Venture capital (VC) investment is set for a steady return to growth in 2024 according to the latest statistics published in a report by HSBC Innovation Bank and DealRoom. The UK continues to be the European hotspot for VC investment, with growth of 19% in the period from 2019 to 2023. The value of VC investment in UK startups fell off a cliff-edge in 2023 to USD$21.3 billion, following the post-pandemic peaks of 2021(USD$41 billion) and 2022 (USD$31.3 billion). In early 2023 the appetite for injecting capital into riskier ventures was diminished due to a broad range of macroeconomic and geopolitical factors like rising interest rates, global supply chain issues and international conflict. However, investor confidence resurged in the second half of 2023 with a 46% increase in investment compared to the previous six months. The HSBC Innovation Bank and Dealroom report indicates the UK will not deviate from this trajectory with “standout sectors” like AI and Climate Tech expected to drive growth across Europe’s largest tech ecosystem.
AI and machine-learning technology dominated headlines and portfolios in 2023 with a significant spike in VC investment in Europe and across the globe. In the UK, start-ups with an AI offering raised USD$4.5 billion. Significant VC deals in this space include the USD$129 million funding round which resulted in UK-based AI start-up Quantexa becoming the first new British unicorn of 2023 in the second quarter. On the continent, French AI start-up Mistral AI raised over $500 million throughout 2023, featuring the largest-ever seed round recorded in Europe of USD$112 million. Although AI was a hot area for VC investment, this was overtaken by BigTech as companies like Microsoft, Google and Amazon outspent VC groups with large-scale investment into AI (particularly in generative AI start-ups) as VC investors were forced to adjust to high interest rates and depressed valuations.
There has been a clear regulatory reaction, including the introduction of the AI Act in the European Union and the world’s first AI Safety Summit hosted in the UK (please see our insights on the AI Act here and the AI Safety Summit here). AI will continue to be at the forefront of discussions in 2024, starting off with the 2024 World Economic Forum in Davos which featured an “AI House” to facilitate discussion between political and business leaders on the risks and opportunities that AI brings. Regulatory changes will inevitably influence levels of investment in this space as investors navigate divergent approaches. The UK has currently chosen to steer away from stringent legislation and instead promotes a pro-innovation approach to AI regulation, with the goal of focusing on growth and becoming an AI superpower. With an impending election, this could change, and investors will be live to the effect of the changing regulatory landscape on potential transactions.
In 2023 there was a prominent focus on Climate Tech in VC investment, with a report published by A/O, a European built world focused VC firm, highlighting that as the need to decarbonise intensifies, climate themes now represent 70% of built world technology VC dollars. In the UK, Climate Tech accounted for 29% of all VC investment in 2023, hitting an all-time high of $6.2 billion, driven by investment in some of the top funded UK start up sectors like electric mobility and EV battery technology. VC investment in sectors like building efficiency, electrification and grid solutions was prominent as the global energy markets navigated supply and transport issues.
The increasing cost of energy and pressing need to meet emissions targets have driven the demand for innovative low carbon solutions across a broad range of economic sectors. The International Energy Agency has reported that meeting ambitious emissions targets will depend on technologies that are at protocol/demonstration phase and not yet deployed at a commercial stage. VC investment will be crucial in the next few years for financing and scaling emerging technologies, and it is expected that 2024 will continue to see a high volume of activity in the Climate Tech sector.