Equity investment into small businesses declined last year due to worsening market conditions, but there were some bright spots in the technology space.
The total value of equity funding into the UK’s small firms declined by 11 per cent to £16.7bn in 2022, due to a significant drop-off in the second half of the year, according to the British Business Bank’s annual small business equity tracker.
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“2022 proved to be a year of two halves for small business equity investment, with record levels of finance raised over the first two quarters of the year, followed by a 47 per cent decline in total investment during the second half,” said Louis Taylor, chief executive of the British Business Bank.
“This decline reflected concern about the overvaluation of deals, and the effects of higher inflation and rising interest rates.”
The total number of deals dropped by seven per cent, falling from 2,912 in 2021 to 2,702, the first annual drop in equity deal volumes since the Beauhurst data series began in 2011.
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The state development bank said that the downturn reflected venture capital (VC) fund managers reducing their dealmaking activity and focusing more on business fundamentals, to compensate for rapid investment in previous months.
However, there were some “bright spots” in the technology space, the British Business Bank said.
While overall equity investment into UK technology firms fell by 11 per cent last year, cleantech saw a 50 per cent rise in funding to £900m.
Meanwhile, UK nanotech investment soared by more than 220 per cent in 2020-22 compared to 2017-19, giving the UK the third largest market share globally.
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“Being home to a number of world-class universities and the leading VC market in Europe, the UK has scaled a number of technology sectors through its VC ecosystem,” the British Business Bank said.
“Looking at total VC investment and the UK’s share of the global market, British Business Bank analysis finds that the UK performs well across fintech, SaaS (software as a service), life sciences and AI, with life sciences as one of the UK’s largest sectors within the broader deep tech category.”
The state-backed bank said that it remains more likely to invest in tech businesses than the wider equity market, with 48 per cent of Bank-supported deals in the sector, compared to 42 per cent across the overall market, in 2020-22. It cited programmes such as future fund: breakthrough – the successor to the pandemic-era future fund, which funds high-growth, innovative firms.
“The tech sector is still attracting a healthy level of venture capital investment, but it has shown it is not impervious to the wider economic conditions,” Taylor said. “It’s promising to see cleantech bucking this trend as investors look to support environmentally motivated technology.
“At the British Business Bank, we are committed to backing innovation, ensuring innovative businesses can access the right capital to start and scale. The data in our latest report shows evidence that this priority is being felt across the small business equity market.”
It was also a record year for university spinouts, which received 12 per cent of equity investment in 2022, at a value of £2bn.
