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UK defends ‘fintech crown’

HSBC’s purchase of Silicon Valley Bank’s UK arm and government attempts to foster innovation outside the capital are drawing greater attention to the country’s VC ecosystem

This article first appeared in the April 2023 UK Insights Report

HSBC’s purchase of Silicon Valley Bank’s UK arm and government attempts to foster innovation outside the capital are drawing greater attention to the country’s VC ecosystem

Despite news reports in March that thousands of UK tech firms were at risk following the failure of Silicon Valley Bank, the crisis should leave barely a scratch on the country’s venture capital industry. The US bank had a limited presence in the UK and, according to reports, a quick sale to HSBC created little upheaval for those affected. The episode had another effect though, underscoring the economic significance of venture capital and the start-up economy to many in government and highlighting to others too how UK VC continues to develop independently from goings-on in California.

Despite a global downturn in valuations which started last year, London’s tech firms raised double the amount of investment than any European city during 2022. London helped boost the total amount of VC funding secured by UK tech firms in 2022 to $29.9billion, according to figures from Dealroom, making the UK the third largest country for tech investment behind the US and China.

According to data from KPMG, London has benefitted the most, drawing in 72% of VC cash across 1,770 deals last year while investment into the regions fell by £3billion year-on-year, with £6.2billion raised over 1,443 deals in 2022. High-profile funding rounds included the $1billion Series D round for, the $312million Series G round for Go Cardless and a $200million Series D for Paddle.

Last July, London’s Deputy Mayor for Business crowned London the “fintech capital of the world” claiming it was home to more fintech companies than any other city globally. “London‘s tech sector is looking resilient, despite the challenging context,” said Laura Citron, CEO of the city’s business agency at the start of this year. “Investors have raised more capital to deploy into high-growth companies than ever before. Innovation in London continues to be grounded in the city’s deep historic strengths – so we see sectors like fintech, edtech and gaming thrive. This data shows that London continues to be Europe’s tech capital and one of the best places in the world to scale a tech business.”

Talent is without doubt a big part of London’s success story. In a survey by Private Equity Wire, 73% of respondents said they consider the UK to be an attractive talent pool to recruit from or within. A lower proportion (45%) believe that Brexit has helped the attractiveness of the UK from a private equity point of view. Nevertheless, US-based VC firms including Bessemer Venture Partners, Lightspeed Venture Partners and General Catalyst have all recently hired or added to their teams in London and Europe as part of a global expansion. A survey by Private Equity Wire last year found that the UK held the most interesting investment opportunities in Europe for VC fund managers, with 25% of responses, followed by Germany with 20%.

Patrick Molyneux, partner at KPMG Acceleris recently highlighted the UK’s strength in VC sectors such as sustainability, gaming and health and biotech, as well as tech sub-sectors such as regtech and cybersecurity. “Soaring energy costs sparked a significant uptick in VC investment in new energy alternatives, electric vehicles, and cleantech. Heading into 2023, the acceleration of investment in energy alternatives is particularly exciting… as we look ahead to 2023 it is likely that we’re about to enter a period of ‘new normal’ in terms of valuations and M&A. Dry powder is still being deployed — what’s changing is the way it’s being invested.”

London and the UK compete against cities and VC hubs around the world and governments are working harder to attract founders, talent and venture capital funds as they recognise the importance of innovation to their economies, says Ed Knight, president at VC firm Antler in London. “Around the world, there’s an enormous amount of innovation going on, for example in the Middle East driven by rapidly growing young populations and the energy transition, to Japan, where the government has announced its intention for Tokyo to become the most founder-friendly city in the world. In various parts of the world, new countries are embracing this innovation with different levels of enthusiasm – those which aren’t, will get left behind.”

The memory of Silicon Valley Bank may fade quickly in the UK following the government’s rescue, but founders and investors are watching the regulatory environment here closely following other, less popular policy moves. In the most recent Private Equity Wire survey, 60% of international respondents said they have confidence in the UK regulatory environment for private equity generally. According to Alan Vaksman, managing partner at UK-based VC firm Digital Horizon, the UK government tends to act more on a ‘wait and see’, conservative approach when it comes to active extension of VC funding, while some more proactive approaches emerging in Europe move ahead.

So, what does government policy look like for VC in the UK? Tech Nation – the government-backed tech incubator responsible for companies including Deliveroo, Revolut, and Ocado – will close at the end of March after the government awarded £12million to Barclays Eagle Labs instead of renewing Tech Nation’s funding. Some critics argued that it focused too much on London and neglected UK regional activity.

Also in March, the UK Treasury-backed Centre for Finance, Innovation and Technology was launched in Leeds. The chair told news reporters that its aim is not to draw the existing sector away from the capital but to help establish cities like Manchester, Belfast and Bristol as thriving fintech ecosystems in their own right.

The UK government’s March budget also announced investment of £2.5billion into quantum computing spread over 10 years, confirmation of 12 regional investment zones and changes to R&D tax credits. It was followed by a white paper on AI regulation two weeks later. There are many positives here but global VC firms are not blinkered.

Knight at Antler says the firm doesn’t see UK VC as different to other markets – it may be more advanced but there are start-ups and founders all around the world each simply with a different ecosystem to foster them. “It’s a bit like assuming the best athletes in the world are from California,” he says. “Of course, they’re not, they’re everywhere, only they might not all have the opportunity to run on a nice running track with a nice pair of trainers.”

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