Scottish scaleup investment dips as caution enters market 

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 north of the border, according to the latest figures from KPMG UK.

Scottish scaleups saw 14 deals completed in the first three months of this year, raising around £70 million – 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 €9 million minority investment from IKEA’s investment arm, Ingka Investments. Elsewhere £9 million was raised by Causeway Therapeutics, a University of Glasgow spin-out specialising in tendon disease. 

During the same quarter in 2022, £181 million was raised across 41 deals and a record total of £700 million 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, according to KPMG.

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 M&A for Scotland, 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 pioneer Dxcover secured almost £10 million in Series A and grant financing during Q1 to fund the development of its pioneering blood test to detect cancer at an early stage. Founder and Chief Technical Officer at Dxcover, Prof. 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 £2.9 billion ($3.6 billion) 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 Q1’23 is also the lowest raised by UK businesses in the opening quarter of a year since 2020 and significantly down on the £8.2 billion raised in Q1’21 and £12.3 billion raised in Q1’22.  Deal volumes were also muted with just 402 deals captured in the data.

Two-thirds of VC investment (£1.9 billion) coming into UK businesses in the opening quarter of this year flowed into London, with more than half of the deals completed (219) by businesses based in the capital. 

A $602 million raise by fintech player Abound (Consumer Finance) was the UK’s largest deal of Q1’23, followed by a $160 million raise by B2B focused fintech the Bank of London, a $149 million raise by EV automotive company One Moto, and a $140 million raise by autonomous vehicle software firm Oxbotica. Carmoola rounded out the largest of deals with a $126 million series A deal according to the data.

Hot sectors 

From a sector perspective, business services and energy transition continued to attract significant attention from VC investors in Q1’23, while interest in consumer retail and real estate remained dry. Looking forward, B2B technology enablement is likely to remain a key driver of investment, not only in areas like financial and health services but across every sector.

European governments race to become innovation superpowers

Several government-backed initiatives were initiated in Europe during Q1’23 to support startup growth. The Chancellor’s first budget included £3.5 billion to help the country become a scientific and technologic superpower, including funding to support next-gen supercomputing and AI research. The UK also released a whitepaper on the regulation of AI. During the quarter, the German government also launched a €1 billion fund to support growth stage deeptech and climatetech companies, while the European Investment Bank Group and five EU member states announced the European Technology Champions Initiative – a $3.75 billion fund to address funding gaps and support late-stage growth companies in the region. 

Scotland VC deal data