I’ve dedicated half my working life — more than 20 years — to working with startups and to building the environment and ecosystem that has helped many great tech companies flourish in the UK.
As an investor with LocalGlobe, and before that with Index Ventures, I have backed companies including Zoopla, TransferWise, Citymapper, Mind Candy, Moo and Graze — all from their startup phase.
Of all the threats that Covid-19 poses, the threat to early-stage startups is the least we should worry about.
Yet I am certain that of all the threats that Covid-19 poses, the threat to early-stage startups is the least we should worry about. I’m far more concerned about companies and freelancers whose revenues have collapsed overnight and whose recovery is very uncertain.
Years of government support for startups
We went into this crisis with a tech sector in very strong health: having raised a record $13bn in 2019 alone, it is better capitalised than ever. The UK outgrew all major tech hubs in Europe in 2019 and lags only the US and China in the capital it has raised.
The UK government has helped enormously to develop the extremely strong tech ecosystem that we have here. Some of its initiatives have been truly transformational.
The EIS (the Enterprise Investment Scheme) and SEIS (the Seed Enterprise Investment Scheme) have raised over £21bn of equity capital and helped more than 42,600 companies, with the tech sector taking an increasing share. Via the British Business Bank (BBB) and British Patient Capital, the government is investing £2.5bn in startups and growing businesses. Innovate UK is a vital source of grant funding for research-heavy early-stage businesses.
Without these sources of equity capital, the UK’s ecosystem would never have developed so strongly and arguably would not have produced its 77 current unicorns.
Few startups survive, even in the good times
But in pushing for more UK government help for startups we need to recognise some of the facts. Years of data shows us the nature of investing in this sector. Three quarters of startups that raise a seed round never reach a Series A, according to data platform Dealroom.co — this data reflects the past 10 years of ‘bull market’.
Among the worst-performing investors, 93% of companies never progress to Series A.
Venture capital funds in the UK have more than enough capital and every incentive to do so now.
Has the current crisis increased the likelihood of more than three quarters of startups being unable to raise further funding? I don’t believe so. Venture capital funds in the UK have more than enough capital and the incentives to fund the best companies. Funds raised $5.2bn in 2019, so have more than enough capital to invest and every incentive to do so now. Even in the first three months of this year, a handful of new funds were announced, with $2.8bn raised in the year to date, according to analyst Dealroom.co.
A bailout fund risks misdirecting much-needed capital to the wrong part of the economy. It also creates adverse selection in a healthy and growing ecosystem. The 27% of companies that do make it from seed to Series A are probably the least likely to seek government support.
Startups have more options to survive the crisis than more mature companies, where incomes are tumbling. Active seed investors are working closely with the startups in their portfolios to find solutions to extend their cash runway, which will give them more months before it is necessary to raise again. Many are using government support packages like the furlough programme so they can conserve cash and deploy their capital selectively.
Make more of what we already have
I’m not advocating doing nothing — on the contrary, we should urgently make the established mechanisms and tools more efficient and responsive. We should aim to automatically grant R&D tax credits and use claw back mechanisms if companies offend. We must radically speed up decision-making processes at British Patient Capital and Innovate UK to six to 12 weeks, not six to nine months — then they would be as good as the very best private investors.
By rapidly reviewing the funds which BBB has already backed, further capital could be committed which would deliver targeted co-investment funds for startups. The other LPs of these funds could be offered similar opportunities.
One area where the UK has lagged its counterparts in France and Germany, is in offering specific help to scaleups — those growing tech companies that are trying to disrupt much larger incumbents. When it comes to getting the economy back into growth mode, these fast-growing companies will be crucial, yet they are unable to access the schemes that have been put in place by the chancellor, such as the Covid Corporate Financing Facility (CCFF), or the Coronavirus Business Interruption Loan Scheme (CBILS). It can’t be right that these innovative companies do not have a level playing field with incumbents.
Ensure that only the startups and scaleups that continue to have the backing of existing investors benefit from the state’s support.
And if we are to go down the bailout fund route, we should only consider investing tax payers money through either crowd or institutional co-investing. This would ensure that only the startups and scaleups that continue to have the backing of existing investors benefit from the state’s support. A time-limited co-investment fund, with no profit share, that returns all profits to the Exchequer and is run by experienced investors is the sort of model that could avoid the very real problem of adverse selection.
UK tech is one of Britain's greatest modern success stories producing companies and technologies that have the potential to improve our lives, transform our economy and produce well-paid and desirable jobs across the country. If we are to get the economy back on track rapidly, we need to make sure that our most innovative companies are not actively disadvantaged.
Please use scarce taxpayers money in the sectors that really need it — offering startups debt packages or handouts is not the way to go.
Finally, one of the biggest soft benefits that the entire tech sector has benefited from has been vocal government support. From the early days of Silicon Roundabout to the appearance by the last prime minister at London Tech Week, the UK government was — long before president Macron found his voice — a great champion of the tech sector because it recognised in it the potential to create good jobs and growing companies right across the company.
Right now, the tech sector and the startup world could do with some assurance that what has been achieved so far will not be allowed to wither. This means the continued tangible support for BBB, BPC, Innovate UK, EIS/SEIS and R&D tax credits.
But please use scarce taxpayers money in the sectors that really need it — hospitality, transport, recreation, arts and charities. Offering startups debt packages or handouts is not the way to go.