Investment in Scottish startups almost halved last year as part of a trend that saw venture capital activity decline around the world.
Scottish startups secured £369m in funding across 115 deals, according to KPMG. Risk pulse survey. During the final quarter of 2023, a total of 45 deals were recorded for Scotland, worth just over £71m.
The latest figures show a stark contrast to the previous two years, which saw investment in Scottish startups reach record levels.
Companies operating in the Scottish tech ecosystem raised £628 million in 2021 and exceeded expectations in 2022 with £707 million of funding despite difficult economic conditions.
Graeme Williams, head of corporate finance M&A for Scotland at KPMG UK, said statistics show the market has “reached a more stable point” and the consultancy has seen greater caution among investors over the past year.
“Looking ahead, venture capital investment is likely to remain stable at least in the face of challenges such as geopolitical complexities. “However, based on the deals we have seen, there is clearly still a huge interest in Scottish businesses and investing in them.”
Major deals in Scotland last year included alternative meat startup Enough, which raised £31m in capital, and Manus Neurodynamica, which closed a £2.6m funding round.
Similarly, fintech company DirectID, which provides data to optimize credit and risk decisions, secured a £7.69 million minority investment from IKEA's investment arm, Ingka Investments.
Amy Burnett, senior manager at private firm KPMG in Scotland, said these funding successes still show investors' appetite to back Scottish startups.
“We continue to see investors focus on new emerging technologies such as cleantech, artificial intelligence and life sciences more generally, including medtech, all strong areas in Scotland where we are seeing intellectual property-rich companies emerging from universities. “, he claimed.
“There is no doubt that there has been a re-levelling of the markets, but I am hopeful that our Scottish founders, who have historically taken an astute approach to growing their businesses, are already raising funds.”
Falling investment in Scottish startups reflects wider UK conditions
The Scottish startup ecosystem was not the only one to experience a sharp drop in venture capital funding last year, KPMG noted.
While London continued to attract the most venture capital investment with £10.7bn across 1,495 deals, this also marked a significant drop from the £22.3bn raised by London companies in 2022.
London-based companies accounted for five of the top 10 European fundraisings in the final quarter of 2023, including £788m raised by communications company DAZN.
A £141.6m raise by Manchester-based Castore was also one of the top ten deals in Europe.
“Fast-growing companies in the UK have been quite resilient to the global slowdown in venture capital investment, and fundraising levels remain on a positive trajectory and above pre-pandemic years,” said Nicole Lowe, head of KPMG's emerging giants practice in the UK.
“While there is a real yearning for normality and a period of stability this year to help boost the fundraising environment, conditions are unlikely to improve much over the next 12 months.”
Companies looking to raise funds will need to ensure they have really strong business models and management teams to attract venture capital investment, Lowe added.
“Given the global economic climate, venture capital is shifting from a 'growth at any cost' model to prioritizing innovative companies with strong unit economics.
“This new focus on strong gross margins and effective customer acquisition strategies underscores a balanced approach to risk management and value creation, favoring sustainable growth and financial stability over rapid cash burn and scale.”
