The UK's tech unicorns are booming, but the next wave won't find it so easy

A new report shows that although huge amounts of money were injected in tech across the globe, early-stage funding is worryingly declining.
Written by Daphne Leprince-Ringuet, Contributor

Good news if you've got a startup idea you've always wanted to get funded: the past year has seen venture capital investments soar across the globe. In Europe, $40 billion was injected into tech companies in 2019, with UK startups receiving a generous $13.2 billion chunk of the pie. 

According to a report published by the consultancy TechNation, that's 44% more than the previous year. The UK produces twice as many unicorns as Germany and three times as many as France, it said.

That's not to say that it has become easier to access VC money. In fact, a separate report released by KPMG suggests that for some companies, it could actually have gotten more difficult

SEE: Launching and building a startup: A founder's guide (free PDF)

The research shows that, although the amount of money invested has boomed, the number of actual deals closed has reduced. In the UK, for example, VC investment more than doubled since 2014 – but 1,648 deals were signed, which is almost 100 less than five years ago.

VC money, it seems, is increasingly going to a select few. The trend is not just confined to the UK: in Europe overall, less deals were closed in the last year than in 2012. And the US has seen similar symptoms over the last few years, too.

In other words, investors are splashing the cash on fewer companies, but they are giving them much larger amounts of money. Tim Kay, director with KPMG, told ZDNet that the phenomenon has multiple causes: "You've got a smaller number of much larger deals, because the VC landscape is changing," he said.

"Companies are staying private for longer, which requires bigger cheques. And the types of businesses currently growing need a lot of capital. Fintech, for example, needs a lot of funding to be successful."

Many examples seem to confirm that 2019 was the year of the megaround. According to KPMG, 18 new European unicorns were created last year, compared to only six in 2017. Softbank was behind the largest investment in the UK via its $800 million investment in fintech company Greensill. Deliveroo, backed by Amazon, secured $575 million; mobile banking app Monzo raised $145 million in a round led by California-based Y Combinator. And that's only to name a few.

Investors have been pouring money into companies with well-established business models and clear paths to profitability, rather than new startups that carry more risk, indicated KPMG's report. 

And the numbers reflect the trend: according to the research, first-time venture financing of companies sunk to an all-time low. In the last year, $2.9 billion was invested in 1,264 deals in Europe – a step down from 2015, which saw $3.1 billion invested in 2,080 deals.

In a way, it is only the natural continuation of a process started five years ago, when, argued Kay, venture capital was "at the peak of its startup early-stage funding cycle."

"We're growing up," he said. "The conversation has switched from concentrating on startups to finding out how we can scale these businesses. These unicorns are not an overnight success – they are the product of a four-, five-year-long cycle."

SEE: Despite Brexit, London's unicorns are still attracting foreign money

But while scaling up a successful business is the aim of many an entrepreneur, it might in this case come at the expense of future innovation. As Kay explained, the declining amounts of early-stage and seed funding could mean that future unicorns are not getting sufficient capital. 

The issue is certainly noticeable in the US, where 2014 was a peak year for early-stage VC funding, with over 4,200 deals signed that were worth less than $1 million. Four years later, in 2018, the number of such deals had almost halved. 

"It is evident that the first tranche of institutional money has been declining," said Kay, "and a reduction of the early-stage funding space could be a very high-risk issue. The question for the next decade will be: will new startups suffer from a decline in funding?"

He is hopeful that, in the UK, the tech ecosystem is robust enough to withstand the future; and that as Brexit uncertainty gradually withdraws, investors will once again be willing to take the risk of early-stage funding for new companies. But for the next generation of tech entrepreneurs, the journey to the megaround is not looking any easier. 

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