Scottish scale-up investment slowed over the summer, according to new figures from KPMG.

Scotland’s fast-growth businesses attracted £117 million in venture capital across 41 deals in the third quarter of the year, marking a 40% decrease compared to the same period in 2021.

The figures come amid rising economic challenges and an impending global recession, which KPMG said has prompted investors to take a more cautious approach.

Despite expecting a “far quieter” end to the year, a record-breaking £623 million was invested in the first nine months of 2022, almost surpassing the £626.9m invested across the whole of 2021.

Amy Burnett, KPMG Private Enterprise Senior Manager in Scotland said: “Despite strong fund-raising activity in the first half of the year, global economic turmoil has seen VC investment decline across all markets, including in Scotland where the value and volume of completed deals fell slightly in Q3.”

Scottish scale-up investment

The lion’s share of Scottish deals in Q3 involved businesses in Edinburgh (18), followed by Glasgow with eight.

Aberdeen saw four investment deals during the quarter while Stirling attracted three, KPMG revealed.

Nearly half (19) of these deals were late-stage VC, with nine seed rounds, seven early-stage raises and six angel investments taking place.

Standout deals during the quarter include Stirling-based Integrated Graphene.

The firm announced plans to invest up to £8m to scale its manufacturing process for the commercial production of graphene, which is used in human diagnostics and energy markets.

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Additionally, Edinburgh-based pureLiFi secured £10m from the Scottish National Investment Bank as the optical communications firm prepares to embark on a global roll-out of its light-based WiFi technology.

Burnett noted that investors are “increasingly turning away” from sectors that rely on consumer spend to drive growth and are actively targeting investments in sectors which address “macro trends” such as health tech and ESG.

Despite troubling figures, this may represent good news for Scotland’s deep tech and health tech firms moving forward.

Dramatic Decrease

While KPMG described Scotland’s investment performance during Q3 as “steady”, figures highlight a concerning decrease in funding for the broader UK.

VC investment in the UK fell dramatically during the summer, with the volume of deals reaching its lowest level since Q3 2016.

However, the volume of VC investment into scale-ups outside of London outpaced the capital for the first time since 2014.

Graeme Williams, M&A Director at KPMG UK, commented: “As expected VCs are becoming increasingly cautious and investing funds into less risky asset classes.

“There is good news for the longer-term health of the VC market as more than half of the investments made in the quarter were to early stage and seed businesses.

“Whilst some VCs will be focussed on existing portfolios, many have a commitment to investors to deploy capital so there are opportunities for good businesses with solid growth plans.”

As economic disruption continues, Williams expects VC investment will “remain subdued heading into Q4 and beyond” – and this might create challenges for businesses raising capital in competitive markets.

He said: “Competition for well-performing businesses in growth sectors will be fierce and could lead to some deal head as we head (not sure what this is supposed to say, but it doesn’t look correct?) into the final quarter of the year.

“Having said that, Scotland has all but surpassed last year’s half a billion total and will chalk up another record breaking 12 months for VC investment come the end of December.”

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