Capital Gains The future of UK venture investing

The UK's venture capital (VC) market enters 2026 at a pivotal moment. AI, deep tech, health, fintech, and climate continue to draw strong investor interest, cementing the country's position as a hub for early-stage innovation. Amid more cautious fundraising and selective deal-making, new opportunities are emerging for founders and investors who can navigate a market defined by both risk and potential

According to Alastair Moore, Investment Director at PXN Ventures, the leading venture capital firm for the North of England, Scotland, and Northern Ireland, the VC market in the UK has experienced a clear shift toward sectors like AI and deep tech. "AI has been a huge draw for UK VC this year, attracting about 30% of investment in H1, but other areas like health, fintech, climate, and deep tech are holding strong," Moore says. "Deep tech, in particular, is seeing real growth because it taps into the UK's industrial strategy and a strong talent base." For Moore, the key factor driving the investment boom in deep tech is the UK's strong industrial base and its ability to foster a talented workforce capable of scaling innovative solutions. He highlights that, despite global uncertainty, the UK remains a preferred destination for investors seeking to fund companies with a solid vision and scalable technologies. "Deal flow is getting stronger, especially at pre-seed and seed stages, with companies often raising bigger rounds earlier through syndicates of investors." The increasing deal flow and the ability for companies to secure larger rounds at earlier stages signals a healthy and competitive market. "Investors are backing companies that have a clear story and strong sector focus," Moore continues. "For instance, PXN recently closed a complex £7m investment in just 10 weeks - proof that good companies with a compelling narrative can move quickly." As we look towards the broader venture capital environment, it's clear that sector-focused funds and corporate VCs are becoming increasingly active. "Across Europe, sector-focused funds and corporate VCs are active, and many companies are looking to scale closer to home given uncertainty in the US," Moore observes. While the international landscape remains fluid, the UK's venture capital scene is holding its own, proving its resilience and capacity for growth.

A more cautious investor sentiment
Despite signs of growth in certain sectors, particularly with increased interest from US-based investors, Rahul Parekh, Partner at 2150, a VC firm investing in technology companies that seek to sustainably reimagine and reshape cities and the industries that power them, offers a more cautious outlook for UK VC. He explains that, while there are still high-quality opportunities, the overall sentiment from limited partners (LPs) has become more conservative in recent months. "There's a much more cautious LP sentiment around fundraising. Capital is flowing more slowly into the market with a greater emphasis on quality and focus on exits," Parekh says. "The bar for new funds seems higher than before." This cautious shift is echoed by Nicole Lowe, Head of Emerging Giants at KPMG UK, who notes that "LPs are becoming more discerning, prioritising quality over quantity in their investment strategies and emphasizing thorough due diligence and risk assessment." She adds, "We're seeing increased focus on clear pathways to profitability and much longer DD processes." Despite this more cautious stance, Lowe points out that this is occurring alongside a boost in the future of UK VC investment, as evidenced by KPMG's latest report revealing a major rise in interest from US-based investors due to the market's growing "attractiveness."

Parekh's comments reflect a broader trend seen across the UK in 2023, as fundraising has slowed significantly. A recent report by S&P indicated that UK-based private equity and venture capital funds raised more than 50% less in 2025 compared to the previous year. "The pace of fundraising has slowed in the UK," Parekh explains. "However, the performance of UK funds remains in line with peers in Europe, and there seems to be signs of optimism returning to the market. In our view, exit conditions are improving, and we see high-quality investment opportunities." This shift in sentiment is also visible in the broader deal activity within the UK. Parekh points to a marked decline in the volume of deals, particularly those in later-stage growth sectors. "In parallel with fundraising activity, deal activity has also dropped in the UK this year. We have seen a significant drop in overall deal volume and valuations, particularly in later-stage growth deals. For example, the total transaction value in venture capital and private equity deals in the UK has fallen over 45% in 2025." The more cautious approach among investors can be seen in the increasing selectivity of VC funds. Parekh adds, "There seems to be a more selective environment currently. We have certainly been practicing much more discipline around investing, and we have seen most other funds do the same. VCs seem more discriminating, focused on companies with stronger fundamentals and clearer potential." Despite the drop in later-stage deal activity, early-stage investments, particularly in the seed and Series A stages, are still holding strong. "As always, the early stage (e.g., seed-Series A) still seems active and resilient in terms of valuation in 2025," Parekh notes, indicating that while the overall deal environment has become more challenging, there are still attractive opportunities for early-stage ventures with strong potential.

Adding further nuance to this picture, Dr Elizabeth Young, Investment Manager at PXN Group, highlights early signs of recovery in fundraising conditions, particularly in technical and university-incubated innovation."Fundraising conditions are beginning to recover, and we're seeing significantly more Series A opportunities this year compared with last. At the pre-seed stage, PXN is also encountering a strong pipeline of deep, technical opportunities that have been carefully incubated within universities. That said, a gap still exists at pre-seed, particularly for certain sectors." She also notes that despite stabilising valuations, founders are still navigating extended fundraising processes. "Valuations have settled between the highs of 2021 and the recent downturn. Many rounds remain flat or are extensions aimed at bridging to external capital. Founders continue to face longer transaction timelines due to a hesitance among investors to lead. Encouragingly, co-investment and syndication are becoming more common, which we welcome." Young adds that limited partner focus remains skewed toward later-stage activity, though deep-tech investment vehicles are creating new momentum at earlier stages."General LP sentiment remains focused on later-stage opportunities, largely reflecting current market dynamics for follow-on funding. We are, however, seeing a rise in vertical-specific funds - particularly in deep tech - which bring more hands-on LP involvement at earlier stages. We'd like to see similar momentum in life sciences, where recovery has been slower."

Bifurcation in VC
Erkko Autio, Chair in Technology Venturing and Entrepreneurship at Imperial Business School, observes that the UK's VC market is becoming increasingly bifurcated. "There is everything AI-related and then there is everything else," he says. "What I mean by this is that deep tech and generative AI (specifically infrastructure, data centres, and application-layer innovators) are absorbing the vast majority of capital. Investors are aggressively competing for access, leading to pre-emptive term sheets and accelerated deal velocity." Autio's comments reflect a growing trend where AI and deep tech are driving the lion's share of VC investment. "In contrast, everything else seems to freeze," he adds. "For traditional B2B SaaS and consumer start-ups, deal flow has slowed significantly. The 'growth at all costs' model seems dead. Investors are no longer funding good ideas with high burn rates; they are funding efficient execution." The shift toward a more selective, efficiency-driven investment landscape is reshaping the priorities of investors. Autio also highlights that sectors outside AI and deep tech, such as defense and climate resilience, are seeing steady capital flow, largely driven by geopolitical instability and energy transition mandates. "These areas should see continued growth in the coming years, especially in Europe," he predicts.

The road to liquidity
Alongside the bifurcation between AI and other sectors, Autio points to another key trend: the shift in investor mindset towards liquidity. "The investor mindset appears to be shifting from internal rates of return (IRR) to distributions to paid-in capital," he explains. "Investors are less keen to pursue paper gains (IRR) and are increasingly demanding cash returns before committing to new funds." This has led to more 'acqui-hires' and consolidation deals, where start-ups are acquired primarily for their engineering talent or intellectual property (IP) rather than for revenue multiples. "We're seeing more consolidation plays, especially in the tech space, where companies are being acquired not for growth but for their talent or IP," Autio says. Moreover, the emphasis on liquidity appears to be impacting the fundraising landscape as well. "VCs seem to be struggling a bit to fundraise, which is reflected in a gradual reduction in the overall number of active investors in the market," he adds. This reduction in investor activity may pose a challenge for companies that have relied on a consistent flow of capital to fund their operations and growth.

Optimism and resilience amidst market uncertainty
Despite the cautious sentiment in VC and private equity markets, Tom Whelan, Partner at Reed Smith, an international law firm, points to growing optimism in the M&A and private equity landscape. "It's notable that the total value of domestic M&A has increased despite the lowest number of transactions taking place since Q4 2017. The fall in deals is likely due to the market working through the impacts of recent tariff and trade changes internationally," Whelan explains. Whelan attributes some of the deal slowdown to macroeconomic factors like uncertainty surrounding the Autumn Budget and global trade dynamics. However, he anticipates that pent-up demand will drive future deal activity. "Uncertainty around the Autumn Budget may have also caused some short-term trepidation in the run-up, but this should translate into a release of pent-up demand now that it's past," he adds. Notably, Whelan observes that the industrial sector is experiencing a rebound, following a slow period earlier in the year. "There has been a notable shift in the market recently, and there are growing signs of optimism. In particular, the industrial sector is seeing an uptick in deals, which had been otherwise lethargic for most of this year." He also notes that AI, tech, and digital infrastructure remain prime areas of investor focus, while healthcare and consumer-facing businesses continue to draw consistent interest. "If these positive signs continue, it bodes well for the market going into 2026," Whelan concludes. As for the private equity market, Whelan highlights a trend toward continuation vehicles, where funds are holding onto assets in anticipation of greater returns. "Funds are making greater use of these continuation vehicles as they allow them to defer selling assets at the end of the fund's term when managers are anticipating greater return prospects in the near future," he explains. The demand for such deals is expected to remain strong as we approach the new year, contributing to an overall positive outlook.

Structural challenges in UK VC
Finally, Martin Rigby, Executive Director at ET Capital, a Cambridge based investment firm, offers insight into the structural challenges impacting UK VC, drawing on more than three decades of experience in the Cambridge ecosystem. Rigby identifies two main factors affecting the UK VC landscape. "First, constrained deal flow is a key issue," he explains. "Early-stage investors continue to focus heavily on trying to 'pick winners'; perfect teams, flawless technology, and fully-formed products. This labour-intensive approach often overlooks strong businesses that fall outside current investor fashions or preferences. It also makes it tougher for newer investors to judge early-stage companies, especially in deep tech and science, and that's played a big part in the ongoing shortage of capital in those areas." Rigby highlights that while the venture capital community remains focused on identifying the next big success, this narrow selection process limits the pool of investable companies. "It's difficult to find companies that meet the ideal criteria, and it's creating a bottleneck in early-stage funding, particularly for science- and technology-based businesses that may not fit traditional molds," he adds.

The second structural challenge, Rigby notes, is the uncertainty surrounding returns. Early-stage ventures are inherently volatile, making returns difficult to predict. This unpredictability has led to hesitation among individual investors and institutions alike. "Uncertainty puts off many individual investors, and even some institutions, who often prefer asset classes with clearer and more stable outcomes," Rigby explains. "Despite the growth of angel networks and equity-crowdfunding platforms, this structural issue continues to shape how much capital flows into the sector." This uncertainty is compounded by broader market conditions, which can exacerbate the risk-averse behavior of investors. However, Rigby remains optimistic about the future of venture capital in the UK, especially in sectors like deep tech and life sciences, where long-term growth potential continues to be strong.

A market in flux but full of potential
The UK VC landscape is undeniably complex, shaped by a mixture of caution, growing optimism, and sector-specific booms. While AI and deep tech are leading the charge, with increased investment and a focus on efficiency, there is also a noticeable shift in investor behavior, as funds seek liquidity and prioritize profitable exits. M&A activity remains subdued but resilient, with sectors like industrial, healthcare, and consumer businesses showing signs of growth. At the same time, challenges persist in the form of constrained deal flow and the unpredictable nature of early-stage returns. As investors become more selective, a narrowing of the pool of viable start-ups is becoming apparent, particularly in sectors that require heavy innovation or longer development times, like science and life sciences.

Yet, the UK remains a leading hub for early-stage investments, and as long as the ecosystem continues to nurture high-quality ventures and attract capital - particularly in deep tech, AI, and climate resilience - the country's VC market is well-positioned to adapt and thrive in the face of ongoing uncertainty. As Whelan, Moore, Parekh, Autio, Rigby, and Young all note, the landscape may be shifting, but the opportunities for strategic, high-value investments remain ripe for those able to navigate this evolving terrain.