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Venture capital funding for UK tech startups drops 28% in 2018

Despite remaining ahead of other European countries, venture capital investment in UK tech startups has suffered in 2018 due to political uncertainty

Sebastian Klovig Skelton
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Published: 11 Jan 2019 13:00

UK venture capital funding for tech startups has dropped 28% since 2017, but continues to outpace any other European country.

British firms raised £2.49bn in 2018 according to end of year investment data from London & Partners and PitchBook, beating their German counterparts by over £1bn. London’s tech companies attracted 72% of the UK total.

“London and the UK are creating world-class companies of scale, especially in high-growth areas such as fintech and artificial intelligence (AI),” said Eileen Burbidge, partner at Passion Capital. “This presents enormous opportunity for international investors, and today’s data suggests London’s tech sector has a very bright future.”

However, although the UK remains at the forefront of European technology investment, the 28% reduction signals increasing fears surrounding the uncertainty of Brexit.

“In 2018, London was witness to internationally significant tech exits on the size and scale that many would not have deemed plausible just three years ago,” said Russ Shaw, founder of Tech London Advocates and Global Tech Advocates.

“Yet, it is without question that politics has re-entered the capital markets as an investment variable, in a big way. Data from across the Global Tech Advocates community revealed that Brexit was damaging Britain’s reputation as an investment opportunity – prompting a downturn in confidence and a willingness to direct funds here.”

Shaw added that both businesses and investors need Westminster to provide a sense of stability to renew confidence and build on the progress already made by the UK tech sector.

UK tech company exits

Despite reduced investment, however, 2018 saw 17 exits from UK tech companies, including fashion e-commerce firm Farfetch and peer-to-peer lending company Funding Circle. Sweden had the second-highest number of exits, with 10 tech Initial Public Offerings (IPOs), followed by France and Germany with eight and six respectively.

Breaking down the UK funding further, investment into the UK’s AI companies reached £736m in 2018, a 47% increase on the £499m raised the year before.

Some £153m of this was raised by AI chipmaker Graphcore alone, the UK’s newest $1bn tech company, in a Series D round.

The high level of funding received by AI companies in 2018 reflects increasing interest in the technology. “Democratised AI”, for example, was the top trend in Gartner’s Hype cycle for emerging technologies report last year, and the UK government has been pushing for greater adoption of AI since the launch of its Industrial Strategy in November 2017.

Fintech also continues to be a major draw for investors, attracting £1.17bn in venture capital funding, 90% of which went to London-based companies. Several of these London fintech firms in turn reached unicorn status, including Revolut and Monzo, which, following renewed investment, received an additional £177m and £84m respectively.

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However, businesses developing cryptocurrency and blockchain technologies experienced record growth in 2018, with UK firms receiving over £200m, up from £19.1m in 2017, and £51.96m in 2016.

“In 2019, we can expect to see sustained growth across several tech verticals – in particular, big data, AI, blockchain, retail tech and fintech,” said Shaw.

“It is now essential that we recognise the implications on investment from the other requisite variables. Talent is going to be a major challenge for the tech community, but with a commitment to digital skills across the public and private sectors, Britain will be in a position to thrive.”

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