VC and growth capital funds getting more selective in current climate, says Cleary Gottlieb

Recent research suggests that venture capital activity slowed down in the UK in Q2. Michael Preston, a partner at law firm Cleary Gottlieb, links this to the global macroeconomic uncertainty, but also sees brighter days ahead.

Venture activity dropped to $7.1bn across 478 deals in the UK between April and June, down from a record high of $9bn in the first quarter of 2022, according to a recent CB Insights report.

Reacting to the report, Cleary Gottlieb partner Michael Preston said: “It’s not surprising that we have seen venture funding decline in the second quarter of the year. With an uncertain economic environment, it is much harder for venture investors to take a view on growth prospects. When the economic outlook darkens, higher-risk capital is the first to be pulled back, and venture investing involves an element of speculation.”

Many companies in the venture and growth space are responding by pulling back from idea creation and product development, and instead increasing focus on revenue generation and cashflow management, he added.

Nevertheless, this fall is relative, as 2021 was characterised by all-time-high levels of activity in the UK venture space. The 478 deals inked in Q2 are down 10% on the Q1 tally, but remain ahead of the pre-pandemic levels by some margin: Q2 2019, for instance, saw 397 deals worth a combined $4.1bn taking place in the UK.

Some of the largest VC-backed funding rounds seen in Q2 include a $384m investment in internet service provider Netomnia, a $378m series-A for financing platform Bloom, and a 4312m series-E for payment software SumUp.

Preston also sees reason for optimism in the longer term: “Ultimately, venture funding provides us with a lot of the great innovation, ideas and companies that we all benefit from today, so we will definitely see a return to a healthier environment in the future. However, for now, we will see more selective early-stage capital and growth deployment while we remain in an uncertain economic climate.”