Which of these statements is true? A: The U.K. tech sector is benefiting from an acceleration in digital transformation, driven in part by the pandemic. B: Tech businesses are increasingly in peril as funding dries up and potential customers cut back on procurement.
And the answer is? Well, it’s complicated. It’s certainly true that some tech sector ventures have done pretty well out of the pandemic. We all know how social distancing has changed consumer behavior and working practices. As a result, video conferencing has boomed as has e-commerce. Education tech is having its day in the sun and we’re also likely to see sustained interest in health sector innovation.
All well and good, but that’s not the whole story. Witness new figures published by London innovation and co-working center, Plexal and investment data company Beauhurst. The two organizations have been tracking equity investment in startup technology companies since the start of the pandemic. Their most recent update suggests that businesses across the U.K. are sailing into some extremely choppy waters.
A Cold September
The headline finding is stark. Since the start of the Covid-19 crisis, 1,000 fast-growth technology businesses have filed for administration. More worryingly, the biggest spike in company closures was recorded in September. In that month, 273 ventures pulled down their shutters, representing an increase of 181% from the August figure.
So why closures on the rise? The obvious answer is that government support measures designed to preserve jobs – notably the furlough scheme, which paid workers to stay at home – are being wound down, but that’s not the only factor in play. Equity finance is becoming much harder to find in the current environment. As Plexal Managing Director, Andrew Roughan points out: “Equity finance has continued to flow to startups, but the volume of deals has been dropping.”
This has had a particular impact on early-stage companies, he says. Many are struggling to raise the finance they need as VCs and angels cut back on new investment and perhaps concentrate on shoring up businesses in their existing portfolios.
However, even businesses that have secured funding are facing some tough decisions. The research indicates that London and Scotland have been worst affected by closures. In the case of London, the high number of administrations to some extent reflects the large concentration of businesses in and around the capital. In Scotland, it’s a slightly different picture. “There is a cluster of deep tech companies in Scotland,” says Roughan. “These companies have a long route to revenue.”
As such, the possibility is that these businesses are looking at their cash runways, weighing the possibility of securing further finance and concluding they don’t have a viable future.
Buyers of Technology
Certain verticals have been particularly badly hit. Roughan cites hospitality and the events industry as cases in point. The events industry has been crippled by the pandemic and pubs and restaurants now face further lockdowns in certain regions. While not necessarily tech-driven, these businesses are buyers of technology solutions. Thus, suppliers selling into these sectors face a double whammy. They face lower demand for their products. In addition, they fall outside the financial support measures designed to save hospitality and events jobs.
Roughan stresses that he isn’t seeking to spread doom and gloom and he argues that a lot can be done by policymakers and established businesses to help startups and early-stage businesses weather the storm.
Contracts Not Bailouts
On the government side, he suggests increasing the permitted investment through the tax-efficient Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS). This, he says, would increase the flow of funding to businesses without any significant cost to the public purse. Similarly, he says the payment of Research and Development Tax Credits to eligible companies could be executed more quickly. At the moment it can take up to two years for the payments to be processed. A more efficient system would represent a lifeline for at least some businesses.
Turning to the private sector, he says that big companies (and also, it has to be said, government departments) could make a difference by buying more from startups. “Companies don’t need bailouts, they need contracts.”
Meanwhile, startups should be helping themselves by identifying and contacting those who can help them deal with short-term problems. “Identify who your champions are. Go and find them. Use their services and ask them for help,” Roughan says, For its part, Plexal aims to help those businesses that fall within its areas of interest – namely mobility, security, inclusion and innovation.
The innovation economy will be crucial to Britain’s post-Covid landscape. As the survey suggests, however, its health and vitality can’t be taken for granted.