KPMG report shows majority of VC investment spent on larger scaleups

More than $2.5bn (£2bn) of Venture Capital (VC) was invested into UK startups over the last three months, with the bulk of funds spent on later stage deals with larger scaleup businesses, according to KPMG’s Venture Pulse survey out today.
The figures, compiled by Pitchbook found that over the first six months of the year, VC investment into the UK has risen by 37% to $5.5bn (£4.4bn) compared to 2018 ($4bn/£3.2bn). 
Investment levels for the latest quarter (April – June), were down by 14% on Q119 levels ($2.96bn/£2.4bn), but appetite for UK companies remains strong, with year on year VC investment for the quarter up 3%. Deal volume for the quarter was also down with 279 deals completed during Q219 compared to 324 in Q119. 
The latest figures reveal investors have not been dissuaded from plying the largest startups in the UK with plenty of VC. However they are not quite as confident on smaller prospects, and are pulling back the pace seen in 2018, seeking instead to invest their cash into those companies deemed ‘less risky’.  This continues a trend that started in late 2017.  Where investors were tempted to place their bets on start-ups, deal sizes were up with 2019 figures suggesting seed rounds have doubled in size from 2018 levels.
Commenting on the data, Tim Kay, Director, Innovative Startups, KPMG UK said: “Whilst it is great to see investors continuing to plough premium values into our larger scaleup businesses, the stagnation in investment levels for our early stage startups is concerning.  Just $26.9million (£21.5million) of angel and seed investment was made to UK businesses in the last three months and so we have to ask who is funding the innovators of the future.
“Unicorns do not just appear overnight: most are around four to six years old before they hit the big time and it is worrying to see this steady decline in early stage funding, which has been ongoing for the last few years. Access to funding is the foundation for growth and UK innovation could be impacted if our next wave of unicorns fail to attract the capital they need to grow now.”
The UK was home to two of the largest deals completed in Europe during April – June 2019. Checkout.com raised $230 million Series A funding to strengthening their leading position in the market, and expand to Jordan and Pakistan, whilst Deliveroo’s recent $575 million fundraise – has been put on hold temporarily as the Competition and Markets Authority (CMA) decides whether to investigate further. 
Investment across Europe remains strong as diversity remains its biggest asset
Overall the number of VC deals across Europe continued to decline, however total VC investment remained strong at well over $8bn.  The strength of Europe’s VC market continued to be defined by the growing diversity of its innovation hubs. 
Increasing investment in the Nordic countries, France, Spain, Poland and others combined with steady investment in more established innovation centres in Germany and Israel helped keep VC investment in the region high during Q219.
Key investments in Europe were led by Finland-based Wolt raising $130 million.  Other large funding rounds included Germany-based GetYourGuide  ($484 million), Spain-based Glovo app ($174.8 million), and Poland-based Znany Lekarz($93 million).
The analysis also found that corporate investors now set a record high for participation percentages in Q219. This is a testament to the ongoing trend of corporates getting more involved as a matter of strategy within the venture ecosystem, as well as Europe’s still-strong entrepreneurial ecosystem.
Artificial Intelligence tops the list of investors’ must haves
Following on the last quarter, AI drew a significant amount of attention from investors, likely a result of its overwhelming applicability to all sectors.
Compared to other technologies, AI is seen as a true game changer in terms of the disruption it poses for industries and verticals the world over –including healthcare and financial services. China in particular is investing significantly in the development of AI, with the expectation that it will become one of the country’s primary growth differentiators. While China’s VC market currently faces a number of challenges, it is expected that strong AI value propositions will continue to attract funding.
Tim Kay added: “AI is the hot ticket of the moment with VC firms, corporate investors and even a number of governments investing in AI innovations.  The UK is currently implementing the first components of its AI Strategy –supporting the development of relevant Machine Learning degree programs and research institutes at UK-based universities.
“The UK’s Centre for Data Ethics and Innovation is also in the process of consulting on the establishment of data trusts in order to support the use of AI. There is a great deal to be gained for the country that can win the race for AI dominance.”