.
Graeme Williams, head of corporate finance M&A for Scotland at KPMG UK, said: “Q3 has been an outlier for VC investment in Scotland this year, mainly due to a handful of higher value deals taking place.
“Given the uncertain environment including concerns about valuations, potential returns, the lack of exits, high interest rates, and other factors, the time to complete VC deals has slowed considerably across most regions of the world this year.
“Investors are adopting a more cautious approach, conducting additional levels of due diligence, and seeking companies with well-defined paths to profitability. However, businesses with a proven product, market fit, and strong customer data will continue to attract attention of investors.
Amy Burnett, head of KPMG private enterprise access at KPMG UK, said: “Scotland remains an attractive destination for VC investors, especially given our diverse ecosystem of innovators and high performing sectors including healthcare, energy and tech.
“Investment is also finding its way beyond the central belt and north east of Scotland, with significant investments taking place in Oban, Dundee and Perth in the latest quarter.
“Scotland still has a glut of exciting scale up businesses which are continuing to push themselves to grow despite a tougher market.
“Support is there for Scotland’s innovators, including the announcement of a new £150m fund from the British Business Bank to support start-ups. Scottish VC fund, Par Equity, also launched a new £100m northern start-up fund earlier this year and Foresight has its own £60m fund.
“These are new avenues of funding which are undoubtedly being used, meaning the year’s final quarter could well result in a higher volume of VC deals as a result.”
Across the UK, the value of VC investment remained stable in Q3, despite the volume of deals falling by over a third quarter on quarter.
Half of the VC investment made into the UK during Q3 2023 ($2.6 billion) flowed into businesses based outside London.
Steady course expected in Q4 2023
VC investment is expected to remain relatively soft heading into Q4 2023, given ongoing uncertainties in the global VC market and a heightened level of investor caution.
Energy, cleantech, and AI, however, are expected to remain highly attractive to VC investors across much of the world. The major question heading into the end of the year is whether there will be any additional IPO activity in the wake of the three IPOs in late 2023.
Although a dramatic reopening of the IPO market is not expected, additional exits could spark a renewal in IPO activity heading into the first half of 2024.