Sifted | Jessica Rawnsley 20 Apr 2023
40 years of VC: Where does Europe’s biggest VC hub stand today?
We chat to the experts about the future of VC in the UK
Venture capital has planted deep roots in the UK over the past 40 years — and the country’s tech ecosystem has blossomed, maintaining its position as the largest market in Europe and rubbing shoulders with other world-class hubs such as the US.
What predictions can we make for the future of VC in the UK? And how does it compare to its peers? Sifted chatted to the experts.
Then to now: How does the UK compare to Silicon Valley?
As the UK is the biggest tech hub in Europe, it’s often compared to the biggest in the world — Silicon Valley. But Andrew Williamson, managing partner of Cambridge Innovation Capital, ditched the UK for California in the 90s as there was “literally nothing going on”.
One of the more interesting phenomena is where you have people from Silicon Valley seeing Europe as a good place to build a startup
The contrast with today is stark, he says, particularly referencing Cambridge, home to one of Europe’s top “unicorn universities”: “Cambridge has completely transformed: It’s now perhaps the most innovative ecosystem in the whole of Europe for deeptech. There’s a cross-party recognition that the future for the UK for the next 20 years is going to be innovation-driven.”
Stephen Nundy, partner and CTO at Lakestar, says the amount of company formation in the UK has “increased significantly” over the past 10 years.
“What does that mean for the next 40 years? A couple of years ago we started reaching breakout velocity, where people are coming to Europe, to the UK, to start companies,” he says. “One of the more interesting phenomena is where you have people from Silicon Valley seeing Europe as a good place to build a startup.”
Referencing the upcoming BVCA Report on Investment Activity for 2022, Chris Elphick, senior VC manager at The British Private Equity & Venture Capital Association (BVCA), noted that while it showed that investment was down from 2021, “2022 was a challenging year for VC globally, not just in the UK”.
“We need to look at the growth over the past 10 years and we’re still performing strongly. The UK is still by far the largest in Europe, so the growth in VC has solidified and continued to increase as a general trend.”
UK vs Europe
How does the UK compare to Europe? In 2021, more unicorns were created in the country than in France and Germany combined, with more than two created every month on average.
“Considering the tumultuous last few years, I think we’re in a robust place,” says Nundy. “We’ve also seen the rest of Europe up the ante when it comes to seeing the opportunity that startups bring to productivity and GDP.”
There’s an easier movement of talent around Europe. And we’ve taken that simplicity away
He points to French president Emmanuel Macron’s visa policy — startups meeting certain criteria can bring talent from anywhere in the world in two weeks — and Station F, the world’s biggest startup campus in Paris: “It’s clearly poked what Germany and the UK are doing and I think that competition at a governmental and national level is healthy.”
One of the biggest challenges for UK tech, however, remains talent. While tech companies globally are grappling with this, Brexit has made things stickier.
“There’s an easier movement of talent around Europe,” says Nundy. “And we’ve taken that simplicity away.” Even with the introduction of talent visas, “you’ve still put sand in the gears”.
There’s work to do when it comes to regional disparity — tech in the UK is still dominated by the “Golden Triangle” of Oxford, Cambridge and London.
The scaleup gap
One way to take the temperature of a nation’s VC is as a percentage of GDP, and Williamson points out that “venture investment as a percentage of GDP is broadly similar now in the UK to the US, and far ahead of everywhere in Europe except for Israel”.
When you get to the Series B, C rounds, there’s fewer funds of scale in the UK that can lead those rounds
Yet there are places where the UK still falls short. And the US remains leaps and bounds ahead when it comes to turning ideas into globally competitive businesses.
“Up to Series A, the UK is very strong,” says Elphick. “Where the gap is — the scaleup gap — is when we’re looking at those big growth rounds, £50m deals and upwards. When these deals are done in the UK they’re more often led by US VCs. When you get to the Series B, C rounds, there’s fewer funds of scale in the UK that can lead those rounds.
A BVCA analysis of Beauhurst data from 2020-21, looking at science and technology companies, revealed that over half of 52 Series B+ growth rounds in the UK (ranging from £35m to over £400m) were led by US VCs, while only seven were led by UK investors. Comparable deals in America are 80% led by US investors.
This so-called scaleup gap has led to concerns that the UK might fall behind. Lakestar and McKinsey numbers on closing that gap put the cost at £75bn a year over 20 years: £1.5tn by 2040.
What’s needed, Nundy says, are efforts to increase the amount of capital for scaleups to expand globally.
“There’s plenty of capital in the UK, it’s just in places that aren’t being released,” he says. “If we run larger pools of capital, we can invest in later-stage companies and the reliance on Middle Eastern or US funds falls away and it becomes much more competitive.”
And moves are being made.
One significant change is the defined contribution (DC) pension reforms, and the related Long-term Investment for Technology & Science (LIFTS) scheme. These aim to unlock capital from UK DC pension funds, which have historically been unable to invest in startups.
Pension savers get better returns in their pensions and the UK economy will benefit because there’s more capital to scale up the best businesses
“The government is recognising that they have to not only create an attractive situation for entrepreneurs to set up shop here, but also create the capital flows to allow the continued growth of these hubs beyond the first £5m check,” says Nundy.
American pensions, in contrast, have always invested in VC, both at home and abroad. The reasons are in the returns. “Over a 10, 20, 30-year cycle, the data from the US and Europe has shown that private equity and venture capital investments yield stronger results than investing in a FTSE or other kind of index basket,” Nundy adds.
BVCA’s 2021 performance measurement survey illustrated this: VC as an asset class has performed well post-dotcom crash. The returns post-2006 — at 15.6% — are higher than private equity.
“This is one of those rare win-wins in life,” says Williamson. “Pension savers get better returns in their pensions and the UK economy will benefit because there’s more capital to scale up the best businesses.”
Other indicators point to good times ahead for UK VC. A flurry of funds have been established, many led by the British Business Bank, a government-owned development bank; newer funds like Notion are beginning to lead big rounds in the UK; and schemes like LIFTS look to catalyse billions of pounds of investment into later-stage companies, too.
“Now there are investment opportunities, we’ll start to see more funds set up,” says Williamson. “And then I strongly believe that it’s just a matter of time before things start to snowball.”