UK founders have a lot of things to worry about this year. That list now includes a sinking currency — in the year to date, the pound is down nearly 15% against the dollar, and last week it hit an all-time low before slightly rebounding.
This macroeconomic turmoil will undoubtedly prove extremely challenging for lots of startups. But for others, there may actually be benefits amid the dramatics of the last week. Here’s how the devalued pound will affect UK tech companies.
1/ US acquirers are going to come sniffing for targets
The UK’s tech sector was already vulnerable to buyouts from US buyers before the exchange rate shifted. Stateside private equity firms GTCR and Thoma Bravo had already expressed interest in buying cybersecurity companies GB Group and Darktrace respectively, while Arizona-based software giant NortonLifeLock purchased antivirus developer Avast last month in a deal worth $8.1bn.
US buyers will now be sniffing around UK acquisition opportunities like never before, says Stuart Bedford, corporate partner at London-based law firm Linklaters, which specialises in tech investment and M&A.
“If I were a US company that saw a good IP base or a good opportunity to spread my footprint into the UK right now, I’d probably be looking at it thinking it’s a good time to strike,” he says. “You'd be nuts not to if you are cash-rich.”
Given that the UK’s FTSE All-Share index currently only has a 1.5% exposure to tech, more buyouts could undermine the UK government’s push to become a post-Brexit haven for high-growth companies.
2/ It could be easier for UK startups to raise
For smaller tech companies trying to raise money on the private markets, the currency shift could make money much easier to raise.
US VC firms are increasingly expanding their presence in Europe, and Bedford says that UK companies who might have been struggling to raise money will now see increased interest.
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“The US funds will look at it and go, ‘Okay, if I were ever going to shift my focus to the UK, why wouldn't I now?’ You’d be looking at UK assets and at UK funding rounds,” he says.
3/ If you’ve raised in dollars, you’re quids in
Startups that have recently raised money from US funds could also be in for a boon, says Kieran Cleere, head of sales trading at Silicon Valley Bank, a lender and capital provider to startups with offices around the world.
“Those fortunate enough to have raised dollar commitments through 2022 — there is a great opportunity to leverage USD strength and build their GBP cash reserve, expanding their operational runway,” he tells Sifted.
He adds that UK companies that have already successfully expanded to the US and are generating decent revenue in dollars will also benefit: “The value these revenues offer and the fly-wheel effect this can create have never been greater.”
4/ A weaker pound makes it harder to pay expensive talent in the US
UK companies with established operations might be looking comfortable today, but for those in the early stages of expansion last week’s news will be particularly grim.
European tech companies have historically struggled to compete with the higher salaries offered by US counterparts — a mismatch that will now be even starker.
For startups relying on VC money to fund a US expansion, the shift in currency values dramatically changes the picture.
“If you're reliant on a £50m raise that you landed six months ago to pay a load of people you've hired in the US, your model is starting to look pretty strained,” says Bedford. “With a change of 25% in relatively short order, your cash runway has now gone from 18 months to 14 months. Companies could be having to go back to the market much sooner than they thought against a lower valuation.”
5/ UK institutional investors might get more risk-averse
It’s not only companies with aspirations to make it in the US that are in trouble. One UK-based biotech founder tells Sifted that the economic uncertainty will have major impacts on the ability for high-risk, deeptech companies to raise money.
“Biotech is a risky asset class so, when you have geopolitical risk, money moves out of high-risk assets into low-risk assets like gold,” he says. “You get a chunk of money coming out of the capital markets that would ordinarily be available for deployment into biotech. That then results in people liquidating their positions in certain biotech asset classes, leading to massive downward pressure on prices.”
6/ A possible talent exodus?
Beyond capital, if there’s one thing that startups and tech companies need in abundance it is talent. Konstantin Sidorov, founder of the entrepreneurial network the London Technology Club, says the country should be worried if economic turmoil starts putting off bright British graduates from starting their entrepreneurial journey at home.
“The UK has the greatest network of schools and universities, you have no lack of talented students,” he says. “The question is, whether those graduates from Oxford or Cambridge will stay in the country or if they decide to move to Silicon Valley or Dubai. With this inflation rate, many of them will think twice [about staying in the UK].”