Finance

UK venture capital investment jumps in Q2

By KPMG
Finance
Published: 14 July 2017

Global investment comes roaring back due to a resurgence in mega deals. Improbable’s landmark $502m fundraising is UK stand-out

The number of UK venture capital (VC) deals fell significantly during the second quarter of 2017, yet deal value surged to its highest level since the end of 2015 according to Venture Pulse Q2 2017, the quarterly global VC trends report published by KPMG Enterprise.

The UK saw a total of 189 VC investments made during the second quarter, compared with 258 in Q1’17. However, the combined value of these transactions totalled $1.42bn, up from the $1.15bn raised during the first quarter of the year. 

Patrick Imbach, head of KPMG’s Tech Growth team in the UK, said: “The standout transaction of the quarter was undoubtedly Improbable’s $502m investment from SoftBank, one of the largest funding rounds ever made by an early stage European tech firm. I think particularly when you consider the risk profile of the business, it’s not an exaggeration to say this was a ‘one of a kind’ investment. It shows how UK’s ‘deep tech’ sector is catching the attention of investors from around the globe, and is a timely reminder that tech investment in post-Brexit Britain absolutely can, and will come from outside Europe.

“Despite gathering economic headwinds and the uncertainty created by the UK’s looming exit from the EU, the early-stage company scene in the UK remains quite strong. High investor standards and increased diligence seem to have the effect of heightening the quality of companies, their management teams, and their business strategies as they come to market.”

There was a similar picture across the rest of Europe where deal count slumped from 760 to 589 quarter on quarter – dropping to a six-quarter low, and about 40 percent of the peak high seen in Q1’15. Despite this decline in volume, VC investment remained relatively robust in the region, with $4.1 billion invested – a marginal increase compared to Q1’17. 

Patrick Imbach explained: “The trend seen both in the UK and across wider Europe of a falling deal count, but increasing deal value is perhaps indicative of investors becoming more discerning at the Angel and Seed stages while investment accelerates in later-stage companies with more proven business models and market traction. In addition, investors in Europe seem to be particularly demanding of their portfolio companies in follow-on rounds – Europe was the only world region where an uptick in down rounds was observed this quarter, indicating that investors may be willing to continue to fund companies, but on terms that realistically reflect the intrinsic value of the business.”

Corporate VC participation in European deals surged to its highest level ever, over 20 percent of all deals closed. While total capital invested by CVCs decreased, the enhanced level of participation demonstrates corporate interest in innovative technologies and ideas is not just a blip, but a burgeoning trend. 

In terms of VC fundraising, mega-funds are being raised seemingly daily in the US while “micro-VC” funds ($50m-$150m) have also emerged as popular vehicles. In Europe since 2015, funds totalling $50m or less have gone from over 40 percent of total funds raised to under 20 percent. Patrick Imbach added: “We have seen a corresponding increase in funds sized $100m-$250m, which now comprise almost 40 percent of the market. So while US investors seem to be aiming very big or very small, European funds are taking a different tack, raising several-hundred million dollar funds that can be judiciously deployed over several years.”

Globally, venture capital deal value increased by 55.3 percent to $40.07 billion in Q2’17, propelled by an uptick in mega-deals around the world. The United States led VC investment, accounting for $21.8 billion, followed by Asia ($12.7 billion) and Europe ($4.1 billion). The increase in funding was strongly affected by a continued resurgence in mega-deals, including Didi Chuxing’s record-breaking $5.5 billion round and Toutiao’s $1 billion Series D round. Globally, there were nine deals at or over $500 million in value during the quarter including Mobike ($600 million) from Asia and Outcome Health ($600 million) from the United States. 

However, while deal value increased, the total number of deals fell for the fifth straight quarter in Q2’17. The ongoing decline has affected the earliest deal stages the most, with angel and seed-stage deal count down for the ninth straight quarter – from a high of 2,674 in Q1 2015 to just 1,310 this quarter. 

Key Q2’17 highlights:

  • Global VC investment rose from $25.8 billion in Q1’17 to $40.1 billion in Q2’17, a strong increase buoyed by a number of $500 million+ mega deals.
  • Global median deal size at every stage remained high. Median Series D+ deal size jumped from $29.5 million in Q1’17 to $40 million in Q2’17.
  • Corporate venture capital investment as a percentage of deal count spiked to 17.6 percent – representing the highest percentage this decade and almost $20 billion in associated deal value globally.
  • Global venture fundraising jumped from $11.5 billion in Q1 to over $17 billion in Q2’17. Dry powder continued to drive high prices and competitive markets.
  • Unicorn rounds spiked in Q2, with 33 rounds representing a total of $15 billion invested.