AI firms take record 44% of UK small business funding

The British Business Bank has published its 2026 Small Business Equity Tracker, which shows that AI companies took a record 44% share of UK smaller-business equity investment in 2025.

Overall equity investment in smaller UK businesses fell 4% to £12.3 billion in 2025, even as investors continued to back larger transactions. The top 10 fundraisings accounted for 23% of all investment, the highest level since 2020, pointing to a market increasingly shaped by a small number of sizeable deals.

AI was at the centre of that shift. The sector accounted for 26% of all deals in 2025, almost double its share in 2022, while investment in AI-related transactions rose 48% year on year.

The findings suggest investors are concentrating capital in businesses seen as having stronger growth prospects, while funding conditions remain more difficult for smaller and earlier-stage companies. Seed-stage deals fell 27% in 2025, and venture-stage deals were down 13%.

Growth-stage investment was more resilient. Digital and Technology remained the largest recipient of equity funding, while Advanced Manufacturing recorded strong growth in investment value. Financial Services and Life Sciences saw lower investment, while Clean Energy and Creative Industries were broadly steady despite lower deal volumes.

Spinout activity

The report also highlighted the role of university spinouts in the UK funding market. Venture capital deal volumes for spinouts rose 95% in 2021-2025 compared with 2016-2020, a faster growth rate than in the United States, Germany and France.

Adjusted for the size of the research base, the UK recorded the highest number of venture capital-backed spinouts among its international peers. The Bank supported 16% of spinout deals, above its 12% share of the wider market.

That momentum weakened in 2025. UK spinout equity deals fell 33% year on year, and investment value dropped 51%, indicating that this part of the market was not immune to the broader slowdown.

The data also pointed to a gap with the United States in overall venture capital funding. UK venture capital investment in 2023-2025 was 32% lower than in the US when adjusted for economy size, although the US figures were affected by a small number of very large deals.

Regional shifts

Outside London, several parts of the UK posted sharp increases in investment. The North West recorded an 82% rise in equity investment in 2025, Scotland increased 74%, and the South West climbed 104%.

Those gains were linked to a small number of large AI and energy deals. London remained the largest market, but its share of UK equity investment fell from 60% in 2024 to 57% in 2025, suggesting some reduction in the capital’s dominance.

Between 2023 and 2025, the British Business Bank supported 15% of all deals and 16% of total investment. Its activity focused particularly on innovation-led businesses, including AI companies and university spinouts.

The institution has also increased the pace of its own investment activity since setting out its five-year strategy. It plans to unlock around £26 billion of private capital alongside £13 billion of its own funding over five years, while also deploying £4 billion across the government’s eight industrial strategy sectors.

It is also committing £2.6 billion to support entrepreneurs across the UK, including through two new Nations and Regions Investment Funds.

Leandros Kalisperas, Chief Investment Officer at the British Business Bank, placed the Bank’s reading of the market in the context of the current funding cycle.

“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,” Kalisperas said.

Michael Moore, Chief Executive, UK Private Capital, pointed to the UK’s standing in spinouts despite the slowdown in 2025.

“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,” Moore said.