Early-stage investment is slowing. There may be local headwinds, but are we at the right stage of the cycle for VC exits, asks Beauhurst’s Henry Whorwood.
Measuring various economic signals at the beginning of a year can be misleading. And annualised figures can hide turbulence. To borrow from football punditry, 2024 was certainly a year of two halves – and the latter half seemed to be littered with own goals.
Crucially in the segment of investing, our focus at Beauhurst is on the decelerating number of new businesses starting up – as is the number of businesses getting their first round of external financing. Financing for firms already on the funding ladder is slowing, too. It’s hard work finding the good news among a raft of problems, some of which are global in origin and some of which are UK-specific.
Funding go-slow
Funding is slowing down for most businesses. Last year saw a drop in the number of deals completed by around a quarter, and the final quarter of last year saw the lowest deal count since 2014.
The number of new companies obtaining their first round of financing, typically from angels and/or Seed Enterprise Investment Scheme funds, has been falling since 2021 – and it continues to fall. There’s a real variety of causes behind this slowdown, but I think the main two are lack of liquidity and lack of confidence. Of course, there may also be a slowdown in attractive investible opportunities.
The liquidity issue reflects, in part at least, where we are in the cycle for risk capital. The most common exit route for an equity-backed, private UK company is a sale to another UK company.
Feeding doubt
Although the sale of businesses to international companies, particularly US ones, is more eye-catching – both for the quantum involved and the political interest in lost jobs – the more common exit is domestic. At big firms, you have to be quite bullish to be in the market right now and making that kind of deal. So the slowdown in funding isn’t just the product of the lack of liquidity; the spiralling costs of energy and employment are feeding doubt and timidity among UK early-stage investors across the board.
Across the economy, unemployment is ticking back upwards. Having fallen to 4.2% in Q2 2024, it increased to 4.4% in Q4 according to the Office for National Statistics, which also estimates a monthly 0.2% drop in the number of payrolled employees. It’s hard to see how this is anything other than a direct consequence of the jump in Employer National Insurance. Without a return of business confidence it is difficult to imagine that it won’t accelerate from here. Loss-making but fast-growing firms face a new pinch from the increased bill even without making any new hires.
Tech time
Not all sectors are created equal – some are faring better than others. Artificial intelligence (AI) is an unsurprising bright spot. Fear of missing out means even those investors most desperately waiting for an exit are putting their hands in their pockets. It was the only significantly sized sector to see year-on-year growth between 2023 and 2024, with 2024 being a record for the amount invested – more than £4bn. The number of deals done remained flat at 835.
Against a difficult backdrop, these numbers are genuinely positive for the UK’s tech sector, but it’s hard to shake the feeling that we might have too many eggs in that particular basket. The launch of Chinese tech minnow DeepSeek’s AI reasoning model sent shockwaves through tech stocks in the US. Several big investors have questioned the exuberance of the investment in and pricing of some AI businesses. Any of those jitters will no doubt continue to ripple back across the pond to the UK.
Henry Whorwood, managing director – research and consultancy, Beauhurst, a publisher of data and analysis on UK high-growth and ambitious companies, and a member organisation of the Corporate Finance Faculty
