Simon Bumfrey sees encouraging signs after a difficult summer in 2023
Is the United Kingdom’s startup investment ecosystem showing signs of bouncing back following the correction of 2022 and 2023? Well, according to the latest set of figures published by HSBC Innovation Banking (formerly Silicon Valley Bank U.K.) and market intelligence provider, Dealroom, the patient has stabilized and there are some tentative pointers to recovery, particularly in early-stage funding.
In the first quarter of 2024, British startups attracted investment of $3.9 billion, down from $4.8 billion in the previous quarter. Breaking that down, early-stage pre-Seed and Seed accounted for $279 million of that total while $769 million was raised in Series A rounds. This represented an improvement in that early-stage investment was up when compared with the previous two quarters.
A further $742 million was raised in Series B – more or less unchanged from the previous quarter – while companies at the Series C stage scooped up $715 million. In addition, six late-stage mega-rounds raised a total of $1.4 billion.
Fintech Leads The Investment Rankings
There were also signs of an old order reasserting itself. For many years, Fintech was the poster child for the U.K. innovation economy, regularly attracting the lion’s share of investment. Last year that changed. With the climate crisis acknowledged as the most pressing problem facing the planet, energy topped the investment chart. In the first quarter, financial technology was back in pole position, with companies in the sector raising $1.4 million, although it has to be said the total was boosted by big rounds for challenger bank Monzo ($350 million), payments company PPRO ($85 million) and wealth management platform Flagstone ($108).
Coming in behind, fintech, enterprise software, health and energy continued to attract considerable investment. Break the figures down into more specific segments and you find challenger banks, semiconductors and quantum computing all doing well.
But what does this all mean? Is the UK innovation economy still navigating choppy waters or is it in a better place? I spoke to Simon Bumfrey, Head of Technology and Life Sciences at HSBC Innovation Banking to get his view on the factors affecting the market and the prospects for the year ahead.
As he sees it, there are encouraging signs. “Last year, the summer was very tough,” he says. “But in the fourth quarter, we (HSBC Innovation Banking) saw an increasing number of inquiries about debt.” This was seen by the bank as an indication that the investment climate was improving. The logic is that debt deals often happen alongside fundraising events.
So while Bumfrey doesn’t feel the market is going to rocket, he does think what we’ve seen so far in 2024 is positive. In particular, he welcomes the current stability of investment around Series B and C. “That has been difficult in the past,” he says.
A trend that Bumfrey finds particularly encouraging is the ability of businesses across the U.K. – rather than just in London – to raise capital. “We are seeing activity in places like Oxford, Cambridge and Edinburgh,” he says. “That’s very pleasing.” According to the data, Edinburgh and Brighton have shown the greatest growth in investment, albeit from lower bases than some of the better known hubs.
Grounds for Optimism?
So what is driving market sentiment? At the big picture level, it’s the economy. Inflation in the U.K. has been falling and on the day I spoke to Bumfrey a rate of 3.2% was announced by the Office for National Statistics. Still well above target but heading in the right direction. Interest rates remain high but they aren’t expected to rise further and there’s an expectation of them coming down a little.
Meanwhile, Bumfrey says VCs are beginning to deploy some of their infamous dry powder. “We have a lot of good companies. Many of them haven’t raised for a while and their cash is depleted. Their incumbent VCs are realizing that it is time to invest to support these good companies.”
The question is, however, how will investment in portfolio companies by VCs affect their appetite for other investments?
A New Dynamic
The investment landscape is changing. So much so that the renewed popularity of fintech startups might be slightly misleading as the headline figure of $1.4 billion raised was boosted by major deals involving established companies. FIntech, he says, will always attract investment but it is a mature sector and the momentum lies elsewhere. In particular, he cites climatetech, quantum, AI and biotech.
There are still some ominous clouds on the horizon. Bumfrey doesn’t detect much of an uptick in IPO and M&A exit activity. “Although there are more discussions ,” he adds. This could put continuing pressure on the sums available for companies at Series B, C and beyond.
In the longer term, more work needs to be done to encourage UK-based startups to list on the London Stock Exchange. This is important for keeping capital in the UK, post-IPO.
Overall, it doesn’t appear that Britain’s startup companies are likely to see rocketing investment in 2024, but after a tough period, stability is probably good enough for now. The U.K. continues to be Europe’s biggest investment destination.
