UK venture capital funding slumped in the second quarter of the year as an investment frenzy tailed off amid rising interest rates and the prospect of a looming recession.
Total cash injected by venture firms in the UK fell to $7.1bn across 478 deals between April and June, down from an all time high of $9bn in the first three months of the year as a global tech downturn that has rocked listed tech firms hit the private markets, according to a report from analytics firm CB Insights.
Venture firms have felt the pinch of rising interest rates in the last three months which has put an end to the cheap cash that fuelled an investment boom for the last decade. A looming recession has also caused investors to pull back from firms with expansive growth plans and push for a faster route to profitability from founders.
Analysts at CB Insights said that all regions globally had been hit by a slowdown, but European venture had proved more resilient than others.
“As investors scaled back, funding shrank across all major regions in Q2, including the US and Asia with a 25 per cent quarter-on-quarter drop each,” the analysts said.
“While the US drove almost half of all funding ($52.9bn), Q2 marked its lowest funding amount since 2020. In contrast, Europe-based startups only saw a 13 per cent dip in total funding quarter-on-quarter.”
Henry Whorwood, head of research and consultancy and analysis firm Beauhurst, told City A.M. that a smaller fall in funding had been driven in part by lower European valuations to begin with, as well as a different mix of startups to other regions.
Europe’s startups and scaleups look different: more fintech and more deeptech. And we’ve had more investors moving into Europe as a geography, which gives us momentum,” he said.
“One of the reasons non-European investors are interested in Europe is lower valuations, which is still true.”
Early stage startup funding stayed comparatively buoyant in the second quarter, making up 64 per cent of deals globally and 67 per cent in the UK.
The figures mark a continuation of the first three months of the year where early stage venture funding and valuations of early stage firms remained resilient compared to late stage, due to tax incentives for investors and insulation from public market volatility.
“The Seed Enterprise Investment Scheme and Enterprise Investment Scheme drive the bulk of UK early-stage activity: these incentives are still strong,” Whorwood told City A.M.
“Frankly, around the world, early-stage activity should stay strong: one should be making these investments on 5-10 year horizons, so the only people pulling back should those with liquidity crunches caused by the current issues.”
Later stage tech firms have been hit hard by volatility on the public markets as shorter term lucrative exits via listings remain largely off the table.
The downturn has slashed billions from valuations at bigger tech firms in the past three months. Swedish BNPL firm Klarna was this week rocked by an 85 per cent plunge in its valuation to $6.7bn this week, down from $45.6bn a year ago, amid a slowdown in funding after its boss said last month that it was shifting its investment to focus on profitability.
Top VC firms have also been sounding the alarm to founders that the days of expansive growth are over. Silicon Valley venture giant Sequoia said in a presentation to founders earlier this year that “capital is becoming more expensive while the macro is becoming less certain, leading to investors de-prioritizing and paying up less for growth.”