Venture capital funding for start-up companies in Scotland plunged by 80% in the second quarter of this year as investors balked at higher-priced late-stage deals.
The latest Venture Pulse report from accountancy giant KPMG shows a total of 28 deals worth a collective £63 million from April through to the end of June, down from the same period last year when £325m was invested across 45 deals.
The total for the first half of 2023 now stands at £133m – significantly lower than the £332m raised in the first six months of 2021 and the £506m raised in the first half of last year when the market was "extraordinarily busy" following the pandemic.
This downward trend was also evident across the UK and globally with investors concerned about valuations and exit opportunities amid tough economic conditions. Though most experts currently think the UK will escape a technical recession, the continuing cost-of-living crisis combined with rising interest rates will hamper economic growth for the foreseeable future.
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A total of £3.2 billion was invested in UK businesses during the second quarter with 551 deals completed. That was down from £3.62bn in the first three months of this year, with the number of deals completed 23% lower.
“After two years of exceptional activity, the market has reached a more stable point," said Graeme Williams, head of corporate finance in Scotland for KPMG.
"However, there is a noticeable sense of caution prevailing, with VC investors more wary about committing to bigger deals. The smaller investments in seed, angel, and series A stages are holding steady.
“Looking ahead, it's likely that venture capital investment will maintain its stability in the third quarter of 2023. Despite ample funds, well-known challenges including geopolitical complexities, and the potential for further interest rate rises will persistently influence the volume of deals taking place.”
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The VC investment in Scotland during the second quarter went to Chemify, a spin-out from the University of Glasgow which is aiming to "digitise chemistry" in a bid to speed up the development of new medicines. It secured £16m in later-stage funding in May, and has since gone on to raise a further £36m that will be reflected in figures for the third quarter of this year.
Another standout in Scotland was Manus Neurodynamica, which closed a £2.6m funding round during the second quarter to support the commercialisation of its NeuroMotor Pen, a medical device to aid diagnosis and monitoring of disorders such as Parkinson's disease.
Amy Burnett, head of private enterprise access at KPMG, said said promising businesses in Scotland are still securing investment even though the overall figures are "slightly downbeat".
"This is especially true in the tech and MedTech sectors, where we’re seeing robust growth," she added. "Investment in AI and generative AI remain one of the few resilient areas of investment in the current market.
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"As is always the case, those with a proven product, market fit, strong customer data, and clear paths to profitability will continue to gain attention from seed and series A investors.”
Across the UK, more than 60% of completed deals in the first half of 2023 were at seed, early and series A stage.
Looking globally, US-based payments company Stripe’s $6.9bn (£5.4bn) fundraising was by far the largest VC round of the second quarter. This was followed by Singapore-based online marketplace startup Shein which raised $2bn, US artificial intelligence startup Inflection on $1.3bn, and India-based educational technology company Byju on $700m.
Eyewear retailer Lenskart, also based in India, rounded out the largest five deals with a $600m round. Overall, the top 10 deals globally were spread among 8 different countries.
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