City of London skyline

VC investment continues to flow to London

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The U.K. economy is in a parlous state. With the country once again locked-down, the latest (although lagging) figures from the Office for National Statistics show that after a period of modest growth, gross domestic product was more than 8.0 percent below its pre-pandemic peak in November. A rapid recovery is not expected until the vaccine program has an impact and large swathes of the nation return to work.   

So given that Covid has wreaked havoc to not just the U.K. but also the world economy, you might expect investment in tech startups to sharply down but that’s not the case. According to figures published by London & Partners –  VC activity has been barely dented by the impact of the virus. 

Released last week, the data suggest that 2020 was – counter-intuitively – a record year for tech investment across the whole of Europe. And while London’s tech startups – the focus of the report – didn’t attract funding on quite the same scale as in 2019, they came pretty close.  

In money terms, investment in Europe totaled an unprecedented $43.1 billion out of $272 billion globally. For its part, London remained the biggest magnet for investment in Europe, attracting $10.5 billion in funding compared with $10.8 billion in 2019.  

As the agency responsible for promoting the U.K. capital, London & Partners can’t resist a certain amount of flag waving, pointing out that London attracted more funding than Paris, Berlin and Stockholm put together. As such, it continued to be the top destination for startup capital in Europe.

The Mega-rounds

London is also – according to London & Partners – Europe’s most international city, with 57 percent of VC funding coming from outside Europe in 2020. This compared to  49 and 43 percent respectively flowing into the closest challengers, Stockholm and Berlin. However, the interest of U.S. and Asian investors tended to be mainly triggered by the so-called mega-rounds. For instance, while just 12 percent of seed funding emanated from U.S. investors, that figure rose to 57 percent in rounds worth between $100 and $250 million. Meanwhile, 39 percent of funding for deals worth more than $250 million came from Asia.   

In other words, global investors were focusing on businesses that have already proved themselves. 

Tough Times For Some

And there is parallel evidence suggesting that for some startup companies, times are pretty tough. For instance, regularly updated figures compiled by London Innovation Centre, Plexal, and market intelligence company Beauhurst indicate that across the UK as a whole, more than 1,700 startup companies have gone into administration since the start of the pandemic.  

And for businesses that haven’t raised cash before, investment, the value of investment has fallen by around 47 percent since 2019 with the number of deals down by  25 percent. In other words, the largesse of investors is not evenly spread.   

And there is significant variation in activity across sectors. Returning to the London & Partner figures, fintech was by far and away the main destination last year, drawing in 41 percent of investment into London, with enterprise software, transport, and health also doing well.  

The Global Picture

London dominates Europe but globally there’s quite a lot of catching up to do. While the U.K. capital is the only European city to rank in the global top ten, it trails Beijing, San Francisco, New York and Shanghai.    

Overall, though the investment picture bodes well for London’s startup ecosystem. However, before we celebrate too much, it’s worth remembering that behind the headline figures, these are indeed very tough times. Tech startups attract investment because their backers are looking beyond the pandemic to opportunities further down the line. But in the current climate very early-stage businesses may struggle to raise finance as investors look to shorinng up their existing portfolio companies and to safer bets with better-established business models.

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Roland Millaner