2021's record year for UK tech investment. What now?
Following another record-breaking year, the UK tech sector reported its highest ever level of investment in 2021 with over £29.4 billion invested across startups and scaleups, further strengthening the sector's attractiveness to venture capital investors.
Last month the government revealed that in 2021 the UK sector not only attracted record levels of investment, but also that the £29.4 billion invested was 2.3x that recorded in 2020 (the most significant yearly growth recorded since 2013/14’s £1.5 billion to £3.5 billion increase).
With over 72% of this investment originating from outside of the UK, more speculation surrounds Britain’s burgeoning tech sector now than ever before, leaving VC investors keen to identify what is driving the surge, why the UK’s tech scene is proving so attractive, and how investment portfolios can best harness the sector’s meteoric growth.
An increase in global popularity
The UK’s long established European tech dominance was asserted especially in 2021. The £29.4 billion invested into Britain’s startups and scaleups in 2021 was more than double that of Germany (£14.7 billion) and almost three times that of France (£9.7 billion), Europe’s next two most prolific tech investment hubs.
Accounting for a third of the total £89.5 billion that flowed into the European tech ecosystem in 2021, the UK’s continental tech dominance has been reflected in its growing influence within global tech innovation over the past decade, the UK second only to the US in early stage tech investment received in 2021.
Largely fuelled by overseas investment, US investors contributed to the majority of capital invested into the UK tech sector in 2021 with 37% (primarily via large VC funds including Bessemer Venture Partners and General Catalyst), 5.5% higher than the year before and 9% higher than the proportion of UK tech investment that was sourced domestically.
This significant growth in interest from the world’s leading technological hub isn’t the only positive indicator investors can take from the UK tech sector in 2021 though.
With just 28% of investment into the sector’s startups being sourced domestically, the further emphasis the UK government has reiterated throughout 2021 on incentivised, home-grown VC investment has been taken as another encouraging sign by the UK’s private investors.
In retaining the full extent of generous tax benefits UK VC schemes such as the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) in last year’s Autumn Budget announcement, Chancellor Rishi Sunak and made clear the key role the schemes will play in the government’s plans to rebuild and grow the economy using their simultaneous benefits for startup and investor.
Facilitating private investment into growth-focused early stage companies whilst offering investors a host of tax advantages, the EIS and SEIS were labelled by Sunak as “world leading programmes”.
Looking ahead to 2022 - in addition to their evident favour of the Chancellor - many in the industry predict the schemes will boast another strong year given their evident suitability to high-growth tech startups alongside the government's ambitions to share the benefits of the flourishing tech sector domestically.
Rishi Sunak said:
It’s time we recognised the quality that other countries see in the UK, and back ourselves by investing more money into the companies and infrastructure that will drive growth and prosperity across our country.
Currently, global investors, including pension funds from Canada and Australia, are benefitting from the opportunities that UK long term investments afford, while UK investors are under-represented in owning UK assets.
Building on record unicorn creation
Though 2021’s record UK tech investment figures arguably proved the headline achievement for the sector last year, an equally encouraging development the UK’s VC investors can take from 2021 was its impact on the formation of business unicorns (privately held startup companies with a value of over $1 billion).
Largely as a result of increased investment, in 2021 a record 29 new companies registered as business unicorns in the UK, of which almost three quarters resided in the tech sector. Taking Britain's total unicorn count up to 115, the UK now has more business unicorns than Germany and France combined, with nearly 25% of these being created in 2021 alone.
A positive sign for experienced investors keen to supplement their portfolio with tech startups, the likelihood of backing the next UK business unicorn is higher now than it ever has been, and with unforeseen levels of unicorn creation materialising, the previous average startup-to-unicorn period of 4 years is fast shortening.
Luisa Alemany, Associate professor at London Business School’s Institute of Entrepreneurship and Private Capital, said:
The UK startup and scale-up sector is very attractive right now and investors don’t want to miss out on this opportunity. We are living in a ‘founders’ market’ and investors want to be there at the very beginning. We have seen top series A and B VCs moving into seed during 2021.
What’s notable compared to other countries in Europe is that talented founders are starting companies right across the UK. Given that difficulty hiring is one of the main headaches for growing tech startups, this geographic spread should translate into another structural advantage for UK tech.
Not only is the UK’s booming unicorn landscape a positive sign for those considering the tech space for venture capital this year, but 2021 has also reinforced the significant potential regional tech startups provide, with 9 of the 27 unicorns created in 2021 originating outside of London, alongside 35% of the UK’s current futurecorns.
Everywhere from Newcastle to Cambridge to Edinburgh, last year’s influx of regional tech innovation contributed to £9 billion of investment.
Proving to investors that VC deals sourced outside of London, whether that be into regional SME lenders like Bank North redefining business banking, or innovative digital ordering platforms like Qikserve supporting thousands of hospitality locations throughout the pandemic, can be just as favourable as their London-based counterparts, last year’s figures reinforced the strong regional influence the UK tech sector possess.
Gerard Grech, founding Chief Executive of industry group Tech Nation, added:
With such a record tech investment year, it’s becoming increasingly evident that the UK is very good at rearing and cultivating startups and scale-ups into successful global companies right across the UK, unlike its continental European neighbours, where it tends to be more in capital cities. A true network of digital excellence is emerging right across the country through entrepreneurship, driving new job and wealth creation.
Emphasising future growth with R&D
Whilst 2021 as a whole was an undeniably prosperous year for UK tech startups and those invested into them, the government's vocal support of the future growth and the development of the sector has served as a further positive sign for the UK’s VC investors.
Centred around the decision to increase UK R&D investment to £20 billion per year by 2024/25 (rising to £22 billion by 2026/27) the government’s ‘Plan for Long Term Growth’, (announced last July) puts Britain’s universities, research institutions and businesses at the forefront of its objectives, and is angled with the overall goal of securing the UK’s future as a global science and tech superpower.
Involving a broad range of startup-centric initiatives built to fortify and develop the UK’s thriving early stage tech landscape, the plan includes a long list of budgets from the £10 million Innovation Seed Fund set to provide growth capital for “high-potential” early stage businesses, to the “Made Smarter Scheme” that will see £8 million invested across the North East to increase the adoption of advanced digital technologies.
This enthusiasm for supporting the future of UK tech has already been widely reciprocated in the private investment sphere, with investment into UK deep tech firms totalling £6.2 billion in 2021, compared with £2.8 billion the year before.
A mutually beneficial relationship between government policy and investor vision, this initiative has helped to lay the roadmap for the future of the tech sector.
Setting out an all-encompassing plan following 2021’s record year of investment, startup growth and unicorn creation, now more than ever the UK tech sector poses a burgeoning opportunity for experienced investors around the globe.
Saul Klein, partner and co-founder at LocalGlobe, said:
It’s taken 20 years for UK tech to get to the starting line and things start to get interesting in the next 20 years. We have all the ingredients to become the leading tech ecosystem in the world, with record levels of R&D, financing and established tech hubs across the country from New Palo Alto in Kings Cross, to Cambridge, Edinburgh and Manchester.
Selecting the most appropriate investment route
Whilst the past year especially has made it clear the rapidly growing potential the UK tech sector holds for VC investors keen to support startups and scaleups at the forefront of innovation, selecting the most appropriate route for doing so can be a crucial step for any experienced investor.
Largely dependent on personal investment goals, capacity and appetite for risk, a range of options are available to UK investors keen to invest in startups and scaleups.
Where the government-backed schemes of the EIS and SEIS are two of the most well known and popular methods for investing into early stage companies (having raised a combined total of over £25 billion since their introduction), another common vehicle for investing into UK startups is venture capital trusts (VCTs).
Unlike the EIS and SEIS, VCTs are independent funds that are listed on the stock exchange. Managed externally by fund managers that pool together a group of businesses they deem promising, investor share value will increase should those businesses perform well and the VCT’s share price increase with it (and vice-versa).
Although VCTs can suit investors eager to adopt a more laid back, less autonomous approach to venture capital, schemes such as the EIS and SEIS are known for giving the investor more control of their portfolio, allowing investors to hand pick eligible startups and scaleups that they deem promising and that reflect their individual portfolio goals, not to mention the often more significant growth associated with them (due to being centred around a single company).
Just a handful of the most popular tax efficient vehicles available to UK investors looking to extend the presence of UK tech startups in their portfolio, a broad range of methods exist across VC, each with their own individual risks and advantages and all of which should be thoroughly researched before investing.
Regardless of the route any experienced investor chooses when investing in UK tech though, in 2022 and the years that follow, mindfully and purposefully investing in early stage companies at such a key focal point in the sector’s history can and will carry abundant reward for some that pursue it.