Investing in innovation: The UK’s VC sector in 2025

Let’s talk about what the current VC climate looks like relative to how the asset class has performed historically. The past few years have been defined by high rates and geopolitical uncertainty. How has VC as an asset class responded? 

When you look at the companies that are being built today, the emergence of, and enormous investment in, large language models (LLMs) has enabled a huge amount of entrepreneurial activity around the AI application layer. We’ve seen a significant amount of VC dollars going into all things AI.

This, however, is matched with an exit environment for VCs that’s been significantly challenged, as it has across all of private equity.  We’re in an interesting spot at the moment where there are huge technological shifts that require funding, but the distributed to paid-in capital (DPI) back to limited partners (LPs) has been muted for a few years.

That has made fundraising far more challenging and led to a concentration around more established firms on the one hand and more specialised, niche firms on the other.

What is important to remember is that it’s critical for early-stage VC firms to continue to invest across economic cycles. Entrepreneurs don’t just stop because interest rates are high, or the economic environment is difficult. In fact, when times are tough, the most resilient entrepreneurs tend to emerge, and VC vintages may well follow suit in being some of the best.

There’s always going to be entrepreneurs doing entrepreneurial things and scientific discovery and innovation never stop.

Typically, what type of economic environment lends itself to VC valuations rising? What do we need to see happen on a macro level today to ensure the sector remains robust or continues to improve?

Most LPs prefer to make investment choices when there’s a more predictable macro environment.

Exits come in many forms – for example, big corporates buying these companies, not just IPOs – but those decisions tend to be made when investors have a bit more certainty. At the moment, of course, there’s more geopolitical and economic uncertainty and investors are reluctant to make the ‘big’ decisions.

A more stable environment, therefore, is going to help with exits. That should also ensure LPs have capital returned to them which can then be invested into subsequent vintages, which is an essential element of the flywheel which ensures the recycling of capital.

There’s obviously a lot of different start-ups and spinouts that make up the VC space. In the current environment, are there any particular types of portfolio companies that seem to be attracting capital more than others? 

Well, as alluded to before, AI really is the big thing at the moment and I’ll expand on that because it’s such a generational technology with wide reaching consequences, primarily in a good way.

We’re now seeing an enormous amount of innovation at the application, with AI being used to create business models and take on mundane tasks. In my view, it’s something that’s going to attract capital for a very long time and, obviously, there’ll be some better allocators of that capital than others.

Then there’s the broader life science and healthcare space. There’s always a substantial amount of money going towards drug discovery as well as medtech and healthtech. I think you’ll continue to see that. There’s a great opportunity with things like genome sequencing and being able to better understand people's bodies at an individual level and what AI, and eventually quantum computing, will be able to do with these vast datasets. We may then be able to create personalised, preventative health care at scale, not just for those that can afford it.

Finally, quantum computing. For me, this could be as big as AI, insofar as its potential impact on the world economically. 

What is potentially attractive about UK businesses seeking VC funding? 

Let’s frame this slightly differently – why is the UK an attractive place to start and scale a business? Because if it’s a good place to start and scale a business, investment will likely flow from that.

In a broad, macro sense there’s a lot there. We’ve got a stable government, there’s the rule of law and trading networks all around the world.

But also, as a science and innovation base the UK is world leading. Our universities consistently rank among the best in the world. Increasingly, our science and research base is attracting more capital. Why is that the case? Because we’ve been doing this for so long. Our oldest universities are 800 years old, globally recognised and world-leading in their respective disciplines. That’s not something you can replicate overnight.

Increasingly, we’re seeing recognition that the spinouts coming from our top universities are attracting more investor attention as they are underpinned by such brilliant science and the intellectual property that flows from that.