Q3 2021 | Scaleup Financing Trends - Latest Investment Data to Help You Close Your Next Round

Q3 2021 | Scaleup Financing Trends - Latest Investment Data to Help You Close Your Next Round
Photo by Stephen Dawson / Unsplash

By and large, 2021 is proving to be a favourable time for UK companies looking to secure scaleup financing. As investors move away from the riskier market landscape of start-ups, UK scaleups are enjoying record-high venture capital investment.

The downside? Competition is fierce, as 50% of scaleups are vying to raise funding within 2021. If your business is looking to secure investment at a good valuation, you can’t be too familiar with the intricacies of the current scaling financing market.

This article will provide you with insights drawn from the latest data on scaleup financing. Read on to inform your positioning and stand out from the crowd to capture the funding you need during this highly competitive time.

2020’s Shadow Over UK Scaleup Financing

Facing the funding gap

Covid-19 uncertainty and Brexit worries were the driving factors of a £15bn gap in growth capital in 2020. Vigilant, yet optimistic, many experts called for collective support between both private and public entities, seeing it as an opportunity to solve the persistent lack of available funding which has plagued UK scaleups for years.

Source: The ScaleUp Index 2020

Deloitte, Innovate Finance, and The ScaleUp Institute gathered insight from investors, analysts, and policymakers to create The Future of Growth Capital Report in August of 2020. It highlighted five critical recommendations for fostering UK scaleup financing such as:

  • Creating a cohesive plan to support economic growth throughout all regions and sectors.
  • Legislative & organisational changes to speed up access to institutional and corporate funding.
  • Greater support for the regional presence of the British Business Bank (BBB).
  • Enlarging the role and reach of Innovate UK.
  • Development of emerging and inclusive markets through the creation of a “Future Opportunity Fund”.

Closing on a high note

The latter half of 2020 saw a marked improvement, thanks to growing market confidence as vaccines were rolled out and government policy responded, including announcements to review existing IPO regulations. Signs of a comeback were already on the horizon by Q4 of 2020, which saw an increase of 65% in VC funding from Q3.

Source: Venture Pulse Q4’20, Global Analysis of Venture Funding, KPMG Private Enterprise

The Who, What & Where of Scaleup Financing in 2021

UK scaleups hit the ground running

According to KPMG, VC funding, primarily from investors in Asia and the US, injected £5.1bn into the UK scaleup market during the first quarter of 2021. During Q2, 60 deals were made; triple the amount of that period in 2020.

Source: Venture Pulse, Q1’ 21, Global Analysis of Venture Funding, KPMG Enterprise

Furthermore, 7 of the 10 largest deals of 2021 have gone to London-based companies thus far,  as Hopin, LendInvest, Checkout.com, and Rapyd were a few of the big names clinching sizable scaleup financing.

Source: Venture Pulse, Q1’21 Global analysis of Venture Funding, KPMG Enterprise

Regional insights

Scottish scaleups snapped up record sums of £322.3 million in the first half of 2021, most notably of which include £36.17 million raised by Glasgow-based Enough and Current Health of Edinburgh, receiving £31.42 million.

The second quarter of 2021 also saw increased funding to scaleups in The Midlands, Cambridge, and the South East of England.

Tech remains king

UK tech investment continues to shatter records and solidify London’s place on the map of global tech hubs. In 2020, UK tech VC investment reached $15 bn, outpaced by only the US and China. UK tech scaleup financing is predicted to top its current numbers by the end of 2021.

Source: Tech Nation, Dealroom 2021

Software, Fintech, and Health tech companies continue to bring in the largest deals, with £1.9 bn of VC investment being raised by UK fintech scaleups. SaltPay and digital bank Starling Bank led the pack, receiving £360m and £322m of scaleup financing respectively.

Health tech’s stand-outs included AI-powered drug discovery company Exscientia, which garnered £240m in funding, while digital health company Huma secured £94m.

Source: Gerald Edelman

Not only is technology at the forefront of scaleup financing, but tech scaleups also remain a pivotal pillar of the UK’s economic recovery. As founding Chief Executive of Tech Nation Gerard Grech observes:

“This year has highlighted the UK tech sector’s enormous resilience and world-beating innovative spirit. In the face of a major global crisis, it has not only survived; in many areas, it has boomed. From EdTech to HealthTech, tech scaleups are at the centre of rebuilding the British economy and setting new standards worldwide.

Maturity matters

Late-stage companies remain the favorite among VC investors, driving up valuations and leaving behind the riskier playing field of start-ups. This was confirmed in a recent survey by EIF conducted among Venture Capital (VC), Private Equity Mid-Market (PE-MM), and Business Angels (BA) representatives, which found that scaleups have higher chances of financing than start-ups during Covid-19’s ongoing global disruption. In an increasingly disrupted market, investors now prize the stability and reliability scale-ups can bring to their investments.

Source: Venture Pulse Q2’21, Global Analysis of Venture Funding, KPMG Enterprise

Furthermore, Bina Mehta, Chair of KPMG UK notes:

“The VC market is performing incredibly well right now and there is little sign that the activity will taper off in the near future. There continues to be a significant amount of dry powder in the market – and that money is looking for a home. If there’s any caution, it’s that deals continue to focus primarily on late-stage companies – driving valuations up – while early-stage deals continue to be more difficult to come by.”

Late-stage UK tech scaleups were also favoured by investors compared to their younger counterparts.

Source: Tech Nation, Dealroom 2021

Companies Remain Skeptical of Scaleup Financing Prospects

Despite preferential treatment among investors, 40% of scaleups believe their funding needs cannot be met by current capital availability. They also cite access to local and international markets as well as opportunities for long-term growth investment as the biggest challenges faced by their companies.

This is likely at least in part due to the previously identified £15bn funding gap the ScaleUp Institute identified in 2020, as negative press tends to stick around beyond its original remit. This shortfall had been effectively doubled by the pandemic, and as businesses and markets recover and investor confidence rises, businesses can expect to see this gap shrink.

Financing Frustration for Scaleups

As Scaleups find themselves caught between an investment boom and continued Covid-19 uncertainty, many founders feel this may be their ‘now or never’ moment.

Speaking to Harvard Business Review, Tom Szaky, CEO of Terra Cycle, aptly points out:

“As an investor, I have seen quite a few ventures fail from running out of cash. I have yet to see a venture fail from too much dilution.”

2021 is proving to become an investment buffet for UK scaleups, and many experts consider the present moment could be a defining one for VC growth.

However, that’s not to say founders should simply throw caution to the wind and dive in. With investors leaning heavily towards late-stage companies and valuations increasing, companies will have to demonstrate exceptional potential for growth and market sustainability in order to secure the scaleup financing they need.

To Scale, Or Not To Scale

The last year has proven that the world of scaleup financing can be an unpredictable one. Pandemic uncertainty, regulatory hurdles, and political shake-ups continue to impose a tangible air of caution throughout the market.

However, as the last six months have shown, UK scaleups have adapted and even optimised their operations to grow in a challenging environment. As investor confidence grows and the disbursement of funding moves in to close the £15 bn gap in capital, scaleups continue to break records and attract investors from around the globe.

But as the world has learned, everything could change tomorrow. Preparation and insight remain the defining factors that determine whether a company will be in a position to take advantage of an investment bonanza (such as the one we’re experiencing now) or will be left scrambling to catch up.