From invention to investment:
The case for UK venture capital

Read this article to understand:

• Where are the opportunities to invest in innovation
• Why UK innovators face a ‘scale up’ funding gap 
• How venture capital can bridge that gap and deliver diversified returns to investors

Few economies turn research into invention as reliably as the United Kingdom. It places sixth of 139 economies in the Global Innovation Index, and fourth in the world for innovation outputs – a measure of how effectively an economy converts what it spends on research into high-quality results.¹ Two of its universities, Cambridge and Oxford, sit among the top five globally, and nineteen rank inside the world’s top 200.² London is the fifth-ranked startup city worldwide and the only European city inside the global top 20, with Cambridge and Oxford forming further clusters of genuine global standing.³

The UK’s capacity for invention has significant economic value. The combined enterprise value of the UK startup ecosystem has grown from around US$252 billion in 2017 to roughly US$1.3 trillion in 2026, making it the third most valuable in the world.⁴ Britain is home to around 150 unicorns and more than 25,000 funded startups, with venture capital consistently providing 40 to 50 per cent of total startup funding over the past decade.⁵

Meanwhile, a wave of pension reform aims to channel long-term capital towards productive, private assets. The policy backdrop is creating momentum behind domestic investment in exactly the kind of high-growth companies venture capital seek to finance. For institutional investors weighing where to deploy over the coming decade, the convergence of one of the world’s most innovative economies and a supportive policy environment is difficult to ignore.

The structural funding gap

Nevertheless, while the UK is good at starting companies, it is less good at scaling them. The early-stage end of the market is reasonably well served by domestic capital; the gap lies further up the ladder, in the later-stage growth rounds where companies need larger cheques to expand and stay headquartered in the UK. This is the much-discussed “scale-up gap”, and it is structural rather than cyclical.

The shape of the problem is visible in where the money comes from. Almost three-quarters of the UK venture funding raised over the past year originated outside the UK, with the United States alone accounting for close to half.⁶ The issue is less the size of individual UK funds than the depth and maturity of the market behind them: although average UK and US fund sizes are broadly comparable, the US ecosystem can deploy capital at scale in a way the UK cannot yet match. In 2025, 97 per cent of US venture investment went into deals above £25 million; the UK market remains weighted towards earlier stages, with limited follow-on capacity.

The consequence is that many promising British businesses either have to rely on overseas investors, slow their growth plans or exit earlier than they otherwise might. Each of those outcomes exports a share of the value these companies create. The opportunity for domestic institutional capital is to fill that later-stage gap, retaining more of the upside at home while accessing the return potential of companies at their fastest-growing stage.

More positively, there are signs the market is maturing in quality as well as size. UK venture fundraising reached £7.2 billion in the first quarter of 2026, its strongest quarter since mid-2022, keeping the UK at the top of the European rankings, with London accounting for around 85 per cent of the total.⁷ Furthermore, investors are applying greater scrutiny, with companies reaching the market with clearer business models and stronger unit economics. Fewer deals are being completed, but those that tend to be larger and of a higher quality.
 

Productive finance and the Mansion House Accord

Venture capital sits squarely within the government’s ambition to channel more long-term savings into the productive economy. Venture-backed companies now support more than 378,000 jobs in the UK, and over 9,000 high-growth businesses currently receive venture backing across sectors from healthcare to advanced manufacturing.⁸ 

The policy architecture has moved quickly. In May 2025, seventeen of the largest workplace pension providers (including Aviva), managing around 90 per cent of active savers’ defined contribution pensions, signed the Mansion House Accord. These institutions have committed on a voluntary basis to invest at least ten per cent of their main default funds in private markets by 2030, with at least five per cent of the total ringfenced for the UK.⁹ 

The Accord is expected to release around £25 billion into the UK economy. It builds on the 2023 Mansion House Compact, under which signatories committed to invest at least five per cent of DC defaults in unlisted equities (including venture capital and growth equity).¹⁰

For the institutional market, the direction of travel is clear: a structural reallocation towards private assets, with an explicit domestic tilt, supported by government and led by industry. Venture capital is one of the more natural beneficiaries, because it offers exactly the combination policymakers are seeking, namely long-term growth capital for innovative domestic businesses.

The sectors driving UK innovation

Innovation is not evenly distributed, meaning a disciplined investor should concentrate on areas where the UK has genuine, durable advantages. In our view, four sectors stand out, each underpinned by structural demand and a deep domestic talent base.

Science and deep tech

This is the engine room of UK innovation. Intellectual property-rich companies, often spun out of university research, span areas such as artificial intelligence and machine learning, quantum computing and life sciences. The strength of the UK’s universities and leading innovation clusters in London, Cambridge, Oxford and Manchester gives this sector real depth, and it is where the largest share of venture capital is currently being directed.

Climate and sustainability

Companies in this sector address climate, environmental and social challenges – decarbonisation technologies, products and services supporting the net-zero transition, green finance and social mobility. The transition represents one of the largest reallocations of capital in modern economic history, and the breadth of the theme spans both early innovation and the industrial scaling of proven solutions.

Healthtech

Health technology applies new tools to improve outcomes and the delivery of care, including digital therapeutics, early detection and preventative care. The combination of an ageing population, pressure on health systems and the UK’s clinical research base should create durable tailwinds.

Fintech and insurtech

The UK, and London in particular, is a global financial-services hub. Fintech and insurtech companies are competing with established providers through new technology and propositions, including embedded finance, insurance digitisation, new wealth models and digital assets. The depth of the UK’s financial-services infrastructure, regulatory credibility and a growing set of regional clusters give domestic investors an informational and network advantage in this sector.

Venture capital’s role in a diversified portfolio

The most obvious reason to allocate to venture capital is its return potential. Over the long-time horizons that suit the asset class, UK venture capital has delivered attractive multiples relative to other private markets. On a total-value-to-paid-in basis across 2002–2020 vintages, UK venture capital returned a median multiple of 1.48x, ahead of infrastructure, private debt and real estate, and second only to private equity.¹¹ These are long-dated, illiquid returns, but for investors able to hold through the cycle, the reward for patience has been real.
 

The second reason is diversification. Venture returns are driven by company-specific execution and long-term structural themes rather than the short-term factors that move listed markets. This makes the asset class a useful complement to existing private equity and broader private-markets holdings. The long holding periods associated with venture capital also helps to dampen the effect of short-term volatility, because value is realised over years rather than quarters.

The third is access. A meaningful share of the economy’s growth is now generated in private hands, and companies are staying private for longer. Venture capital provides exposure to structural growth themes at a stage and in a form that listed markets do not offer. Notably, deeptech and artificial intelligence accounted for 63 per cent of UK venture funding in 2025, around £5 billion of the £8 billion invested, concentrated in businesses with defensible intellectual property and scalable technology. These are themes an institutional portfolio may otherwise struggle to access.

How investors can access the market

There is more than one route into the asset class depending on an investor’s starting point, governance and liquidity needs. Indirect investment – committing to specialist external funds – offers diversified exposure and access to managers and deal flow that would be hard to reach directly and is a logical way to build early exposure. Co-investment alongside those managers allows investors to concentrate capital in chosen opportunities while drawing on a lead manager’s expertise. Direct investment, typically at later stages, offers the greatest control and the lowest fee drag, but is most demanding in terms of the resources and expertise required.

For investors new to the asset class, evergreen structures have become a natural stepping stone. Unlike traditional closed-ended funds with a fixed life, evergreen vehicles invest continuously and are structured to align better with the liquidity needs of long-term investors such as pension schemes. Such structures enable patient capital to support high-growth companies without committing to a rigid drawdown-and-distribution timetable.

Managing risk in venture capital

Early-stage and growth companies have limited operating histories and sometimes unproven business models. They also depend on successive financing rounds, face rapid shifts in technology and competition, and can be difficult to value. The investments are illiquid and long-term and should be understood as a multi-year commitment rather than a tradeable exposure. Exit timing depends on market conditions outside any investor’s control.

Because the holding is long-dated and illiquid, manager discipline has to come at the front end, through enhanced underwriting and due diligence before capital is committed. From there, risk is managed through portfolio construction rather than a single safeguard. Diversification across companies, stages and vintages reduces concentration risk; careful sector selection focuses capital where conviction is highest; and geographic diversification broadens the opportunity set.

In our view, blending direct and indirect investments is an effective way to enhance diversification. Our strategy is weighted with around 70 per cent going towards direct holdings and 30 per cent towards third-party funds. We favour indirect exposure at the earlier, higher-risk stages to spread risk and source deal flow, while concentrating direct investment in later-stage companies where we can underwrite individual businesses with greater confidence. 

What we look for in investments

A credible venture strategy is built on more than capital. It begins with origination: a focused team, concentrating on a select few sectors where it has both the experience and the deep network to see and win the right deals. That focus is what allows genuine conviction at the point of investment.

Selection then turns on company quality: scalable business models, exceptional leadership and a demonstrated ability to execute. The most useful capital is active rather than passive – supporting portfolio companies directly and through a network of subject-matter experts, so that the manager contributes to value creation rather than simply funding it. Structuring and hold periods are set with the long-term nature of the asset class in mind, with value realised over years.

In summary: Funding the next stage of growth

The thread running through all of this is a single mismatch. Britain generates world-class innovation but has historically under-financed the stage at which that innovation scales, leaving much of the later-stage funding and a sizable share of the value created to overseas investors. Pension reforms and the wider productive-finance agenda are now shifting long-term capital towards exactly this part of the market, at a moment when the UK venture ecosystem is larger, more disciplined and of a higher quality.

For institutional investors, the case rests on two ideas held together. Venture capital is a long-term return driver, with historically attractive multiples and access to structural growth themes unavailable in listed markets, and a genuine diversifier when approached with the right time horizon and portfolio construction. It is also a way to participate directly in the UK growth story – funding the companies that could shape the economy’s next decade rather than watching that value created and captured elsewhere.