Venture capital funding to dry up amid ‘red flags’ in first half of 2022

The war in Ukraine, high levels of inflation and rising interest rates have already hit investment globally, with consumer-facing startups struggling in the face of the headwinds. Swedish buy-now-pay-later giant Klarna was one of the highest-profile firms to see a drastic fall in valuation after a recent fundraise saw it valued at just $6.7bn, down from $45.6bn last summer.

While UK investment has thus far defied the downturn, KPMG partner Warren Middleton said this was unlikely to continue, citing “red flags” such as a fall in deal volumes. VCs did 667 deals in the UK over the latest quarter – the lowest number recorded since the same period in 2018.

READ Venture capital piles $18bn into crypto, and JPMorgan sees pace continuing

Middleton, who leads the consultancy’s startup advisory team, said this showed that investors are becoming “more cautious, focusing on companies within their portfolios, businesses with strong paths to profitability, and those operating in sectors being put in the spotlight by the current Russia-Ukraine conflict”.

He added: “Companies that may have attracted funding from optimistic investors in the past will likely face more challenges and require stronger business cases and paths to profitability to attract funding over the next few quarters.”

‘Cash is king’

Fintech remained the UK’s hottest area of investment, Middleton said, led by a £522m raise by payments company SumUp and a £260m raise by GoCardless.

But even in fintech the broader market downturn will likely cause investors to take longer over due diligence, causing deals to progress at a more sluggish pace.

Examples of this have already emerged in the crypto space, which has been hit especially hard by a market crash in recent months with Ambre Soubiran, chief executive of blockchain analytics firm Kaiko, describing a recent $53m raise as a “marathon”.

In an interview with Bloomberg, Soubiran said: “What was challenging, in all honesty, was the due diligence and closing process because we were really, really under scrutiny.”

JPMorgan researchers wrote in an 18 July note that global VC investment into the crypto and blockchain industries had been going at a record pace in recent months. Yet for British fintechs and late-stage startups more widely, initial public offerings have been kicked into the long grass.

Challenger lender Starling Bank, which reported its first annual profit in its latest results, has been forced to push IPO plans back until late 2023 or early 2024, its chief executive Anne Boden said.

Jonathan Boyers, KPMG’s UK head of corporate finance and vice chair, said: “Companies, particularly at late stage that were expecting an IPO, have had to rapidly rethink their plans.

“This is forcing companies into a situation where cash is king — where they need to find the money to bridge the time until they can either raise an additional private financing round or an IPO.”

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