The total value of equity investment in the UK’s small businesses declined by 11% to £16.7bn in 2022, driven by a downturn in market conditions, according to the British Business Bank’s annual Small Business Equity Tracker.
The total number of deals also saw a modest decline of 7%, falling from 2,912 in 2021 to 2,702, the first annual drop in equity deal volumes since the Beauhurst data series began in 2011.
Louis Taylor, CEO, British Business Bank, said: “2022 proved to be a year of two halves for small business equity investment, with record levels of finance raised over the first two quarters of the year, followed by a 47% decline in total investment during the second half. This decline reflected concern about the overvaluation of deals, and the effects of higher inflation and rising interest rates.
“However, there are still some bright spots that can be drawn from this year’s report, in particular levels of investment in university spinouts and breakthrough technology sectors. While it is still too early to tell the full scale of the downturn in investment, the UK’s broad and advanced equity finance markets are well placed to support recovery”.
The downturn reflects venture capital (VC) fund managers reducing their dealmaking activity and focusing more on business fundamentals, to compensate for the rapid capital deployment in previous months.
Growth stage investment declined by 25% to £8.2bn in 2022 and was 54% lower comparing the first and second halves of the year. A key reason for this has been the lack of exit opportunities via trade sales or public listings, causing investors to avoid larger deals as they attempt to preserve their capital.
This overall trend has continued into the first three months of 2023, during which £2.2bn was raised by UK small businesses – a 28% drop in investment value compared with the last quarter of 2022.
University spinouts received 12% of total equity investment in 2022, at a value of £2bn. The average deal size for university spinouts was £8.9m, which was 33% higher than the wider market. Of all equity deals in the UK in this year, 8% were in university spinouts, totalling 226 deals. The creation of spinout companies is an important avenue through which founders and universities can commercialise cutting edge academic research. The development and increasing financing of these spinouts highlight the important role they play in creating high growth, innovative companies in the UK.
By institution, the highest number of spinout deals in 2022 belonged to the University of Cambridge, with 33 deals. The University of Oxford ranked second with 31 deals and the University of Edinburgh third with 15. Spinouts from either Cambridge or Oxford raised £12.7 million on average across 192 deals between 2020-2022.
While tech companies continue to receive the majority of UK equity finance, overall investment value in the sector fell by 11% in 2022. Certain sub-sectors still experienced investment growth during the year, despite the decline in overall small business equity finance. The cleantech sub-sector in particular bucked the trend of the wider market, with equity investment in this area increasing by over 50% to £0.9bn.