Bridging the scale-up funding gap: a market snapshot

The UK venture ecosystem kicked off 2026 with strong momentum in dealmaking activity accompanied by improving but still uncertain macroeconomic indicators. The inflation rate had inched closer to the Bank of England’s 2% target rate, but impending energy price volatilities may disrupt the path to 2%.[1] The macroeconomic environment is taking steps in the right direction to improve fund economics, which is necessary for a broad recovery in venture dealmaking. However, emerging geopolitical conflicts could threaten the UK venture ecosystem’s recovery timeline by raising energy costs and disrupting global supply chains. The end of 2026 is still out of sight. These macroeconomic and geopolitical uncertainties will take months to unfold, and the extent to which they will impact investor risk appetites, fund economics, and the broader venture ecosystem is far from a foregone conclusion.

Despite such uncertainties, initial readings of venture funding data in 2026 suggest that progress was not lost. In less than a quarter, megadeals (VC deals exceeding £100m) closed for Kraken Technologies, Roark, Tenpoint Therapeutics, OLIX Computing, and Pipeline Media. Roark emerged as a unicorn, and early- and late-stage investments saw materially larger deal sizes and valuations on average. UK venture capital invested YTD remains elevated (£2.8bn) at levels higher than the pre-pandemic era, yet deal volume is at its slowest pace over the same window. AI is driving the concentration: The average UK AI deal size has more than doubled from £8.9m in 2025 to £19.4m YTD. These trends point to 2026 as a year of significant capital concentration into fewer, larger deals.

Corrections in fundraising dynamics take time to materialise, and current signals allude to a lengthened timeline to recovery and continued capital concentration. Only four funds have closed YTD, but their average size exceeds the averages of the past eight years. Furthermore, the process of closing funds remains challenging. These few funds took an average of 28.7 months to close, compared with 11.3 months the prior year. NatWest’s previous report (PDF, 7.9MB) positioned 2026 as an inflection point for fund economics. This view can still hold true despite the macroeconomic uncertainties as long as the UK’s tech-dominant startup scene remains insulated from geopolitical sensitivities.

The impact of macroeconomic uncertainties is unlikely to materialise in the data for months, but the dearth of scale-up capital is a salient and persistent challenge today. As such, this report provides not only a quarterly update on the UK venture landscape and the variables that shaped it but also a deep dive into the scale-up funding gap, why it persists, and how to address it.

1: “What to Expect From February’s UK Inflation Data,” Morningstar, Christian Mayes, 23 March 2026.

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A dearth of scale-up capital acutely impacts founders. Scale-ready startups with a viable and market-competitive product must source growth capital elsewhere, delay growth plans, or alter initial exit plans to provide earlier investors with returns on their capital, which also impacts the valuation at which a founder must sell. It is therefore more critical than ever for founders to know when to expect this roadblock and how to overcome it.

Dry powder, fund sizes, and deal sizes are structural variables that impact the availability of scale-up capital. At the same time, the participation of cross-border investors can unveil the stages of the financing cycle where startups face the scale-up funding gap.

Despite having the dry powder to deploy, UK funds are not structurally conducive to the long-term support and growth of a billion-pound company, let alone a portfolio of scaled, hundred-million-pound tech companies. UK dry powder levels have stagnated near record highs ($23.1bn YTD), while fund sizes have skewed smaller, in the £50m to £250m range. Institutional capital, such as pension fund capital, has also been underallocated to private markets compared to the US, leading to a smaller pool of capital for GPs to raise from.

One of the greatest pieces of evidence of the UK’s scale-up funding gap can be seen in how capital is deployed. While fund sizes usually shape how allocators select investments, UK and US average fund sizes remain comparable, suggesting another structural challenge is contributing to the scale-up funding gap. In 2025, UK funds raised an average of £83.2m in 2025, compared with $122.8m (approximately £92.6m) for their US counterparts. In other words, US funds raised in 2025 were only 11.3% larger than UK funds on average. Yet funding outcomes are disparate. The UK’s fundraising dynamics structurally favour an early-stage ecosystem. Pre-seed/seed and early-stage deals continue to represent well over half of UK VC deal volumes. Nearly 50% of deals closed YTD were small (under £5m), while about 80% of all capital invested (£2.2bn) came from larger deals (£25m+).

The US saw a similar deal count distribution—almost 60% of US VC deals were under £5m—but 97% of venture capital invested (£170.8bn) flowed into deals exceeding £25m, reflecting a greater capacity to deploy at scale. The culprit is not fund size in isolation, but the aggregate depth of the market: The UK has fewer funds, with a structural bias toward earlier stages and limited follow-on capacity to support companies through successive large rounds. It is this gap—a shortage of domestic equity at the scale-up stage—that makes the case for venture debt as a complementary tool capable of extending runway without having an equity investor be available at the right moment.

While the UK has an active cohort of growth-stage investors, the overall pool of domestic late-stage capital remains comparatively shallow. The funding gap has, however, fuelled a targeted investor response. Active late-stage investors include Octopus Ventures and Balderton Capital. While government-backed initiatives to close the scale-up funding gap continue to evolve, the UK has nonetheless produced a remarkable cohort of scaled, world-class companies—from Arm and DeepMind to Revolut and Darktrace—that demonstrate the potential of British innovation on the global stage.

Domestic funds, even when paired with dedicated capital targeting the scale-up funding gap, often lack the size necessary to lead or meaningfully participate in very large late-stage rounds. While unicorns are rare by default—dependent on alignments between competitive business models, competent management, governance, and market tailwinds, among other factors—this challenge is even more pronounced when it comes to facilitating the growth and maturity required to reach unicorn status. As companies mature, they frequently require £100m-plus financings to compete globally—cheques that US growth funds can routinely write but UK managers often cannot without syndicating internationally. The result is either stalled scaling, earlier exits, or reliance on overseas capital.

The disparity in unicorn formation underscores the magnitude of the gap: The US has produced roughly 880 unicorns to date, compared with 32 in the UK. While ecosystem size and market depth naturally differ, the contrast highlights how limitations in late-stage capital formation constrain the UK’s ability to systematically produce and retain globally scaled companies.

The scaling gap is particularly visible in YTD cross-border deal data. Across every financing stage, UK VC rounds that included at least one overseas investor were larger on average than those backed solely by domestic capital. The divergence is most pronounced at the late stage: The average late-stage deal with cross-border investor participation was 6.3x larger than the average without. A deal size premium is also evident earlier in the lifecycle: Pre-seed/seed rounds with cross-border investor participation were 1.5x larger on average, and early-stage rounds were 2.5x larger. However, the late-stage differential is the most consequential. Three of the five megadeals completed YTD featured cross-border investors. In effect, overseas capital is not merely supplementary; it is often decisive in enabling UK companies to raise at a globally competitive scale.

For founders who fall outside the narrow mandate of cross-border investors—which tend to prioritise the largest and most mature opportunities—the domestic venture debt market has played an increasingly important role in easing founders’ fundraising pressures. The UK venture debt landscape remains concentrated, with a relatively small group of UK-based commercial and investment banks actively serving local venture-backed companies, like NatWest. However, these handful of bank lenders are attributed to billions of pounds of venture debt dollars issued each year.

On the surface, US and UK venture debt markets share similarities: Loan issuance has been concentrated in late-stage and venture-growth companies, and loan sizes have grown faster than loan counts in recent years. However, structural differences and familiarity with debt financing shape how each ecosystem’s founders deploy debt.

In the US, the private debt ecosystem is markedly larger and more mature, but the material differentiator between the US and the UK is familiarity with debt as a financing tool. In 2025, lenders issued $62.4bn across 943 venture debt loans in the US, compared with the UK’s £5.3bn across 272 loans. In recent years, AI infrastructure financing has been a primary driver of venture debt loan value growth.[1] At the same time, companies are remaining private for longer and scaling to larger revenue bases before exiting, necessitating significantly larger debt facilities. As such, the median early-stage loan size in the US has seen relatively little movement, while the expansion in aggregate venture debt value was largely attributable to larger, later-stage financings. A stalled exit environment and the capital demands of AI infrastructure have played instrumental roles in accelerating US venture debt issuance.

These structural tailwinds have driven an increase in both VC-backed startup borrowing activity and the perception of debt as a tool, not a burden. In a survey conducted by US debt provider Runway Growth Capital, 61.3% of respondents did not consider venture debt to be “rescue financing”—emergency funding that serves as a financial lifeline for companies facing the end of their cash runways, unexpected funding gaps, or other challenges—and 41.7% were considering using venture debt to fund their startup over the next 12 to 18 months.[2]

In contrast, the UK venture debt ecosystem remains comparably underdeveloped, reflecting a set of structural constraints. Institutional investors continue to underallocate to private markets—and to venture debt strategies in particular—limiting the overall supply of capital available for startup lending.[3] At the same time, the number of dedicated venture debt providers remains relatively small, especially when measured against the financing needs of Europe’s largest late-stage venture market. The UK consistently accounts for approximately 30% of European late-stage deal volume.

This supply-demand imbalance has tangible downstream effects. With fewer debt providers and less available debt capital, UK founders are less familiar with venture debt as a financing tool than their US counterparts. By contrast, US founders have a longer track record of incorporating venture debt into their capital strategies to extend runway, reduce dilution, and optimise outcomes.

While non-bank lenders account for the majority of venture debt activity in the UK, banks can play a differentiated role. A banking relationship offers not only access to credit but also the potential for a long-term partnership—providing continuity, balance sheet support, and ancillary services as companies scale. As the ecosystem matures, these relationships will likely become increasingly valuable for founders navigating an evolving venture financing landscape.

1: "AI and a New Scale of Startups Took US Venture Debt Funding to Another Record," PitchBook, Jacob Robbins, 2 February 2026.

2: "Venture Debt Review 2024 - 2025," Runway Growth Capital, February 2026.

3: "Venture Debt: Why It's Attractive for Founders, Investors and the UK Economy," UK Private Capital, Mei Lim and Sonia Powar, 28 May 2025.