AI drives record share of UK equity investment despite market slowdown

Artificial intelligence companies attracted a record share of UK smaller business equity investment in 2025, accounting for almost half of all funding, despite an overall decline in investment activity, according to the latest Small Business Equity Tracker from the British Business Bank.

The report found that equity investment into UK smaller businesses fell by 4% year-on-year to £12.3bn in 2025. However, investment remained above pre-pandemic levels, with investors increasingly concentrating capital into fewer, larger transactions.

AI businesses captured a record 44% of all smaller business equity investment during the year, while representing 26% of all deals – almost double their share in 2022. Investment into AI-related businesses increased by 48% year-on-year, underlining continued investor confidence in the sector.

The trend has continued into 2026, with a small number of AI megadeals driving overall market growth in the first quarter, despite more subdued funding conditions for the wider startup market.

The report also highlights the growing concentration of investment, with the 10 largest fundraisings accounting for 23% of total investment in 2025 – the highest proportion since 2020.

While later-stage businesses continued to attract capital, early-stage funding weakened. Seed-stage deals fell by 27% and venture-stage transactions declined by 13% compared with 2024. Digital and Technology remained the largest sector for investment, while Advanced Manufacturing recorded strong growth. Investment in Financial Services and Life Sciences declined, although Clean Energy and Creative Industries maintained stable funding levels despite fewer transactions.

The report also highlights the UK’s growing strength in university spinouts. Venture capital-backed spinout deal volumes increased by 95% between 2021 and 2025 compared with the previous five-year period, outperforming the US, Germany and France when adjusted for research output.

However, activity slowed in 2025, with spinout equity deals falling by 33% and investment value declining by 51% year-on-year.

The British Business Bank continued to play a significant role across the market, supporting 15% of all equity deals and 16% of investment between 2023 and 2025, with a particular focus on innovation-led businesses, including AI. The Bank also supported 16% of spinout deals, compared with 12% across the wider market.

Following the launch of its Five-Year Strategic Plan in late 2025, the Bank said it is increasing investment activity, deploying £13bn over the next five years to unlock around £26bn of private capital. This includes £4bn targeted at businesses operating in the government’s eight Industrial Strategy sectors.

Regional investment patterns also shifted during 2025, with London’s dominance easing. London’s share of UK equity investment fell from 60% to 57%, while the North West recorded an 82% increase in investment, Scotland grew by 74% and the South West saw funding more than double, driven by several large AI and energy transactions.

“While we are seeing signs of the market cycle playing out, the British Business Bank is accelerating deployment of investment across the cycle, and ensuring promising businesses can continue to access the finance they need to start, scale and stay in the UK.

“The concentration of investment into AI highlights both the scale of the opportunity and the challenges within the wider market. Ensuring capital is available across sectors and stages will be critical to maintaining a diverse and competitive pipeline of UK companies.”

Michael Moore, Chief Executive of UK Private Capital, added: “The UK should celebrate the strength of our spinout ecosystem – outpacing the US, France and Germany is no mean feat, but it’s important that we build on this competitive advantage in years to come.

“The British Business Bank is playing an important anchor role in helping develop this ecosystem and growing an investor base of larger VC funds. Nurturing these start ups and ensuring they can access the right capital at the right time will encourage more companies to scale and stay in the UK.”