UK Trends and Developments Contributed by: Dylan Doran Kennett, Michael Jacobs, Stephen Newby and Mark Ife, Herbert Smith Freehills LLP
There are a number of reasons for this increased interest in investing in seed, early-stage and breakout-stage companies. In certain sectors, such as generative AI, the opportunities aris - ing from the emergence of this technology have resulted in many start-ups leveraging the UK’s historical strength in the underlying science. For instance, British AI company Wayve secured around GBP840 million to develop AI-powered self-driving vehicles in the UK’s largest venture capital funding round of 2024. British AI-enabled travel and hospitality platform Lighthouse also had an impressive EUR350 million Series C funding round led by KKR, leading to the com - pany achieving unicorn status in the process. Furthermore, tax-advantaged investing under the Seed Enterprise Investment Scheme/ Enterprise Investment Scheme (SEIS/EIS) pro - grammes in the UK continues to be the bedrock for facilitating early-stage investment from UK tax-resident angels. These flagship programmes remain incredibly attractive for early-stage inves - tors, and are a means for companies to attract risk capital early in their journey. Demonstrat - ing its support of early-stage enterprise, the government has confirmed that the EIS will be extended to 2035. Looking at exits, whilst the number of compa - nies launching their initial public offerings (IPOs) remains subdued in the UK and in other markets, such as the US, the IPO pipeline is very signifi - cant and IPO activity is expecting to increase rapidly throughout the year and into 2026. Klar - na’s upcoming US IPO should help to boost the tech IPO environment, especially in fintech. The UK’s M&A activity and deal value have seen a modest increase in 2024, as reported by PwC, with 2025 expected to see more private equity activity both on the sell side (as many portfo -
lio companies have been owned beyond their usual hold periods) and on the buy side, with funds continuing to sit on surplus funds ready to be invested. As of today, the constrained exit environment does limit exit opportunities for late-stage investors and, by extension, impacts late-stage deal-making, creating more limited capital recycling in the later-stage funding mar - ket, with investors focusing their dry powder on earlier-stage companies in these core sectors. The expectation is that these constraints should alleviate throughout 2025 and 2026. Fundraising at the seed stage is often more insu - lated from the volatility seen in public markets and the valuation of listed peers observed over the past few years, with early-stage investors taking a seven to ten-year view, which is beyond the current forecast horizon for macroeconomic trends such as inflation and interest rates, the volatility of which has also impacted public and private market valuations. Exit opportunities: IPO or sale versus secondary fundraising A company naturally reaches a stage in its growth where its investors start looking to real - ise their investment. Challenges in achieving an exit or otherwise realising value were the key driver behind extended hold periods in 2024 (with macroeconomic themes also playing their part), as investments were kept for longer. For example, of the 181 unicorns in the UK, 69 are yet to exit through IPOs or M&A, according to HSBC Innovation Banking. The subdued exit landscape, together with the broader challenges in the VC/growth capital market, has led to the higher prevalence of inter - nal rounds – ie, rounds of funding in which all existing investors participate. Historically, inter - nal rounds may have been considered a sign
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