Venture Capital in the UK. What we know and where we need it to grow.

The report is worth a read, providing interesting statistics on the health and opportunities of the UK venture landscape and the businesses who benefit from it. To highlight some of the key findings, here are some of the points we found most interesting (broken down into some relevant themes alongside some of our own thoughts where relevant):

The UK VC market is the third largest in the world, ranking behind only the US and China, and is significantly larger than other European markets. Approximately £8bn of capital was invested into UK venture-backed businesses in 2023.

This is a healthy figure to see and clearly demonstrates plenty of capital being deployed, though this should be considered against broader trends – for example, Pitchbook have referred to 2023 as being a “challenging” year for VC funding, stating that “deal-making, valuations and exit activity were all down in 2023 with many investors sitting on the sidelines instead of deploying capital” . It will be interesting to see how this figure has (hopefully) grown in 2024, particularly in light of one of the BVCA’s own podcasts from the start of this year, which gave the following gloomy message: “Survive to ’25 – for those founders and companies that have enough cash to get through in 2024 they should then look to come back to the market next year.” . Interestingly, the £8bn figure doesn’t include angel investments, secondaries or “growth equity”.

“Early-stage companies make up circa 85% of all venture backed companies in recent years. While this positions the UK as a leading hub for start-up founders and entrepreneurs alike, it also demonstrates barriers in scaling up companies through the venture capital pipeline which could negatively impact the UK’s long-term competitiveness.”

Although availability and deployment of capital has improved over the last few years, UK companies can struggle to source domestic funding for significant scale (Series B funding and beyond), leading to a greater reliance on international investors. Investment into the UK from overseas is a good thing, but there are concerns that this “poses a relocation risk of key talent and IP rights out of the UK”. This is perhaps best illustrated by the composition of investors backing University spinouts, “with the proportion of deals involving UK only investors dropping to 63.4% in 2023 compared to 81% in 2020”.

Linking to the above point on international funding, the report states: “Circa 40% of capital raised by UK VC funds comes from UK investors, in contrast with France or Germany where domestic investment typically reaches over 70%. This points to a significant headroom for growth in domestic VC investment in the UK, including capital coming from UK pension funds, to fully unlock the potential and boost investment in the UK economy.”

Typical holding periods (i.e. time between investment and exit, or other liquidity event for the investors) for VC backed businesses currently stand at 4 – 8 years, “but can be for more than 10 years”.

Anecdotally, some funds we have recently spoken with have mentioned 8 – 12 years as being fairly common for exit horizons. Either way, timescales appear to be getting longer than what used to be a common target of circa 5 years.

“Almost 50% of venture businesses backed in 2023 were outside of London.”

We’re sure this is intended to come across as a positive statistic – whilst we acknowledge that, in many ways, it is positive and shows improvement to the London-centric mindset, there must be more that can be done to move the needle here. After all, London makes up only around 13% of the UK population . Wouldn’t it be nice to see this tipping to over 50% outside of London in 24/25?

“Approximately 80% of VC firms are based in London.”

See above! Though from our experience there has been major improvement on this over the past 5-10 years (we couldn’t trace figures for the position 10 years ago, but would suspect this to be closer to 99/100%!) – using Bristol as an example, funds such as Mercia, Maven and Foresight have opened bases in the city in recent years, alongside new funds such as QantX and Science Creates Ventures (SCVC). There are many reasons for this but a key factor will be the work done by the government owned British Business Bank (BBB), which was founded in 2014 with a mandate to support the growth of businesses across the UK as a whole, and in particular the regionally-focussed funds backed by BBB – the BVCA report recognises this, stating that BBB: “plays a key role… recognising the importance of strengthening VC availability outside the traditional London-centric focus.”

Where international investors are attracted to the UK, the BVCA would like to see more of them opening UK / London offices – “fund managers based in the UK are twice as likely to invest outside London compared to those only based abroad. This would help drive more investment into emerging technology hubs beyond London and strengthen the national technology landscape across the country.”

“VC investors are proportionally over-weight in the technology sector relative to the rest of the UK economy. The UK tech sector leads the way in Europe, with eight UK cities home to two or more unicorn companies”.

These cities include Bristol, Oxford and of course London, all home to RWK Goodman offices!

The top sectors by percentage proportion of venture capital investment in 2023 were: 1) Application Software, 2) SaaS, and 3) Cleantech.

It’s interesting to see “application software” outranking other sectors in these statistics, particularly as more and more traditional application software seems to have been migrating to a SaaS model over recent years. Though we’re not clear on how the BVCA has delineated between these two categories. In any event, the unsurprising news here is that non-cleantech focussed hardware remains significantly more difficult to scale than software (and doesn’t directly appear in any of the top seven sectors identified in the BVCA report).

Broadly speaking, UK VC funds have delivered good returns to their investors, though must keep working to remain competitive. Looking at Total Value to Paid-in multiple (TVPI, i.e. the total value of a fund as against the amount of capital originally put into it), “UK VC funds perform in line with their European peers but lag the US. While the pooled TVPI multiple of 1.87x for UK fund with 2002-2019 vintages is slightly lower than for European funds (1.96x), the median fund performance is on par (1.61x versus 1.60x). US VC funds demonstrate the highest total returns, with a pooled TVPI of 2.01x and a median TVPI of 1.78x.”

The report cites the proportion of equity deals for teams with at least one female founder as being 28% (up from 18%), but only 3% of all funding is reported as going to all-female teams. More promisingly, 41% of founders identify as coming from an ethnic minority background.

Diversity and representation in the VC ecosystem is increasingly and rightfully a key topic. Although it is good to see that the number of founders from ethnic minority backgrounds has increased, it is perhaps time to see more affirmative action being taken to support female founders. The report also states that only 14% of senior investment roles in VC firms are occupied by females – would attracting more women into the VC industry help to address some of the imbalance in funding?

The report rounds off with a number of recommendations from the BCVA on how the UK should protect and build on the strength of its VC market. These include, amongst others:

• A stable and competitive tax system;
• Predictable and world-class regulatory standards, “which are applied proportionately and do not disadvantage businesses seeking private capital investment”;
• Increasing UK pension investment in private capital;
• Continuing to “expand the remit of the British Business Bank to invest across the whole range of UK venture capital and growth equity funds”;
• A remit to “Expand funding for and resources of both UKRI and Innovate UK with a focus on investor readiness, so that startups are better prepared to pitch for VC investment”;
• Increasing limits on SEIS, EIS and VCT investments into knowledge intensive companies; and
• A need to “Remove constraints on companies accessing EMI reliefs at the later stages of a company’s development.”

Although highlighting several areas for improvement and warning of competition from international markets, the overall tone of the report appears to be a positive one. The widely popularised unlocking of pension funds into private businesses should also be a boon. The BVCA report reflects that “11 of the UK’s largest Defined Contribution (DC) schemes have committed to increasing the proportion of their DC default funds allocated to unlisted equities, with objective of allocating at least 5% of that capital to such assets by 2030.” This would still lag behind the proportions of pension funds allocated to these securities by international “competitors” such as the US, but is 5% of a very significant amount of capital.

 The RWK Goodman Tech team works closely with VC and private equity funds, and regularly supports scaling businesses and founder teams seeking investment – through this work we have experienced first-hand some of the themes recognised in the report, including the slow but welcomed improvement in availability of capital, regional growth outside of London and more diverse founder representation. Over the coming years, we are looking forward to working with more UK entrepreneurs and investors to do our bit in order to grow exciting businesses and improve the UK funding landscape as a whole.

1. 1. https://pitchbook.com/news/articles/2024-europe-vc-prediction
   2. https://www.bvca.co.uk/insights/thought-leadership/details/The-outlook-for-venture-capital-and-tech-in-2024-growing-pain
   3. https://worldpopulationreview.com/cities/united-kingdom/london