Investments in fast-growth Scottish businesses cooled slightly over the summer, as economic challenges and an impending global recession saw investors take a more cautious approach.
KPMG’s latest Venture Pulse Survey showed that Scotland’s scale-ups attracted £117m of venture capital (VC) investment across 41 deals in the third quarter of 2022 - 40% less than was invested during the same time in 2021; with volumes also down by 28%.
While the second half of 2022 looks set to be far quieter, a record breaking £623m has already been invested in the first nine months of this year, almost surpassing the £626.9m total invested in 2021.
Compared with Scotland’s steady third quarter performance, VC investment in the UK fell dramatically during the summer with the volume of deals at its lowest since the third quarter of 2016. However, the volume of VC investment into scale-ups outside of London outpaced the capital for the first time in eight years during the third quarter.
The lion’s share of Scottish deals in the third quarter involved businesses in Edinburgh (18), followed by Glasgow (8), Aberdeen (4) and Stirling (3).
Most deals were late-stage VC (19), with nine seed round, seven early-stage VC and six angel investments taking place.
Standout deals during the quarter include Stirling-based Integrated Graphene, which announced plans to invest up to £8m to scale its manufacturing process for the commercial production of graphene, which is used in human diagnostics and energy markets.
Meanwhile, Edinburgh-based pureLiFi secured £10m from the Scottish National Investment Bank. The optical communications firm plans to target a global roll out of its wi-fi compatible technology.
Amy Burnett, senior manager at KPMG Private Enterprise in Scotland, said: “Despite strong fund-raising activity in the first half of the year, global economic turmoil has seen VC investment decline across all markets, including in Scotland where the value and volume of completed deals fell slightly in the third quarter.
“As the cost-of-living crisis deepens, investors are increasingly turning away from those sectors that rely on consumer spend to drive growth and doubling down on investments in those sectors where technology is addressing big macro trends such as health tech and ESG.
“With an abundance of these businesses being nurtured outside of London, it is good news for Scotland’s deep tech and health tech firms.”
Graeme Williams, M&A director at KPMG UK, explained: “As expected VCs are becoming increasingly cautious and investing funds into less risky asset classes.
“There is good news for the longer-term health of the VC market as more than half of the investments made in the quarter were to early stage and seed businesses.
“While some VCs will be focussed on existing portfolios, many have a commitment to investors to deploy capital so there are opportunities for good businesses with solid growth plans.
“Competition for well performing businesses in growth sectors will be fierce and could lead to some deal heat as we head into the final quarter of the year, but as economic conditions continue to present significant challenges, it is likely that VC investment will remain subdued heading into the fourth quarter and beyond. “
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