What is the Small Business Equity Tracker?
The eighth annual British Business Bank Equity Tracker report examines recent trends in equity investment into UK SMEs. This year’s report also examines how UK VC markets compare to other countries – especially in relation to funding going to deep tech and R&D intensive sectors – and looks at the contribution overseas VC investors make to the UK VC market.
This is a summary of key findings and conclusions from the 2022 report. The full report can be accessed here.
Why does equity finance matter?
Equity finance is a driver of high growth, innovative companies that can respond quickly to new opportunities created in the market, and help address emerging and long term global challenges.
About the British Business Bank
The British Business Bank is the UK’s economic development bank. Our mission is to drive sustainable growth and prosperity across the UK, and to enable the transition to a net zero economy, by supporting access to finance for smaller businesses. The British Business Bank delivers a range of both debt and equity programmes, ensuring that small businesses can access to finance that is right for their needs at the right time.
Snapshot summary
- 2021 has been an exceptional year for UK equity finance with £18.1bn of investment, nearly double its 2020 level. Momentum continued into Q1 2022 despite emerging economic headwinds.
- The UK has a relatively high level of Venture Capital (VC) activity compared to other European countries but continues to lag behind the US, especially for investment in deep tech and R&D intensive sectors.
- Overseas investors have a large role in UK VC markets, contributing funding at both deal and fund level.
- British Business Bank equity programmes have increased their role in UK SME equity finance markets, and supported around 14% of all announced equity deals between 2019 to 2021.
- The British Business Bank will continue to monitor UK equity finance conditions closely and deliver programmes designed to fill market gaps, including:
- Helping to fund later stage R&D intensive companies;
- Developing the early stage VC ecosystem;
- Addressing geographic disparities in equity finance.
Small Business Equity Tracker 2022
Our Small Business Equity Tracker 2022 Report provides a comprehensive picture of equity funding conditions for smaller businesses across the UK.
Key findings
The state of the market
1. 2021 has been an exceptional year for UK equity finance
2021 was characterised by larger deal sizes and higher valuations as increased competition for deals led to more founder friendly terms, with record levels of activity across seed, venture and growth stage investment.
- Equity investment increased by 88% in 2021 with£18.1bn invested into high growth potential smaller companies, compared to the £9.6bn invested in 2020.
- There were 2,616 announced equity deals in 2021, which is a 17% increase on 2020, showing more companies are able to raise the funding they need.
- Strong growth continued in Q1 2022 with £7.6bn invested, the largest quarterly amount recorded, despite emerging economic headwinds.
- The technology sector continues to be the main sector of focus for investors, and the market for clean tech is beginning to increase with 30% more deals in 2021.
Number and value of equity deals by stage
2. The UK continues to lag behind the US, particularly for investment in deep tech and R&D intensive sectors
The report examines the importance of ‘deep tech’ and R&D-intensive companies, which are founded on scientific discoveries with the potential to drive economic growth. However, these companies face specific challenges in raising venture capital investment.
- The UK still lags behind the US for VC activity but has made progress closing the gap. UK VC investment has grown 585% since 2015, compared to 353% growth in the US.
- Between 2015 and 2021, the UK has created a higher number of unicorn businesses than France and Germany, but Europe has created fewer unicorn companies than the US.
- The UK has a lower proportion of VC deals and investment going to deep tech and R&D intensive companies than other countries.
- The overall UK-US VC funding gap is largely caused by differences in funding going to deep tech and R&D intensive sectors.
VC investment over time by country (£bn)
3. Overseas investors have a large role in UK markets
Overseas investors can contribute additional funding to UK companies, leading to larger deal sizes, which is good for the UK ecosystem. Better capitalised companies are more likely to achieve their growth ambitions, resulting in potentially higher returns for investors, which will encourage more capital into the ecosystem. However, companies that have received overseas investment were more likely to have exited abroad.
- The involvement of overseas investors in the UK VC market has increased over time, with 29% of all equity deals in 2021 involving an overseas investor – a record proportion.
- Overseas investors have the largest role at the later stages of financing where they can contribute additional funding to UK companies, leading to larger deal sizes. 45% of deals at the growth stage involved an overseas investor.
- The average growth stage deal involving an overseas investor in 2021 was £46.1m, compared to £8.7m for growth stage deals only involving domestic investors.
- Overseas investors not only contribute funding at the deal level but also contribute investment into UK VC funds. Despite increases in UK VC funding over time, UK VC funds are reliant on overseas sources of capital.
Average deal size, by investor location type
The role of the British Business Bank
4. The Bank’s equity programmes have increased their role in UK SME equity finance markets
The share of equity deals supported by Bank equity programmes has increased in the past several years, with recent increases driven by increased deal activity by British Patient Capital (BPC), Managed Funds and Regional Angels programmes.
- British Business Bank equity programmes supported around 14% of all announced equity deals between 2019 to 2021.
- The Bank’s share of supported deals increased from 6% in 2011 to 18% in 2021.
- Bank supported funds were more likely to undertake deals in venture stage companies compared to the overall market, and were more likely to invest in technology/ IP-based businesses.
- Bank programmes were more likely to fund academic spinout companies than the wider equity market, showing that Bank equity programmes are helping to support the commercialisation of research coming out of UK universities.
- The Bank has a higher proportion of equity deals outside of London than the wider VC/ private equity market, but is similar to the overall equity market.
- 21% of British Business Bank programme supported deals in 2019-21 went to a company with at least one female founder - lower than the overall equity market (24%) but more in line with the VC/ PE market (22%).
Proportion of deals by stage (2019-21)
5. The Bank will continue to monitor the market and deliver programmes that fill market gaps
The British Business Bank will use the evidence presented in this report to refine our programmes so they remain targeted on parts of the market where smaller businesses can benefit most from the Bank’s support:
- Helping to fund later stage R&D intensive companies: The report shows a lack of VC funding going to R&D intensive industries, which contributes to the UK’s overall VC funding gap with the US. The Future Fund: Breakthrough programme delivered by BPC is currently helping to fund later stage R&D intensive companies, but the scale of the challenge is large.
- Developing the early stage VC ecosystem: Whilst the number and value of early-stage seed stage deals increased in 2021, its rate of increase was lower than other parts of the market leading to a fall in the proportion of deals and funding going to seed stage companies. The Bank’s Enterprise Capital Funds and Regional Angel programmes will continue to focus on early stages of the market, to build on their existing successes developing the early-stage VC ecosystem and keep pace with increases in the later-stage VC market.
- Addressing disparities in equity finance: London’s proportion of the UK’s equity deals increased by three percentage points in 2021 to 49%, showing the continued need for the Bank to address disparities in equity finance. The Bank received £1.6bn of funding at the 2021 Spending Review to develop the next generation of regional funds and looks forwards to working with the devolved economic development banks and local stakeholders to deliver this increased support. For every £1 of equity investment in the UK in 2021, all-female founder teams received 2p. This is lower than the 4% received by all female teams in 2020, reflecting yearly volatility and demonstrating the importance of continued Bank efforts to encourage diversity and inclusion in the equity ecosystem.
Get in contact
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