A look back at 2018
Whilst VC investment in Europe reached $24.4 billion in 2018, surpassing 2017’s record numbers, the figures found that $7.7 billion was invested in UK startups over the course of 2018. This was more than 1.5 times the level invested in fast growth businesses in Germany, and 2.6 times the levels of investment seen by the startup ecosystem in France.
The true implications of Brexit remain open questions. However, the venture ecosystem would appear to have been unaffected so far. Global VC investors continue to be attracted to good quality UK businesses and are particularly focused on larger and later stage deals.
Like the rest of Europe, the UK has seen a decline in the number of completed financings towards the end of 2018, indicating that as the deadline approaches, investors are starting to grow more cautious, waiting to see whether a plan materialises. Concern around competing for talent will dominate conversations being had by entrepreneurs across the UK and could impact the growth of innovation and our startup sector as we face what is likely to be a challenging year ahead.
Unicorns spread their wings
While substantially lower than VC investment in the US and Asia, the strengthening investment level seen in 2018 bodes well for Europe’s growing nexus of innovation activity. In Q4’18, the 10 largest deals spanned six diverse countries, including the UK, Germany, France, Ireland, Denmark, and Israel.
Unicorn* births during 2018 also showed diversity, with the 10 new unicorns coming from six different countries —as opposed to 2017 when the three new unicorns were all born in the UK. The IPO market will be one area to watch as several massive unicorns, including Uber and Lyft, prepare for IPOs despite the unexpected turbulence in the capital markets at the end of 2018.
Although quite variable on a quarterly basis, corporate venture arms and corporations still remain participatory in a significant aggregate sum of VC invested. Unlike the US, corporate participation in Europe soared to an even newer high in terms of percentage of overall activity at around a quarter of all deals closed in Q4 of 2018. Corporations and their venture arms remain key to the European venture ecosystem, joining in many of the larger rounds across multiple sectors.
Place your bets for 2019
Given the strong year for VC investment in the US, Asia and Europe, including the two largest VC deals in history, the total level of investment in 2019 will be tough to match. However, there will likely continue to be substantial VC investment globally, particularly in late-stage deals.
Fintech was a key sector for investment during 2018 with $1.6 billion invested in UK fintech. In the last three months of 2018, $502.7 million was invested, with challenger banks Monzo and Zopa and blockchain company BitFury among the top funding rounds. It is expected to remain a hot ticket for VC investment across most of Europe.
James Alexander, co-founder and former CEO of peer-to-peer lending business Zopa and Director of FutureAgenda.org commented on this quarter's fintech trends.
"As we have already seen with the $2.7bn valuation of Berlin-based app-only bank N26 in their recent $300m funding round, there remains significant interest in fintech. That said, I believe there will be a shift in activity through 2019, towards funding the growth phase of the emerging winners alongside early consolidation moves (e.g. big banks acquiring either capability +/or emerging winners). The counter to this will be increasing numbers of fintech failures from those left behind or whose propositions were never sufficiently compelling in the first place. I believe we can expect huge competition as we move beyond the hype cycle."
Following Funding Circle’s IPO in 2018, other mature fintech companies might also look to exit over the coming quarters, whether through IPO or M&A. Moving forward, the sector is likely to see some consolidation as some fintechs shift to become more like banks, thereby needing to adhere to more stringent regulations. Regulation continued to be a focus area for the UK government, with a push in 2018 for the development of frameworks to guide the development and ethical use of AI.
London is unlikely to lose its status as a global financial center and concentration of traditional private investment managers overnight. That said, London’s financial industry continues to wait and see what will happen following the UK’s withdrawal from the EU. As the deadline approaches, it is likely that any decline will be due to investors pressing pause and waiting to see the ramifications of 2019.
Looking ahead to 2019 autotech – whether autonomous vehicles, alternative energy vehicles, or ride hailing – is expected to continue seeing strong investment, with fintech, healthtech and proptech likely to join this success. When it comes to technologies, investors will keep deploying substantial funds in innovative AI-first and AI-enabled businesses. And who will be gaining increasing attention from VC investors this year? Foodtech, e-sport, and e-tourism are predicted as the ones to watch.
Top UK Deals Q4
- Graphcore (Electronic Components) - $200m
- Nested (Real Estate Services) - $156.45m
- Moonbug (Movies, Music and Entertainment) - $145m
- Monzo (Financial Software) - $110.60m
- BitFury (Other Financial Services) - $80m
- Zopa (Other Financial Services) - $78.23m
- Otro (Other Media) - $58.25m
- Owlstone Medical (Diagnostic Equipment) - $50m
- Ultrahaptics (Other Information Technology) - $45.63m
- Egress (Network Management Software) - $40m
* We define a unicorn venture financing as a VC round that generates a post-money valuation of $1 billion or more.
About Venture Pulse
KPMG Enterprise’s Global Network for Innovative Startups launched the Q4’18 edition of the Venture Pulse Report. The report analyses the latest global trends in venture capital investment data and provides insights from both a global and regional perspective. This edition of the quarterly series provides in-depth analysis on venture capital investments across North America, EMA and ASPAC and will cover a range of issues such as financing and deal sizes, unicorns, industry highlights and corporate investment.