The growing popularity of regional venture capital in the UK
The UK is recognised as home to one of the world’s major financial capitals and has long been regarded by global investors as an international hub for tech investment. Traditionally, London has attracted the majority of the UK’s total investment. But with the emphasis on the Government’s ‘levelling-up’ agenda, venture capital opportunities (particularly within transformative sectors such as fintech) are becoming increasingly apparent and lucrative in regions outside of London and the South East.
UK venture capital: a growing regional presence
In 2021, startups and scaleups in the UK as a whole attracted £29.4 billion of investment. This was double the figure raised in Germany (£14.7 billion) and three times the amount raised in France (£9.7 billion).
Looking specifically at tech investment, the UK received a third of the total £89.5 billion that flowed into the European technology ecosystem in 2021.
As a result of the UK’s comparatively high levels of investment, the UK saw 25 businesses achieve unicorn status in 2021, with a further four firms achieving this status in H1 2022, including fintech firm, GoCardless, and EdTech company, Multiverse.
UK startups are reaching unicorn status at a faster rate than ever before, largely driven by the maturing venture capital industry. Early access to large amounts of funding, plus mentoring and business networks, allow a startup company to accelerate their growth, demonstrate their potential, and reach colossal valuations at a very young age.
Whilst a significant share of total UK VC funding circulates in and around London, figures published by Dealroom in June 2022 highlighted that £3.8 billion of VC funding secured by UK startups and scaleups in H1 2022 (representing almost a third of the total funding received in this period) was allocated to regions outside of London.
Furthermore, seed-stage investment outside of London rose by 88% last year, signalling that early-stage startups based in the UK’s regional tech hubs are increasingly attracting the capital required to grow. By contrast, seed-stage investment in London fell by 22% in 2021 compared to the previous year, according to the British Business Bank’s annual Nations and Regions Tracker, suggesting that the investment potential of other UK regions is becoming more apparent and attractive to many VC investors.
A recent report by Manchester venture capital firm, Praetura Ventures, found that if businesses in the North were to receive equal amounts of funding to their London counterparts, the UK’s GDP could increase by £92 billion.
Some opportunities and endeavours reflecting this shifting trend include applications opening for cyber security startups to join the first cohort of Greater Manchester’s Digital Security Hub (DiSH) accelerator, which is designed to support the growth of early-stage startups throughout the North West.
And the Welsh Government, alongside the Cardiff Capital Region investment body and a range of industry partners, is set to spend a total of £9.5 million on a cyber security innovation hub – scheduled to become operational at the end of 2022 – which is designed to help the Welsh cyber sector become a global leader.
Again, looking at business unicorns in the UK, 35% of all created are based outside of London, and 35% of ‘futurecorns’ are also based outside the capital, suggesting that the growth in regional tech investment and VC is likely to continue over the coming years.
In particular, the North East of England shows strengths in life sciences, fintech, and net zero initiatives, and currently offers £30 billion of investable projects, providing a once-in-a-generation opportunity for British and global investors alike.
The potential of the North East is further emphasised by the 2022 Global Startup Ecosystem Report placing Durham (home to transformative high-growth businesses such as the UK’s first purely app-based challenger bank, Atom Bank) within the Top 100 Emerging Startup Ecosystems worldwide.
Additionally, the North East received the greatest share of the UK's net zero investment, after London, between 2011 and Q2 2022, according to the British Business Bank's second annual Nations and Regions Tracker. In total, the region received 28% of net zero investment in the UK.
The future economic, social and environmental benefits of this could further position the North East as an attractive hub for investment, especially following the rise in popularity and necessity of ESG investing.
UK fintech: an increasingly attractive sector
Focusing on a specific sector that receives significant levels of VC investment both in the UK and worldwide, the global fintech market reached £110 billion in revenue in 2019, and is forecast to more than triple to £380 billion by 2030. Subsequently, the sector has been a focal point for many VC investor portfolios in recent years.
The UK is a dominant force in fintech, representing 10% of the global fintech market share (according to KPMG), and generating an annual average value of £11 billion for the UK economy (highlighted by EY).
Following the COVID-19 pandemic, almost 70% of UK individuals use less cash, approximately half expect to use more contactless payments, and a third now use digital applications as a payment method. Such trends have only increased the demand for innovative fintech solutions and companies, and with that, have further increased demand for venture capital investment opportunities in this space.
Ultimately, the race to become the world’s leading fintech centre has been accelerated by changing social trends post-COVID-19. And to help with achieving this mission in the UK, the Financial Conduct Authority’s (FCA) pro-competition mandate has supported new fintech firms and created a more encouraging regulatory environment.
In 2016, the FCA launched the world’s first regulatory ‘sandbox’, which was subsequently replicated abroad by those aiming to follow the UK’s lead in fintech innovation. It is expected that fintech could provide the UK economy with considerable export success, facilitating global expansion and potentially a larger share of the anticipated £380 billion future global fintech market value.
Furthermore, a national review of the state-of-play of the UK fintech sector, known as the Kalifa Review of UK Fintech, was published in February 2021, highlighting three of the main areas in which fintech can benefit the UK economy, including:
- Employment: Fintech is embedded across the UK with the potential to create high-income tech-based employment, becoming an engine of the ‘levelling up’ agenda, as well as playing a part in upskilling and retraining the existing workforce. The sector’s direct GVA contribution to the economy is estimated to reach £13.7 billion by 2030, with job creation constituting 70% of this figure.
- International trade: Fintechs could achieve global reach via access to international markets and continuing to lead the way in regulation of fast-moving tech, helping to benefit the UK’s export environment and total GDP value.
- Inclusion and recovery: Helping consumers and small businesses to more easily access higher quality, better value financial services, and supporting the ‘build back better’ agenda in the years following the pandemic, innovative fintechs can provide a useful solution.
Fintech is one of the UK’s great success stories and will help us seize new opportunities around the world. We must now build on our global reputation for fostering innovative startups and ensure firms can access the talent, finance and support they need to scale up here in the UK. This review will make an important contribution to our plan to retain the UK’s fintech crown, create more skilled jobs, and deliver better financial services for people and businesses.
– Rishi Sunak.
Whilst London is widely viewed as the ‘superhub’ of UK fintech activity, nine additional high growth fintech clusters outside of the city are also gaining significant traction and investor interest, as highlighted in the Kalifa Review.
Across the UK, from Belfast to Birmingham, Cardiff to Newcastle, and Edinburgh to Bristol, a growing level of fintech investment activity and development is taking place and the FCA is planning to strengthen ties with regional fintech hubs across the UK in efforts to ensure ‘as level a playing field as possible’ is fostered.
Already boasting developed fintech sectors, the following regions (referred to in the report as ‘established clusters’) are each home to a large critical mass of fintechs; a significant proportion of which have been deemed to display high growth potential:
- Manchester and Leeds: This cluster represents over 135 fintechs – the highest number outside of London – with 7% of scaleup fintechs nationally being headquartered here. Specialisms within this area include lending, payments and RegTech.
- Edinburgh and Glasgow: Hosting the third largest volume of fintechs within the UK, this cluster has strong roots in financial services, with many large financial institutions, such as The NatWest Group and Aberdeen Standard Life, choosing Scotland as headquarters. Additionally, the University of Edinburgh, as a world leader in AI, supplies a rich flow of data skills and talent to the region.
- Birmingham: With a significant financial services presence, Birmingham has welcomed the relocation of HSBC’s UK Retail Banking Head Office from London. And, given Birmingham’s size and status as the UK’s second largest city, there is a sense that a lot more is yet to emerge from this cluster.
Following on from their ‘established’ counterparts, the UK fintech environment also includes a number of ‘emerging clusters’, which the report has identified as Newcastle and Durham, Northern Ireland, Wales, Cambridge, Reading, and Bristol, with each of these regions representing significant fintech investment opportunities and improved fintech adoption and performance.
Though smaller than the established clusters, the UK’s emerging fintech clusters show exciting potential to grow, with some areas already receiving a specialist fintech focus.
For example, the North East of England is currently experiencing some of the most rapid fintech sector growth of any region in the UK, which has seen the North East establish itself on an international scale as an attractive region for fintech investment.
The number of fintech startups and scaleups in the North East totalled 21 in 2019, and 39 in 2022, representing an 81% increase over just a three-year time span. Furthermore, North East fintech contributed £312 million gross value added (GVA) to the UK economy in 2021, which is forecast to increase to £431 million by 2025.
This growth has been emphasised and accelerated by the North East FinTech Strategy, which is in place for 2022-25, and the Kalifa Review of Fintech, which highlighted the region’s significant fintech progress and proposed future milestones to be achieved.
As mentioned above, Newcastle and Durham were recognised as an emerging cluster in the Kalifa Review, and have been named one of the Top 10 Fintech Clusters in the UK, evidenced by substantial levels of regional investment and employment growth.
Much of this growth has been driven by small and medium-sized enterprises (SMEs), and has contributed to the creation of highly productive, well-paid jobs across the region, promoting competition and expanding local supply chain opportunities.
Furthermore, the North of Tyne Combined Authority has invested over £20 million into digital skills, innovation, inclusion and infrastructure to support this regional fintech growth, with the overall ambition of securing a further 10,000 jobs and 1,200 new businesses in the North East digital sector across the next five years. This is set to further improve levels of innovation and productivity within the region and foster increased opportunities for VC investment into regional fintech opportunities for investors.
The plans outlined by the Kalifa Review of UK Fintech and the North East Fintech Strategy involve actionable steps for the region to become further recognised as a global fintech powerhouse, each spanning across three overarching aims:
1. Create more and higher-skilled jobs in the North East
2. Operate a collaborative, sustainable, growth-focused fintech hub
3. Foster regional, national and international connectivity
The benefits of this ambition are not only expected to be visible from an investment, innovation and technological point of view, but also from a wider social and economic point of view. The benefits are unlikely to remain contained within a defined region, but are anticipated to spill over to wider surrounding communities – as has been observed with London’s growth supporting the economic development of neighbouring cities and regions.
The future of regional VC and fintech investment in the UK
Over the past decade, the UK has been undergoing a fintech revolution – in jobs, innovation, improvements to living standards and increased global trade opportunities – with a significant proportion of this phase fuelled by venture capital funding.
Consumers and businesses are rapidly changing the way they interact with financial services and the fintech sector is ideally placed to respond to this changing dynamic. This will result in the creation of new digital jobs to power our most innovative businesses, inspire a next generation of entrepreneurs, and in turn enable the growth of global champions.
– Charlotte Crosswell, former CEO of Innovate Finance
The focus on nurturing the UK’s regional high growth clusters and overall fintech assets can help to support economic recovery and prosperity on both a local and national scale, acting as a key driver for the levelling up agenda, as well as unlocking the potential of regions located all across the country.
The number of fintech companies in the UK is set to exceed 3,200 by 2030, and whilst London has played a significant role in the UK’s fintech success story, being the second highest ranking fintech ecosystem globally and home to the world’s highest concentration of financial and professional services firms, other regions located all across the UK are increasingly showcasing their potential for growth.
As one third of total UK fintechs are based outside of London, and £3.8 billion of VC funding was secured by UK startups and scaleups in these regions in the first six months of 2022, the fintech and startup ecosystems in these areas are receiving increasing support to grow and thrive.
Overall, continuing to invest in high growth fintech clusters outside of London could not only positively impact the economic diversity of the UK, but also has the potential for investors to target superior investment returns whilst facilitating wider positive impact - two of the highest priorities many sophisticated investors will seek to fulfil in coming years.