AI grabs 44% of UK smaller-business equity funding

Artificial intelligence accounted for a record 44% of UK smaller-business equity investment in 2025, according to the British Business Bank. Overall equity funding for smaller businesses fell 4% to £12.3 billion.

The bank’s Small Business Equity Tracker found that investors concentrated capital into fewer, larger transactions, with the 10 biggest fundraisings accounting for 23% of total investment, the highest share since 2020.

AI companies also made up 26% of all deals in the smaller-business equity market, almost double their share in 2022. Investment in AI-related deals rose 48% year on year, underscoring the sector’s growing influence on capital flows across the market.

The figures suggest larger AI transactions are offsetting weaker conditions elsewhere. That pattern continued into the first quarter of 2026, when a small number of AI megadeals lifted total investment even as funding conditions for smaller businesses remained subdued.

Early-stage pressure

Outside the biggest transactions, the picture was weaker for younger companies seeking capital. Seed-stage deals fell 27% in 2025, while venture-stage deals dropped 13%.

Growth-stage investment was more resilient, suggesting investors remained willing to back more established businesses while becoming more selective earlier in the funding cycle. Digital and Technology remained the largest recipient of equity investment overall.

Other sectors had a mixed year. Advanced Manufacturing recorded strong growth in investment value, while Financial Services and Life Sciences declined. Clean Energy and Creative Industries were broadly steady by investment level despite a fall in deal numbers.

Spinout activity

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

Measured against the size of the research base, the UK also had the highest number of venture capital-backed spinouts among those international comparators. This points to strong conversion of academic research into equity-backed companies, even as wider market conditions have become more challenging.

Yet the most recent year showed a slowdown. Equity deals involving UK spinouts fell 33% in 2025 and investment value dropped 51% from the previous year.

The British Business Bank supported a higher share of spinout deals than of the wider market. It backed 16% of spinout deals, compared with 12% across the overall market.

Regional shift

Investment patterns also shifted geographically. The North West recorded an 82% rise in equity investment in 2025, while Scotland rose 74% and the South West increased 104%.

Those gains were tied to a small number of large deals in AI and energy. London still accounted for the biggest share of UK equity investment, but its share fell to 57% in 2025 from 60% in 2024, indicating a modest easing of the capital’s dominance.

Between 2023 and 2025, the bank supported 15% of all deals and 16% of total investment, with a particular focus on innovation-led businesses, including AI companies.

That intervention is part of a broader investment push. After publishing its five-year strategic plan, the bank increased the pace of deployment with the aim of unlocking about £26 billion of private capital alongside £13 billion of its own funding over five years.

It is also deploying £4 billion to support businesses in the government’s eight industrial strategy sectors. Separately, it has committed £2.6 billion to back entrepreneurs across the UK, including through two new Nations and Regions Investment Funds.

A broader international comparison in the report found that UK venture capital investment overall was 32% lower than the US in 2023-2025 when adjusted for the size of the economy. The bank noted that the US figure was influenced by a small number of exceptionally large deals over the same period.

Leandros Kalisperas, Chief Investment Officer at the British Business Bank, said: “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 at UK Private Capital, said: “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.”