Funding in the UK fell by nearly a quarter in the first half of 2025 compared to the same period the previous year, despite the continuing march of agentic AI and a buzzing defence tech sector.
According to Sifted data, VCs invested €6.7bn into UK startups up to the end of June this year, down from €8.7bn across the same six months in 2024. Dealcount also fell, from 615 to 570.
The UK remained the best-funded startup ecosystem in Europe by some way, but Germany gained ground after a series of sizable rounds in defence and deeptech, with funding rising 15% to €4.3bn. France, meanwhile, saw a nearly 30% drop in funding to €3bn.
The drop in funding in the UK is due to the investment market shifting focus to AI deals, says Edward Keelan, partner at Octopus Ventures.
“Across European VC there has been some retrenchment from traditional sectors, however AI funding is picking up much of the slack as investors narrow their focus on what is being seen a once-in-a-generation technological shift,” he tells Sifted.
“Away from the headline deals, many of these companies aren’t as mature and require smaller funding rounds, however that will change and in the next 12-24 months we expect to see increased funding volumes and a reignition of growth across the wider ecosystem.”
Healthtech startups (including biotech and drug discovery, medtech and digital health) recorded the highest portion of funding, raising €1.8bn. That was driven by DeepMind spinout Isomorphic Labs raising $600m and weight loss drug maker Verdiva Bio picking up $410m.
AI agents
The joint-most active sector in UK tech in terms of dealmaking in the first six months of 2025 was AI agents, which tied with medtech on 37.
Startups building agentic tools — systems that can automate complete tasks without a human in the loop — raised €642m in the first half of the year, up from $198m in the same period in 2024.
“The story for H1 has unsurprisingly been all about AI,” says Hanel Baveja, partner at Creandum. “It’s almost like 2021 again with high-demand deals, significantly increased investment volume, but also an immense number of ideas and new startups.”
The standout trend within the agents space has been specialised agents built for vertical use cases, in sectors like healthcare, manufacturing, legal, software development and finance, she adds.
There were big money raises for the likes of AI avatar startup Synthesia and AI voice company ElevenLabs, which both picked up $180m, with the lion’s share of the dealmaking activity taking place at the earlier stages.
“We are seeing a barbell in UK rounds: lots of smaller experimental tickets, then outsized Series A/B cheques for early category leaders, with almost nothing in the middle,” says Nadja Reischel, investor at Cherry Ventures.
Startups are able to bring working products to market quicker and large enterprises are increasingly willing to trial new products and tools, she adds.
But that means seed rounds for AI agents in the UK are squeezed, Reischel says. “If you can’t prove ROI fast, you don’t clear seed. If you can, you leapfrog straight to a Series A.”
Rise of defence tech
While funding also picked up in the defence tech and dual sector — growing from €64m to €157m — the first half of 2025 saw a slew of global defence techs look to expand to the UK.
In March US defence tech giant Anduril announced it would open a factory and R&D facility in the UK, to manufacture advanced attack drones alongside other autonomous weapons.
Weeks later, the UK government said it would invest £400m in defence tech and promised to reform the procurement process for startups in the sector. UK-Portuguese drones startup Tekever announced a major contract with the country’s Royal Air Force in May and said it would invest £400m into the country.
Most recently German autonomous strike drones startup Stark announced it would soon begin producing drones at a new factory in the UK as it looked to tap into technological and defence expertise in the UK.
Earlier this month compatriot Helsing said it would accelerate the deployment of a £350m investment into the country by a couple of years, forecasting deployment by 2027-28 as it begins producing its gliders by the end of this year.
Read the orginal article: https://sifted.eu/articles/uk-startup-funding-drop-h1-2025/
