HSBC Innovation Banker Simon Banfrey sees AI as a tool, not a sector
According to figures released by Dealroom and HSBC Innovation Banking, artificial intelligence startups in the UK accounted for 22% of venture capital investment in the first half of this year. In monetary terms, this translates to a total of $2.1 billion raised by startups operating in this space, with the ecosystem as a whole investing in $9.4 billion. This momentum is set to continue, according to the report: AI investment is expected to be a record-breaking year.
These figures point to the growing importance of AI in the UK’s innovation economy. And it’s probably no coincidence. The UK’s Conservative government, now in opposition, has made the development and commercialization of AI technology a priority. In its action plan published in 2021, funds were set aside to boost research, industry partnerships and commercialization. In addition, a favorable visa regime was introduced to attract talent from overseas. The aim was to position the UK as a significant global player, albeit lagging behind the US and China. That priority is reflected in investors’ apparent enthusiasm.
But what does it mean for startups in this space? The first thing to say is that overall VC investment is on the rise. After a slump in 2023, we saw signs of recovery in the first quarter of this year and momentum continued through May and June.
Bounce off the bottom
“We felt like we had recovered from the bottom in the first quarter,” Simon Bumphrey, head of technology and life sciences at HSBC Innovation Banking, said on a Zoom call. “The recovery has continued in the second quarter and there seems to be positive momentum.”
The $9.4 billion raised by startups in the first half of 2024 is up from $8.1 billion a year ago. Some comparisons are even more favorable: In the second quarter alone, investments reached $4.6 billion, up 36% year over year and 47% quarter over quarter.
But Bumphrey offers a word of warning: Behind the headline numbers, there are some gaps in the investment landscape. “We’re happy with seed and Series A rounds,” he says. “We’re also seeing a resurgence of mega-rounds. But the middle rounds — Series B and C — aren’t as hot.”
And, as he points out, so-called mega-rounds, which accounted for 45% of venture capital investments in the second quarter, may be skewing the headline figures.
Applied AI
But what about AI? With US-owned tech giants like Google, Microsoft, IBM and OpenAI leading the charge, where can UK companies find their niche? As the report points out, much of the investment is going into technologies designed for clearly identifiable sectors. These include healthcare, energy, law and finance. In fact, the largest mega-round was secured by car driving company Wayve, who secured $1.1 billion. “What we’re seeing is investment in AI applied to sectors like sustainability, clean tech, robotics, enterprise software and life sciences,” says Bumfrey. In other words, AI is a tool, not a sector in itself.
There appears to be plenty of investor interest in the commercialisation of university research: spin-outs and start-ups linked to Cambridge and Oxford universities raised the most venture capital outside London in the first half of the year, signalling interest not just in AI but in other science-driven fields such as life sciences and quantum.
Future regulations
Fortunately, the Dealroom/HSBC report coincides with the launch of the new Labour government’s legislative program, which includes a statement of intent on regulating AI. As stated in the King’s Speech, the government has committed to “bringing forward appropriate legislation to impose requirements on those working to develop the most powerful artificial intelligence models”.
This was by no means unexpected – the European Union already has AI legislation and the US is in the process of developing one – so a legal and regulatory framework for the UK is inevitable. But the shape of the regulatory regime will be of great interest to everyone working in a rapidly evolving field.
And it’s a delicate balancing act. In a statement in response to the government’s statement of intent, venture capital firm Open Ocean urged a continued light-touch approach to startups, but acknowledged the need for regulation, and its potential benefits. “With international AI regulations such as the EU’s AI Act and California’s SB 1047 already taking shape, the UK government may consider aligning with these global standards. Doing so would foster an interoperable reporting system and provide a clear roadmap for AI companies operating in the UK,” said general partner Ekaterina Almask.
It is still a work in progress. On the one hand, it is worth remembering that while AI remains popular among venture capitalists, current investment rounds could be something of a bubble. On the other hand, we must not forget that fintech, long the emblem of the UK innovation economy, is still attracting capital. Indeed, it was the largest “integrated sector” with mega-rounds involving major players such as Monzo, Abound and Flagstone.
