Britain’s artificial intelligence startups accounted for 22 percent of venture capital investment in the first half of this year, according to figures published by Dealroom and HSBC Innovation Banking. In money terms that translates into a total of $2.1 billion raised by startups working in the sector against an investment of $9.4 billion across the ecosystem as a whole. According to the report, the momentum is set to continue. The expectation is that investment into AI will have a record breaking year.
The figures illustrate the growing importance of AI within the U.K. innovation economy. And it’s probably not accidental. Britain’s Conservative government – now in opposition – prioritized the development and commercialization of AI technologies. Under an Action Plan published in 2021 funding was set aside to encourage research, industry partnerships and commercialization. In addition, a favorable visa regime was put in place to suck in talent from overseas. The aim was to position the U.K. – admittedly behind the U.S. and China – as a globally important player. That priority is reflected in the apparent enthusiasm of investors.
But what does that mean for startups in the sector? Well, the first thing that has to be said is that overall VC investment is on the up. Following a lackluster 2023 there were tentative signs of recovery in the first quarter of the year and the momentum continued in the May-June period.
Bouncing Off The Bottom
“In the first quarter, we felt we had bounced off the bottom,” says Simon Bumfrey, Head of Technology and Life Sciences at HSBC Innovation Banking, speaking on a Zoom call. “In the second quarter, the bounce continued and there does seem to be forward momentum.”
The $9.4 billion raised by startups in the first half of 2024 was up from $8.1 billion a year earlier. Some comparisons are even more flattering. In the second quarter alone, investment amounted to $4.6 billion, up 36 percent year-on-year and 47 in comparison with the previous quarter.
But Bumfrey has some words of caution. Underneath the headline figures, there are some gaps in the investment picture. “I feel comfortable with the Seed and Series A rounds,” he says. And we are also seeing the return of mega-rounds. But the middle rounds – the Series B and Cs – are not quite so buoyant.”
And as he points out, there is also a possibility that the so-called mega-rounds – which accounted for 45% of VC investment in the second quarter – are distorting headline figures.
Applied AI
But what of AI? With U.S.-owned tech giants such as Google, Microsoft, IBM and OpenAI making much of the running, where can U.K. businesses find a market niche? As the report points out, much of the investment is going into technology designed for clearly identifiable sectors. These include therapeutics, energy, law and finance. Indeed, the biggest mega-round saw automotive driving company Wayve securing $.1.1 billion. “What we are seeing is investment going to AI that is applied in sectors such as sustainability, cleantech, robotics, enterprise software and life sciences,” says Bumfrey. In other words, AI is not a sector in itself but a tool.
There does seem to be considerable investor interest in the commercialisation of University research. Spinouts and startups linked to the universities of Cambridge and Oxford raised the most venture capital outside London in the first half, suggesting a high level of interest not just in AI but in other science-led sectors such as life sciences and quantum.
Coming Regulation
As luck would have it, the Dealroom/HSBC report coincided with the launch of the newly-minted Labour government’s legislative program, which included a statement of intent on the regulation of AI. As set out in the King’s Speech, the government promised to “establish appropriate legislation to place requirements on those working to develop the most powerful artificial intelligence models.”
This certainly wasn’t unexpected. The European Union already has its AI Act and the U.S. is developing legislation. A legal and regulatory framework for the U.K. is therefore, inevitable. However, the unfolding shape of the regulatory regime will be of huge interest to everyone working in a rapidly evolving field.
And it’s a fine balancing act. In a statement responding to the government’s statement of intent, VC OpenOcean urged the continuation of a light-touch approach to startups but acknowledged the need for regulation – and the possible benefits. “With international AI regulations such as the EU’s AI Act and California’s SB 1047 already taking shape, the UK Government may look to align with these global standards. In doing so, it can promote interoperable reporting systems and offer a clear roadmap for AI companies operating within the UK,” said General Partner, Ekaterina Almasque,
That’s still a work in progress. In the meantime, AI is continuing to prove popular with VCs althought it’s worth remembering that the current round of investment could prove to be something of a bubble. In the meantime, it shouldn’t be forgotten that Fintech – for so long the poster child for Britain’s innovation economy – is still a magnet for capital. Indeed, it was the biggest “aggregate sector” with major players such as Monzo, Abound and Flagstone among the mega-rounds.