On April 14, the Office for Budget Responsibility (OBR) finally put a figure on the damage that coronavirus could cause the UK: the economy could contract by 35 per cent in the second quarter of this year and unemployment could hit ten per cent as the government’s budget deficit reaches its highest level since World War II. By the time these figures were released, the majority of companies in the UK had shut down completely or pivoted to working remotely as the country ground to a standstill.
The crisis has been a rude awakening for startups, which turned out to not only be among the most vulnerable businesses, but also did not qualify for the emergency business loan schemes offered by Chancellor Rishi Sunak.
Investment dried up and startups went into freefall after being left without any debt or equity support, according to the VCs and startup industry representatives behind the Save Our Startups campaign. “Without support, thousands of startups will fold in the coming months,” campaign organisers predicted. “The UK Government must act now to protect Britain’s entrepreneurial future so we do not lose a generation of startups and high growth businesses to Covid-19.”
The most high-profile cry for help so far came from gig economy firm Deliveroo, which was designated one of the key companies still operating as normal during this crisis. Last week the firm, which was last valued at $2 billion in 2017, admitted to the Competition and Markets Authority that if it did not green-light a partial takeover by Amazon, it would not survive. And that’s exactly what the CMA did, issuing a statement saying that the imminent exit of Deliveroo “would be worse for competition than allowing the Amazon investment to proceed and has therefore provisionally found that the deal should be cleared”.
The Treasury responded to the wider shockwaves in the startup community, announcing a startup rescue package of over £1bn on April 20. Less than a year after former prime minister Theresa May outlined plans to be “the place everyone thinks of — and comes to — first when they want to develop their world-changing tech ideas”, a generation of companies already affected by Brexit uncertainty will scramble for taxpayers’ money to survive.
“This package will be a lifeline for many UK startups,” says Aaron Archer, a partner at law firm Cooley who advised the government on the rescue package. “The scheme will go a long way to ensure the UK remains the preeminent European location for emerging companies and venture capital, and one of the most attractive places in the world for the very best talent in technology and life sciences.”
But stimulus packages like this one, which are being launched by governments across Europe, will do little to stop a wider investment slowdown. Analysts from data research company Pitchbook predicted that the momentum that catapulted European VC deal activity to record levels last year will abate in 2020. Startups that rely on direct consumer spending will soon face cash shortages. And the ambition that a new wave of UK tech unicorns will soon be on the horizon could be over.
Appetite from VCs and angel investors didn’t completely dry up during the start of the coronavirus pandemic. In the 30 days to April 5, 164 companies closed investments, a 40 per cent increase compared to the month before, according to data from online legal platform SeedLegals.
Companies successfully closing funding rounds during the crisis included Digital identity startup Onfido, which secured $100 million from investors to expand into the US; Oxford University life sciences spin-off Perspectum secured £28.8m of funding in April, and in March flying taxi company Lilium and online car marketplace Cazoo raised €224m and £100m respectively. But fundraising is expected to take a hit in the months to come as VCs run out of portfolio money and have to pick and choose the investments they back.
“Most of the deals being announced currently were well advanced before Covid-19 hit,” says Ed Lascelles, partner and head of technology investment at AlbionVC. “However, a number of funds aren’t doing any new deals at the moment and the rest have less bandwidth to take on new projects as they triage their portfolios. So companies which don’t already have relationships with potential investors are deferring their fundraising plans if they can, which means we can expect a slump in new investment activity in Q2 and Q3 this year compared to 2019.”
The old adage that a good company will succeed no matter what no longer applies. The government’s Future Fund will not be the lifeline it purports to be for truly early-stage startups that have not yet raised £250,000 in private funding to make them eligible, says Stephen Page, chief executive of SFC. “It seems quite plausible that government co-investment will instead primarily benefit VCs as they lean on the Future Fund to help tide over their existing portfolio companies. That’s fine as far as it goes, but matching by definition requires investors to be putting up money, and at the very early stage this has dramatically dried up in the current climate — both for individual companies and for the smaller funds that rely on risk-based investment from angels and HNWs. What’s really needed is action to unblock the pipeline of angel investment for new companies.”
Analysts have described coronavirus as a “stress test” for companies to overcome: those that have lean, intelligent operating models and a good strategy may have to re-evaluate their growth ambitions temporarily, but are unlikely to fail, while those that rode the investment wave over the last three years will collapse and disappear. This trial by fire will test the mettle of the UK’s startup scene, but one thing’s for certain: in the fray, we will lose promising startups and high growth businesses, and that is a tragedy.
Natasha Bernal is WIRED’s business editor. She tweets from @TashaBernal
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