UK start-ups are leaning on debt to fuel their growth this year as venture capital investors are buffeted by a downturn, having “lost discipline” in a funding frenzy last year, the UK chief of Silicon Valley Bank has said.
VC investment across Europe has fallen sharply in the past two quarters as aggressive rate hikes from central banks have spelled an end to cheap cash that fuelled a funding boom in 2021.
The chief of Silicon Valley Bank UK, which lends to both VC investors and start-ups, told City A.M. that the barren funding landscape was pushing firms towards borrowing to fuel their growth.
“If you look at UK and European venture, around $118bn went into the innovation economy last year and companies were racing back around [for funding]. They didn’t need debt,” Erin Platts told City A.M. in an interview.
But soaring energy costs, sharp rate rises and market volatility have caused investors to pull back from punts on growing technology firms as lucrative exits remain some way off.
“A lot of the companies that don’t have to go to market to raise equity are absolutely not going to market for equity. They’re coming to market for debt,” she said.
Investors “lost discipline” last year when capital was easy to come by, Platts added, and they were now looking to rein in their investments and get “back to basics”.
“Management teams are taking the approach of ‘okay, 2021 was kind of a crazy outlier year in terms of the amount of capital that went in the valuations’.”
The UK lender, which has operated in the UK since 2004 and is now a subsidiary of the eponymous US bank, said around 55-60 per cent of its balance sheet was made up of lending to VC and PE funds, while the rest was largely lent directly to tech companies.
Platts comments come after VC investment slumped again to $18.7bn in the third quarter of the year – down from $31.1bn in the second quarter – with VC investment in the UK tumbling by 50 per cent, according to a report last week from KPMG.
Analysts at the ‘Big Four’ firm said they expected investor caution to grow towards the end of the year, although some sectors like energy, business productivity, and cybersecurity will likely remain “hot tickets” for VC investors globally.