UK state-backed development bank prepares for tech valuation falls

Valuations for tech companies have begun to fall in the UK, according to the head of the state-backed British Business Bank, which is preparing to use its funds to help support start-ups in the face of economic headwinds.

Equity investment into smaller UK businesses increased by 88 per cent to £18.1bn in 2021, according to a BBB report published on Wednesday, the highest recorded since it started tracking the data in 2011. Equity investment in small businesses in the first three months of 2022 was also the highest recorded in a quarter, at £7.6bn.

However, Catherine Lewis La Torre, acting BBB chief executive, said that “we can see valuations are coming off” when talking to company founders, even if this shift had not yet shown up in data.

Founders have raised concerns that valuations are falling for fast-growing but often lossmaking companies after more than a decade of strong growth. Listed tech stocks have fallen sharply, and this trend is beginning to be felt by private companies seeking to raise cash.

The most high profile example has been Klarna, the financial services group, which is reported to be seeking to raise money at a valuation significantly less than its previous funding round in 2021.

Lewis La Torre said the bank had access to large amounts of “uncommitted capital” that can “respond to market contractions” as needed. She said that international investors “can be flighty” so the BBB could step in to support larger parts of future fundraisings.

In 2021, overseas investors were involved in equity deals of £13.5bn, about three quarters of the total. The BBB typically invests through other fund managers, including through its venture capital arm, British Patient Capital, although it can take direct equity stakes too.

“Cash burn” was a “key consideration”, Lewis La Torre said, for start-ups needing money to keep growing. The BBB would aim to ensure fund managers had enough reserved capital to participate in future fund raisings, she added.

The bank was allocated an additional £1.6bn in the last Budget to invest in regional businesses and across the devolved nations. It expects its first funds to launch in spring next year, with a mandate to support investment through both debt and equity.

Lewis La Torre said the BBB had supported almost a fifth of all announced UK equity deals in 2021.

Investment in UK tech companies rose to £8.2bn in 2021, from £4.1bn the previous year. The UK retained its position in 2021 as the largest venture capital market in Europe, bigger than France and Germany combined, but it still lagged the US, which nearly doubled in 2021 to £254bn. 

Christine Hockley, managing director of funds at British Patient Capital, said the report showed that the UK had a lower proportion of VC deals and investment going into deep tech and R&D-intensive companies than other countries, “and that this is the primary cause of the overall UK-US VC funding gap”.