KPMG: Pre-lockdown venture capital funding in Scotland ‘resilient’ in first quarter

More than £35 million of Venture Capital (VC) was invested into Scottish start-ups in the first quarter of 2020, ahead of the UK’s COVID-19 lockdown, according to KPMG’s latest Venture Pulse survey.

KPMG: Pre-lockdown venture capital funding in Scotland 'resilient' in first quarter

Amy Burnett, manager in KPMG’s Private Enterprise Emerging Giants team

The figures, compiled by Pitchbook, reveal that eighteen deals were secured in Q1 2020, valued at over £35.02m, with the majority in Edinburgh and East Central Scotland (13) and five deals secured in the North and North East of the country.

The scale-ups that benefited from funding included drinks giant BrewDog, whisky biofuel firm Celtic Renewables, and a range of tech and pharma firms exploring pioneering new products.

Activity in the first quarter remained relatively consistent with the same period in 2019, when a total of 14 deals were secured, valued at more than £40m.

Across the UK, Venture Capital investment in UK scaleups in Q1’20 was £2.6 billion compared to £2.69bn in the record-setting Q1’19. The volume of deals dropped from 558 to 301 over the same period.

Amy Burnett, manager in KPMG’s Private Enterprise Emerging Giants team, said: “Despite a degree of political and economic uncertainty over Brexit, we entered 2020 with Scotland’s scale-ups in robust health. 2019 was an incredibly positive year with some record-breaking funding deals – much of that driven by innovative new players in the market, developing new drugs, renewable energy solutions and software.

“While it’s reassuring to see a positive set of results for the first quarter, we’re now in a period of completely unchartered territory. The economy is entering a deep recession with many businesses facing an incredibly uncertain future, and this will naturally create a more cautious funding environment. Protecting balance sheets and cash reserves will become the new norm, and that could seriously dent the prospects for early-stage businesses that need a firm financial footing to progress from their early development phase.”

In Q2’20, the Venture Capital market will likely face a tough quarter due to COVID-19, although digital services, edtech, health and biotech companies, and certain B2B and B2C companies should remain attractive even during the crisis, given their applicability and long-term relevance.

The recent commitment by the UK government to invest £1.25bn into initiatives to support innovative businesses may be a key factor in maintaining investor sentiment in Q2’20 and beyond.

While the short-term economic outlook is highly uncertain, the pandemic could lead to an increasing acceptance for digital solutions. This could bode well for VC investment over the longer term as both traditional companies and consumers will have required and become accustomed to their use, a process that might have been more difficult to achieve under normal circumstances.

Tim Kay, director in KPMG Private Enterprise Emerging Giants team, commented: “The global COVID-19 pandemic and associated restrictions will likely have a significantly adverse impact on global VC investment in Q2 and beyond. While investments will continue to be made, we can expect a significant slowdown in volume and a potential resetting of valuations. What happens in the medium and long term remains to be seen. Investors may well look to rebalance portfolios with companies that they expect to thrive in a recovering post-COVID-19 world - ranging from edtech to pharmaceuticals.

“Many will be monitoring whether the pandemic has permanently shifted the views of larger corporates towards innovative and disruptive technologies. If it has, you can expect even more investment into those B2B companies providing business resilience, mobility and collaboration tools as that market opportunity increases.

“Similarly, many will be looking at what their sector and market look like in the long term – possibly leading to a spate of M&A activity as they try to leapfrog the competition in a post-COVID-19 world.”

  • Read all of our articles relating to COVID-19 here.
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