Small firm equity cash fell by a tenth last year

SME Publications/ SME XPO 2024

Other key points in its newly published results reveal university spinouts raised the highest amount of equity finance on record, – 12 per cent of all UK equity investment during the year.

The UK has scaled a number of technology sectors through its VC ecosystem, with life sciences one of the largest deep-tech sectors and, while the Bank’s overall share of equity finance fell slightly in 2022, it remains more likely to invest in tech companies and university spinouts than the wider market.

CEO Louis Taylor described 2022 as “a year of two halves for small business equity” investment, with record levels of finance raised over the first two quarters of the year, followed by a 47 per cent decline in total investment during the second half. This decline reflected concern about the overvaluation of deals, and the effects of higher inflation and rising interest rates.

“However, there are still some bright spots that can be drawn from this year’s report, in particular levels of investment in university spinouts and breakthrough technology sectors,” she said. “While it is still too early to tell the full scale of the downturn in investment, the UK’s broad and advanced equity finance markets are well placed to support recovery”.

The downturn reflects the fact that venture VC fund managers were reducing their dealmaking activity and focusing more on business fundamentals, to compensate for the rapid capital deployment in previous months.

Growth stage investment declined by 25 per cent to £8.2bn in 2022 and was 54 per cent lower when comparing both halves of the year. A key reason has been the lack of exit opportunities via trade sales or public listings, causing investors to avoid larger deals as they attempt to preserve their capital.

This overall trend has continued into the first three months of 2023, during which £2.2bn was raised by UK small businesses – a 28 per cent drop in investment value compared with the last quarter of 2022.

The rise in university spinouts represented a record year and a total equity investment in at a value of £2bn. The average deal size was £8.9m, which was 33 per cent higher than the wider market.

The highest number of spinout deals belonged to the University of Cambridge, with 33. Oxford ranked second with 31 and Edinburgh third with 15. Spinouts from either Cambridge or Oxford raised £12.7 million on average across 192 deals between 2020-2022.

While tech companies continue to receive the majority of UK equity finance, overall investment value in the sector fell by 11 per cent, although certain sub-sectors still experienced investment growth; the cleantech sub-sector, in particular, bucking the trend, with investment increasing by over 50 per cent to £0.9bn.

The Bank says it remains more likely to invest in spinouts and tech businesses than the wider equity market. It also found that a greater number of deals went to diverse teams, with a quarter going to companies with at least one female founder.

British Patient Capital CEO Catherine Lewis La Torre said: “The data highlights the fragile operating environment for companies as they navigate a tough economy and a more challenging route to accessing growth capital.”

She did however acknowledge the “bright spots” and green shoots of the next generation of technology – including cleantech, which bucked the wider market trend.

“There is even more opportunity ahead for long-term investors. The UK is the third largest market in nanotechnology, while space technology presents huge potential and one that VC-backed start-ups are already beginning to disrupt. Leveraging this opportunity is crucial and requires patient capital to fund the necessary research and development.”

British Business Bank

SME Publications/ SME XPO 2024