Scotland’s scale-ups attracted £117 million of venture capital (VC) investment across 41 deals in the third quarter of 2022 – a 40 per cent year-on-year drop, with volumes also down by nearly a third, KPMG’s latest Venture Pulse Survey has found.
The “Big Four” accountancy giant – whose Scottish offices comprise Edinburgh, Glasgow and Aberdeen – also said a “record-breaking” £623m has already been invested in the first nine months of this year, almost exceeding the £626.9m total invested in 2021, but the second half looks set to be “far quieter”.
KPMG added that compared with Scotland’s steady third-quarter performance, VC investment in the UK fell dramatically during the summer with the volume of deals down by more than a third to 575 from 865 in the previous quarter, and the lowest amount since Q3 2016. However, the volume of VC investment into scale-ups outside London outpaced the UK capital for the first time in eight years.
The lion’s share of Scottish deals in Q3 involved businesses in Edinburgh (18), followed by Glasgow (eight), Aberdeen (four) and Stirling (three). Most deals were late-stage VC (19), with nine seed round, seven early-stage VC, and six angel investments taking place.
Stand-out deals during the quarter include Stirling-based Integrated Graphene, which in July announced plans to invest up to £8m to scale its manufacturing process for the commercial production of its Gii graphene foam, which is used in human diagnostics and energy markets.
Meanwhile, Edinburgh-based optical communications firm PureLiFi secured £10m from the Scottish National Investment Bank as it plans to target a global rollout of its wi-fi compatible technology.
Amy Burnett, KPMG private enterprise senior manager in Scotland, said: “Despite strong fund-raising activity in the first half of the year, global economic turmoil has seen VC investment decline across all markets, including in Scotland where the value and volume of completed deals fell slightly in Q3.
“As the cost-of-living crisis deepens, investors are increasingly turning away from those sectors that rely on consumer spend to drive growth and doubling down on investments in those sectors where technology is addressing big macro trends such as health tech and [environmental, social, and governance]. With an abundance of these businesses being nurtured outside of London, it is good news for Scotland’s deep tech and health tech firms.”
Graeme Williams, mergers and acquisitions director at KPMG UK, said: “As expected, VCs are becoming increasingly cautious and investing funds into less risky asset classes. There is good news for the longer-term health of the VC market as more than half of the investments made in the quarter were to early-stage and seed businesses.
"Competition for well-performing businesses in growth sectors will be fierce and could lead to some deal heat as we head into the final quarter of the year. However... it is likely that VC investment will remain subdued heading into Q4 22 and beyond. Having said that, Scotland has all but surpassed last year’s half a billion total and will chalk up another record-breaking 12 months for VC investment come the end of December.”