The UK has overtaken India as the third largest venture capital market in the world, now accounting for 6% of global investment as UK companies raised £72bn between 2021 and 2023, according to the British Business Bank’s annual Small Business Equity Tracker.
The UK has strengthened its international position over the past decade as its share of global VC investment has risen to 5.8% in 2021-2023 from 3.4% in 2014-2016, the largest percentage point increase of any of the top 12 global markets.
Following the market downturn in the middle of 2022, equity investment for smaller businesses has returned to 2019 levels. Full year data shows that investment declined by 48% to £8.8bn in 2023 in the UK, in line with other equity markets, while the number of deals fell by 25% to 2,152.
As has been the case in other markets, a tighter macroeconomic environment and heightened interest rates continues both to affect the relative attractiveness of the asset class and hamper exit opportunities for UK companies. However, equity investment for smaller businesses has remained at over £2bn in each of the last five quarters, demonstrating some stability in the market.
While the equity market has seen two consecutive years of contraction, investment values have increased by 182% over the last 10 years, with deal numbers 42% higher. Since 2014, more than 21,000 equity deals have been completed, collectively providing over £90bn of equity finance to support the growth of innovative smaller businesses.
The fintech sector has been a key driver of recent improvements in the UK’s international performance. The UK now accounts for 11.3% of global VC investment in this industry, behind only the US, and 48.3% of investment across Europe. Factors behind the UK’s specialisation include an innovation-enabling regulatory environment, and a strong financial services industry providing talent, networks and a large domestic market for fintech startups.
The UK has also made significant progress in the software sector, with its global market share increasing from 2.7% to 6.2% over the past decade.
Smaller improvements have also been seen in the UK’s market share in the green tech and deeptech sectors, which now account for 4.5% and 3.8% of global investment respectively.
While life sciences continue to be a strength of the UK, its global investment market share of 4.8% has remained static over the last 10 years.
The UK has strong regional ecosystems with London as a leading VC hub with a strong fintech cluster, attracting 42.6% of European fintech investment over the past decade. Cambridge and Oxford are also particularly competitive in life sciences, where they raised 7.0% and 5.0% of European investment respectively during 2014-2023.
The UK continues to close the gap on the US in equity investment. In absolute terms the US raised eight times more investment than the UK in 2021-2023, a significant reduction from 14 times more investment in 2014-2016. When adjusting for the size of the economy, however, the UK now raises the same amount of investment as the US at 0.97% of GDP. Though encouraging, the analysis suggests this has largely resulted from cyclical fluctuations since the pandemic, and not necessarily because the UK has closed the gap with the US on a structural basis.
Looking at UK market gaps on a sectoral basis, the UK performs most strongly in fintech where it raises twice as much as the US in GDP-adjusted terms. The sectors in which the UK has the largest gap with the US include life sciences, where the US raises 59% more investment, R&D intensive sectors (41%) and deeptech (27%). In these sectors, VC investment requires specialist technical and scientific knowledge, as well as large pools of patient capital, areas which remain challenges for UK companies seeking to scale.
Between 2021 and 2023 the British Business Bank supported 15% of UK equity deals and 18% of total investment through its equity programmes. This represented a slight increase from the 2020-2022 period, when 13% of deals and 15% of investment was backed by the Bank.
The Bank’s programmes have focused on financing innovative high-growth companies. During 2021-2023, 48% of Bank-supported deals were in the technology/IP-based sector, compared to 42% of deals across the overall market. The Bank is also more likely to fund university spinouts; these accounted for 13% of Bank-supported deals, compared to 9% across the wider market, with the leading contributors being British Business Investment’s Regional Angels Programme, the Managed Funds Programme and British Patient Capital.
