The total value of equity investment in the UK’s small businesses declined by 11% to £16.7bn in 2022, driven by a downturn in market conditions, reveals the British Business Bank’s annual Small Business Equity Tracker, published today. The total number of deals also saw a modest decline of 7%, falling from 2,912 in 2021 to 2,702, the first annual drop in equity deal volumes since the Beauhurst data series began in 2011.

Louis Taylor, CEO, British Business Bank, said: “2022 proved to be a year of two halves for small business equity investment, with record levels of finance raised over the first two quarters of the year, followed by a 47% decline in total investment during the second half. This decline reflected concern about the overvaluation of deals, and the effects of higher inflation and rising interest rates.

“However, there are still some bright spots that can be drawn from this year’s report, in particular levels of investment in university spinouts and breakthrough technology sectors. While it is still too early to tell the full scale of the downturn in investment, the UK’s broad and advanced equity finance markets are well placed to support recovery”.

The downturn reflects venture capital (VC) fund managers reducing their dealmaking activity and focusing more on business fundamentals, to compensate for the rapid capital deployment in previous months.

Growth stage investment declined by 25% to £8.2bn in 2022 and was 54% lower comparing the first and second halves of the year. A key reason for this has been the lack of exit opportunities via trade sales or public listings, causing investors to avoid larger deals as they attempt to preserve their capital.

This overall trend has continued into the first three months of 2023, during which £2.2bn was raised by UK small businesses – a 28% drop in investment value compared with the last quarter of 2022.

A record year for university spinouts

University spinouts received 12% of total equity investment in 2022, at a value of £2bn. The average deal size for university spinouts was £8.9m, which was 33% higher than the wider market. Of all equity deals in the UK in this year, 8% were in university spinouts, totalling 226 deals. The creation of spinout companies is an important avenue through which founders and universities can commercialise cutting-edge academic research. The development and increasing financing of these spinouts highlight the important role they play in creating high-growth, innovative companies in the UK.

By institution, the highest number of spinout deals in 2022 belonged to the University of Cambridge, with 33 deals. The University of Oxford ranked second with 31 deals and the University of Edinburgh third with 15. Spinouts from either Cambridge or Oxford raised £12.7 million on average across 192 deals between 2020-2022.

Key strengths and opportunities for the UK in clean tech, life sciences and nanotech

While tech companies continue to receive the majority of UK equity finance, overall investment value in the sector fell by 11% in 2022. Certain sub-sectors still experienced investment growth during the year, despite the decline in overall small business equity finance. The cleantech sub-sector in particular bucked the trend of the wider market, with equity investment in this area increasing by over 50% to £0.9bn.

Being home to a number of world-class universities and the leading VC market in Europe, the UK has scaled a number of technology sectors through its VC ecosystem. Looking at total VC investment and the UK’s share of the global market, British Business Bank analysis finds that the UK performs well across fintech, SaaS (software as a service), life sciences and AI, with life sciences as one of the UK’s largest sectors within the broader deep tech category.

Looking ahead, given rapid progress globally in the research, development and commercialisation of breakthrough technologies, there are also a number of future opportunities for the UK VC ecosystem. For example, British Business Bank analysis shows that the UK may be able to benefit from its leading position in some sectors, such as nanotechnology, and could benefit from greater investment in other areas, like space technology.

British Business Bank more likely to support tech and university spinouts

Between 2020 and 2022, British Business Bank’s equity programmes supported 13% of all equity deals and provided 15% of all total investment. This represents a slight decrease from the previous 2019-2021 period, driven by the growth stage of the market, in which there were some large investments during the first half of 2022 without involvement from the Bank. However, the proportion of equity deals and investment supported by the Bank was 9% and 13% respectively in 2016-18, showing that its current market share remains higher than historical levels.

Overall, the Bank remains more likely to invest in tech businesses than the wider equity market, with 48% of Bank-supported deals in the sector, compared to 42% across the overall market, in 2020-22. Furthermore, 12% of all Bank-supported deals were for university spinouts, compared to 9% of wider market deals. Additionally, an increasing proportion of Bank-supported deals are funding diverse teams, with 26% of deals going to companies with at least one female founder, highlighting the Bank’s commitment to supporting an innovative and diverse VC ecosystem.

Commenting on the latest edition of the British Business Bank Small Business Equity Tracker, British Patient Capital CEO Catherine Lewis La Torre said:

“The data highlights the fragile operating environment for companies as they navigate a tough economy and a more challenging route to accessing growth capital. However, there remain a number of bright spots with a record year for university spinouts, growth in life sciences, and green shoots of the next generation of technology – including cleantech, which bucked the wider market trend.

 “University spinouts received 12% of total equity investment in 2022, at a value of £2bn, reinforcing the strength of that ecosystem and the importance of British Patient Capital as a driving force for innovation in this space. Investments in life sciences firm OMass therapeutics and deeptech Quantum Motion via the £375m Future Fund: Breakthrough programme are just two examples, while a £30m investment in Northern Gritstone will support the commercialisation of research across the North of England.

“There is even more opportunity ahead for long-term investors. The UK is the third largest market in nanotechnology, while space technology presents huge potential and one that VC-backed start-ups are already beginning to disrupt. Leveraging this opportunity is crucial and requires patient capital to fund the necessary research and development.”

“The data also shows that 26% of equity deals supported by the Bank, together with British Patient Capital, are going to companies with at least one female founder. This proportion is not only increasing over time but also higher than the wider PE/VC market, demonstrating our commitment to supporting a diverse VC ecosystem that enables female founders to access the finance they need to thrive.”