Site icon The Stack

SaaS, fintech, AI dominate still-booming UK tech investment

UK tech investment seed funding may be falling behind.

Image by Micheile dot Com via Unsplash.

UK tech investment boomed in 2021, with £8.2 billion of equity deals, as SaaS flourished in particular, but deep tech investment is falling behind other countries, according to the British Business Bank (BBB).

Britain’s tech sector saw 1,019 deals, 39% of all equity deals in the year, and 45% of the value, according to the BBB’s analysis of Beauhurst data. The number of UK tech investment deals was up 11% year-on-year, while the value of those deals almost doubled. Twenty of the 33 current British unicorns are tech-related firms.

Software-as-a-service (SaaS) was the most dominant tech sector, attracting £5.1 billion in equity funding, followed by fintech and AI — the consistent top three top performers when it comes to UK tech investment.

 “The average growth stage valuation reached £169m, an 88% increase on the £89.8m in 2020. Post-pandemic growth has enabled many technology companies to flourish, with VC investors competing to participate in flagship rounds, which has led to valuation step-ups,” said the BBB Small Business Equity Tracker 2022 report.

“Funds supported by the British Business Bank were more likely to invest in technology/IP-based businesses than the overall equity market in 2019-21, with 47% of British Business Bank supported deals in this sector compared to 39% for the wider market. The proportion of British Business Bank deals in technology/ IP-based businesses is higher than for PE/VC investors, where 39% of deals went to the sector in 2019-21,” the report added.

See also: Are British universities holding back tech spin-outs with unreasonable equity demands?

The BBB also said equity investment in Q1 2022 reached a mammoth £7.6 billion, significantly higher than the second-highest quarter in the past few years, when investors poured £5 billion into UK tech investments in Q3 2021. The bank didn’t break down the Q1 figure by sector, but assuming levels are roughly in line with previous years, it suggests British tech firms saw a record amount of investment.

But optimism for UK tech investment overall was tempered by concerns over falling rates of seed investment over the past decade. According to research by Google and Tech Nation, pre-seed and seed funding for UK tech startups made up 15% of all VC investment in 2011, but just 4.8% in 2021.

While the BBB doesn’t break down seed funding by sector, its figures show overall seed funding made up around 9% of all VC funding last year, a proportion which has remained consistent for the last three years (when an exceptionally large £601 million seed round in 2020 is removed).

The BBB did note the average seed stage investment was £1.8 million in 2021, a 77% increase on 2020 (again after removal of the outlier deal). “With this outlier deal removed, the average seed stage deal had remained flat since 2018,” said the report.

Encouragingly the median seed deal was also 41% up on 2020, at £492k, according to the BBB. But this lagged behind medians for venture-stage (up 49%) and growth stage (up 65%) deals.

“Whilst the number and value of early-stage seed deals increased in 2021, the rate of increase was lower than other parts of the market, leading to a fall in the proportion of deals and funding going to seed stage companies,” said the BBB report.

See also: One to Watch #8: WCKD RZR’s Chuck Teixeira on revolutionising data access in multinationals

The Google / Tech Nation report said: “If seed and pre-seed tech firms are to grow into the scaling engines of the UK economy, the supply of capital that sustains their early growth must be prioritised, or the UK runs the risk of stifling future stars of the global tech stage.

“Why does this matter from a global perspective? If the UK pipeline of innovative tech companies is curtailed then the UK risks losing that sense of identity, and renown that it has achieved over recent years, and is likely to find itself in limbo, between fast moving smaller economies like Sweden, Switzerland and Estonia, and the might of India, China and the US.”

Along with this note of caution, and concerns about the “headwinds” facing equity markets in 2022, the BBB also highlighted the relatively lower level of investment in deep tech and R&D-heavy enterprises in the UK, compared with other countries.

“Equity Tracker 2021 identified deep tech has grown in importance in the last five years, but the UK lags behind other countries in terms of investment into this sector. Deep tech covers a broad range of different sectors including AI, clean tech and quantum computing, but the key focus is on the development of new ground-breaking technology,” said the report.

Deep tech investment deals in the UK make up a comparable proportion of all VC deals when compared to the US – 22% vs 21%. But Germany (25%), Israel (35%) and China (36%) all see significantly more deep tech investment deals.

Adjusting for economy size, the UK’s deep tech deficit is even clearer; the US sees 1.6 times as much VC funding for deep tech, and Israel a huge 3.6 times. China and Sweden also see more relative deep tech funding than the UK.

“There may be structural differences in the composition of economies that account for the different VC investment focus. For instance, it’s not surprising that Germany has a greater relative focus on deep tech than the UK given Germany’s industrial base. One reason for the UK having a lower proportion of funding going to deep tech and R&D intensive sectors is the UK’s strengths in other sectors like fintech and software. Recognition of the UK’s relative success in these sectors should not be diminished,” the BBB report noted.

Follow The Stack on LinkedIn

Exit mobile version