Last year saw an 11% decline in UK small business equity investment, according to the latest data by British Business Bank.

The drop, which fell to £16.7bn, has been driven by a downturn in market conditions, with the number of investment deals in 2022 falling by 7% to 2,702, following a record year in 2021 of 2,912 deals.

British Business Bank has stated that this is the first annual drop in equity deal volumes since the Beauhurst data series began in 2011.

Furthermore, the overall 2022 trend has continued into 2023, with the first three months seeing £2.2bn raised by UK small businesses, a 28% drop in investment value compared to the last quarter of 2022.

The downturn reflects venture capital (VC) fund managers reducing their dealmaking activity and focusing more on business fundamentals, to compensate for the rapid capital deployment in recent months.

Growth stage investment declined by 25% to £8.2bn in 2022, which was 54% lower when comparing the first and second halves of the year. British Business Bank has put this down to the lack of exit opportunities via trade sales or public listings, causing investors to avoid larger deals as their attempt to preserve their capital.

Despite the overall downward trends, data from the British Business Bank found that 2022 was a record year for university spinouts, which received 12% of the total equity investment last year, at a value of £2bn.

The average deal size for university spinouts was £8.9m, which is 33% higher than the wider market. A total 226 deals were made over the course of the year, which equalled 8% of the number of equity deals in the UK. The University of Cambridge claimed the highest number of deals, totalling 33, with Oxford and Edinburgh totalling 31 and 15 deals, respectively.

British Business Bank CEO, Louis Taylor, said: “[Last year] proved to be a year of two halves for small business equity investment, with record levels of finance raised over the first two quarters of the year, followed by a 47% decline in total investment during the second half. This decline reflected concern about the overvaluation of deals, and the effects of higher inflation and rising interest rates.

“However, there are still some bright spots that can be drawn from this year’s report, in particular levels of investment in university spinouts and breakthrough technology sectors. While it is still too early to tell the full scale of the downturn in investment, the UK’s broad and advanced equity finance markets are well placed to support recovery.”

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