A clear split is emerging in the UK venture capital market. Capital is flowing rapidly into a narrow group of artificial intelligence and deep technology companies, while smaller start-ups encounter stricter conditions and reduced bargaining power. A recent study by HSBC Innovation Banking, based on more than 600 UK-headquartered deals, points to a two-speed market in which risk is being priced unevenly across sectors and stages.
The data shows that investors are increasingly selective. Companies operating in artificial intelligence or adjacent deeptech fields, particularly those raising £10 million or more, are attracting intense interest. For the rest of the market, especially early-stage firms, the environment is markedly more cautious. Founders report longer negotiation periods and more complex deal structures, reflecting a shift in how capital is deployed.
The strongest demand is centred on what investors describe as “pure AI” opportunities. Venture capital firms, many based in the United States and Europe, are competing directly for a limited number of high-growth companies. This has led to higher valuations and more favourable terms for founders. In some cases, investors are prepared to relax standard protections, prioritising access to promising technology over downside safeguards.
The profile of companies attracting this level of competition is becoming clearer. London-based Isomorphic Labs, led by Demis Hassabis, reflects the type of business drawing sustained global capital. The firm applies artificial intelligence to drug discovery, building on systems such as AlphaFold to model biological processes and identify new therapeutic targets. Founded as a spin-out from DeepMind in 2021, it sits at the intersection of advanced research and commercial application, a combination that investors increasingly favour.
This competition is not evenly distributed. It is largely concentrated among scale-ups with established traction, advanced research capabilities, or proprietary data assets. For these companies, the balance of power has tilted towards founders. Negotiations are faster, syndicates are assembled quickly, and capital commitments often exceed initial targets.
Beyond this segment, the tone shifts. Early-stage companies are facing increased scrutiny and more demanding terms. One notable development is the growing use of participating preference shares, sometimes referred to as “double-dip” structures. These instruments allow investors to recover their initial investment before sharing in any remaining proceeds from a sale, effectively increasing their return while reducing the proportion available to founders and early shareholders.
This mechanism alters the distribution of risk and reward. Under traditional equity structures, investors and founders share returns proportionately after exit. Participating preference shares introduce an additional layer of protection for investors, particularly in uncertain markets. For founders, this can significantly dilute eventual gains, even if the company performs well.
The shift is partly driven by the composition of the investor base. Funds backed by retail schemes such as the Enterprise Investment Scheme and Venture Capital Trusts are placing greater emphasis on capital preservation. These investors tend to favour structures that limit downside exposure, contributing to the rise of more aggressive terms in smaller deals.
Geography adds another dimension to the divide. London remains the centre of venture activity, with a dense network of investors competing for deals. In this environment, founders are more likely to secure favourable terms, particularly if they operate in high-demand sectors. Outside the capital, the picture is different. Companies in the North, the Midlands and Scotland often face a smaller pool of investors and reduced competition for their equity.
This imbalance affects deal terms. With fewer funding options available, regional founders are more likely to accept investor-friendly conditions, including higher liquidation preferences and stricter governance rights. The study highlights a persistent disparity between London and the rest of the UK, despite ongoing efforts to decentralise investment.
The reliance on overseas capital remains a defining feature of the market. Of the £8.8 billion analysed in the study, around 67 per cent originated from foreign investors. US-based funds were particularly dominant in larger transactions, leading the majority of deals above £30 million. This reflects the depth of capital available abroad, but it also underscores a structural dependency within the UK ecosystem.
This dependency feeds into a longer-standing issue often described as the “scale-up gap”. While the UK continues to produce high-quality start-ups, many require foreign investment to reach later stages of growth. This creates a pipeline in which early innovation is domestic, but expansion is frequently funded and influenced from overseas.
The implications extend beyond individual companies. When successful businesses are backed primarily by international investors, the financial returns from exits are more likely to flow abroad. This affects the recycling of capital within the UK, limiting the ability of experienced founders and investors to reinvest locally.
The current market reflects both strength and imbalance. The UK remains attractive to global investors, particularly in areas such as artificial intelligence. At the same time, the broader start-up landscape is under pressure. Access to capital is uneven, and the terms attached to that capital are becoming more complex. The divergence between sectors, stages and regions is now a defining feature of the venture environment.
