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British VC deal volume at lowest level since 2016

VC deals UK Q3

The number of VC deals completed in the UK has plummeted to its lowest level since 2016 as investors take a ‘wait and see’ approach to the global economic downturn and impending recession.

According to a report by professional services firm KPMG, there were just 575 venture capital deals in the third quarter this year, a level not seen since the same quarter six years ago. It’s also a notable drop from the quarter prior when investors completed 865 VC deals.

Overall deal value was also markedly down compared to the preceding quarter. KPMG’s Q3 Venture Pulse report found that $4.6bn (£4bn) of VC capital was invested in UK businesses across the quarter, down from the $9.2bn (£8bn) invested in the quarter prior and the lowest since Q3 2020.

Warren Middleton, lead partner, Emerging Giant Centre of Excellence, KPMG said: “VCs are becoming increasingly cautious about where they invest, choosing to put their funds into less risky asset classes.  More than half of the investments made in the quarter were to early-stage and seed businesses, which is good news for the longer-term health of the innovation ecosystem.”

Consumer and retail space saw the biggest decrease, with VCs shifting their attention towards business productivity, digital enablement and B2B fintech solutions. The health industry also stayed “strong” during the quarter, the report noted.

Whilst UK regions attracted a higher amount of VC deals (51%/ 293 deals), London still pulled in the majority of funding at $3.2bn (£2.8bn) for Q3. Later-stage businesses in the last quarter took home 39% of VC funding.

‘VCs are sitting on their hands’

“Deals have fallen because VCs are sitting on their hands, waiting to see where valuations are going. We’re seeing a mix of deals falling over or taking longer than expected,” said David Foreman, managing director of Manchester-based VC Praetura Ventures.

“Ultimately, we’re seeing the world of early-stage funding go back to the core of where it should be. Grow fast and get VCs on board to fuel the flame, create a story of something game-changing and bring people on the journey or reset expectations and bootstrap your way forward.”

Foreman added that last year even “average companies” with “mediocre metrics” were getting funding.

Moray Wright, CEO of London-based Parkwalk Advisors, said that due to the macroeconomic conditions, the war in Europe and the energy crisis, it is no surprise that VCs are wary.

“This behaviour has led to VCs conserving their dry powder and taking longer to do deals, resulting in a drop in overall VC investments. From a university spinout investment perspective, there is a slight silver lining, in that we’ve not seen such a marked slowdown in deep tech,” Wright said.

“Investors still continue to look for solutions to some of the world’s more pressing issues in climate, life science and other key areas, and realise the patient capital required, which looks beyond general market fluctuations.”