The value of and volume of venture capital (VC) investment into Scottish businesses slumped in the opening quarter of 2023, as economic conditions started to make investors more cautious about investments.
Scottish scale-ups saw 14 deals completed in the first three months of this year, raising around £70m – the lowest raised by Scottish businesses in the opening quarter of a year since 2020.
Eight deals involved Edinburgh businesses, with six involving Glasgow-based firms, according to KPMG’s latest Venture Pulse Report.
Standout deals completed this year include Edinburgh-based fintech firm DirectID, which provides data to optimise credit and risk decisions. It attracted a €9m minority investment from IKEA’s investment arm Ingka Investments.
Elsewhere, nearly £9m was raised by Causeway Therapeutics, a University of Glasgow spin-out specialising in tendon disease.
During the same quarter in 2022, £181m was raised across 41 deals and a record total of £700m was invested in Scotland last year, despite investments dipping elsewhere across the UK; particularly in London.
Those strong volumes are unlikely to be repeated this year, as investor hesitancy has crept into the Scottish deals market, and activity returns to levels seen before the pandemic.
Amy Burnett, KPMG private enterprise senior manager in Scotland, said: “As a result of the pandemic and the substantial changes ushered in by businesses and consumers, 2021 and 2022 saw a large appetite for VC investment into Scottish innovation and our fast-growth businesses.
“This was a bit of an outlier period, and what we are starting to see now is VC investment returning to normal levels, albeit compounded by a challenging economic environment.
“The dynamic of the two factors together is making the disparity even bigger, but investor sentiment in the UK is starting to turn slightly with some cautious positivity that the worst of the market turbulence might be over.”
Graeme Williams, head of corporate finance for Scotland at KPMG UK, said: “The dip we’re seeing isn’t a trend confined to Scotland, as our data shows market uncertainty has caused VC investment to plummet across the UK and indeed globally.
“As the cost-of-living crisis continues, investors are increasingly turning away from those sectors that rely on consumer spend to drive growth and doubling down on investments in sectors where technology is addressing big macro trends such as health tech and ESG.
“While VC investment is expected to remain soft over the next few months, we are expecting that some renewed activity will be seen in the second half of the year.”
Glasgow-based blood test tech firm Dxcover secured almost £10m in Series A and grant financing during the first quarter.
Founder and chief technical officer Matthew J. Baker, said: “The investment marks a very significant funding milestone in our mission to detect cancer early and improve survival and quality of life for patients.”
A total of £2.9bn was raised by UK businesses in the opening three months of the year, reflecting the significant slowdown seen in the end of 2022.
Like Scotland, total UK VC investment in the first quarter is also the lowest raised by UK businesses in the opening quarter of a year since 2020 - and significantly down on the £8.2bn raised in the first quarter of 2021 and £12.3bn raised in the first quarter of 2022.
From a sector perspective, business services and energy transition continued to attract significant attention from VC investors in in the first three months of this year, while interest in consumer retail and property remained dry.
Looking forward, KPMG suggested that business-to-business technology enablement is likely to remain a key driver of investment, not only in areas like financial and health services, but across every sector.
Don't miss the latest headlines with our twice-daily newsletter - sign up here for free.
