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What Brexit? UK startup funding has bucked a global slowdown

Lynsey Barber
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A short term hit to VC investment has not materialised (Source: Getty)

Cash being ploughed into the UK's tech startups has defied a global slowdown as the impact of Brexit turns out to be limited - so far, at least.

Venture capital investment inched up 10 per cent to $834m in the third quarter of the year, fueled by high profile rounds for several star startups including Deliveroo and Darktrace.

It comes amid a continued slowdown across Europe and the rest of the world, the latest figures from CBInsights and KPMG reveal, with VC-backed startups raising $24.1b globally, down 14 per cent on the previous quarter and falling to its lowest since the third quarter of 2014.

Read more: The UK needs tech talent quickly and it doesn't matter where it comes from

The rise in investment in the UK broke a consecutive three-quarter decline, however, total funding remains 22 per cent down on the same period last year.

The figures put to rest fears of an immediate impact from the decision to leave the EU and confirms indications that a series of funding rounds announced after the Brexit vote demonstrated continued commitment to UK startups.

The report also suggested the fall in the value of the pound may be seen as an opportunity for VCs outside the UK, echoing comments made by fintech investor Anthemis in the weeks following the referendum.

However, despite the Brexit brush off, concerns remain around the longer term impact.

"The long-term ramifications of Brexit haven’t been felt yet," said KPMG's Anna Scally. "Deals are still getting done, but many of these would have been in the pipeline before the referendum. The real impact will likely be felt heading into 2017, as the UK begins proceedings to disentangle itself from the European Union."

Unicorn's lose their shine

The number of unicorns being created - startups with a value of more than $1bn - remained in single digits, continuing a trend of 2016. Not a single startup reached a unicorn valuation in Europe for the second consecutive quarter.

This is likely a good thing, however.

"Rather than fighting to attain unicorn status quickly when they might not be ready for it, companies are instead getting more realistic valuations that reflect their current value," the report said.

"This means that companies that do achieve unicorn status should be in a better position to keep that status and to achieve strong results upon exit. On the investment side, with the clamour to find the next unicorn decreasing, investors are becoming more tactical with their investments."

The global slowdown was driven by fewer so-called mega-deals - those worth more than $100m.

Read more: Forget Brexit, this startup is eyeing "Brentry" with London expansion plans

"We’re seeing a reset in deal activity and mega-rounds but the levels still remain very high relative to historical levels," said CBInsights chief executive Anand Sanwal.

"A renewed focus on unit economics and sustainability versus growth at all costs is not a bad thing, especially in Asia and North America as both markets got ahead of themselves. The re-introduction of rationality that we are seeing is positive.”

A potential rate rise in the US, which makes up the largest proportion of investment, along with Presidential elections taking place in November have created uncertainties, however, the market is "poised to make a rebound" heading into the new year, if not in the fourth quarter.

IPO comeback

Meanwhile, IPOs are poised for "renewed growth" after the successful float of Twilio - which took place on the day of the EU referendum - sparked renewed interest.

"The success of these companies has given many investors more confidence that the IPO market is opening up again after several dry quarters. Looking ahead, it is highly likely that there will be a groundswell of additional IPOs over the next quarter and into the first quarter of 2017 as other organisations look to exit while the IPO door is open," said the report.

It comes as Snapchat eyes a potential IPO, hiring Morgan Stanley and Goldman Sachs according to reports.

"Numerous other companies are expected to follow suit, issuing IPOs either in Q4’16 or in Q1’17 in order to take advantage of the rebounding IPO sentiment. Institutional investors, in particular, are interested in IPO exits in order to enhance their return on investments," said the report.

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