London start-ups and tech firms battered by dramatic fall in venture capital

UK venture capital funding cratered by almost half last year as rising interest rates and an economic downturn choked off the flow of cash into start-ups and tech firms, new data has revealed.

In a sign of the bruising conditions facing the sector through the year, UK venture investment fell to £16.1bn in 2023 down from £28.9bn the year prior, according to preliminary data from Pitchbook, compiled for City A.M.

Venture capital firms had boomed in the decade to 2022 but began to slow dramatically after Russia invaded Ukraine and central bankers began hiking interest rates to cool inflation. 

Investors have also soured on high-growth, loss-making start-ups as borrowing costs increased and increased the need for profit.

The UK’s slump in funding came amid a wider drop-off in investment globally. European VC investment, including the UK, tumbled to $57bn from $105bn a year prior, while global investment fell from $531bn to $345bn.

Despite a downturn in overall investment, Pitchbook analysts said the value of the average deal size had stayed comparatively steady.

“Median deal sizes for EU-based startups remained at new all-time-highs across all stages of VC”, said Nalin Patel, an analyst at Pitchbook.

Dealmaking across Europe continued its descent in the final three months of the year, with fourth quarter deal count tumbling to the lowest total since the third quarter of 2018.

In each quarter of 2023, European firms made less than just €4bn through exiting their investment, as flotations on the public markets remained largely off the table and investors remained reluctant to sell on their stakes to other firms. The €11.8bn across the year in exits was the lowest for the market in a decade.

Despite overall valuations remaining at near record highs, several high profile firms have been forced to slash the valuations they fetched at the height of an investment frenzy in 2021.