Two years ago the UK late-stage tech scene was on fire. Funding was growing at a faster rate in the UK than the US, Asia and France. US VCs were flocking to London to set up offices and back the country’s ever-expanding roster of unicorns.
It’s a different story in 2023. Amid a global slowdown in tech, the UK has fared worse than many other ecosystems. So far this year, late-stage funding has fallen 75% compared to the first half of 2022 — versus a 51% fall in the US, 58% in Asia and 64% in France. And even some of the biggest supporters of the country’s tech scene have soured on the UK.
Monzo founder Tom Blomfield described the UK as “not always favourable to ambitious founders”. Revolut’s Nik Storonsky said the country’s tech sector had experienced a “slowing down”. Blossom Capital’s Ophelia Brown said it’d been over two years since her fund saw a UK tech company it wanted to invest in.
So, is the UK government shooting its own tech sector in the foot? Or are there more structural problems that need to be fixed?
Just a bad market for fundraising?
Over the past decade, the UK has established itself as the far and away leader in European tech. Driven by an abundance of late-stage funding and historically closer ties with the US, the UK has consistently been the best-funded tech sector in the region and home to the most unicorns.
Now France and Germany are eating into that lead. While late-stage funding in those two countries hasn’t been immune from the downturn slide either, numbers haven’t dipped as much as in the UK.
“We’re past the 2021 exuberance. The UK has to come to terms with the fact that there are other attractive markets across Europe,” says Davor Hebel, managing partner at London-based VC Eight Roads.
But the UK isn't having an “existential crisis”, Hebel tells Sifted, joining a chorus of investors who say the funding dip doesn’t mean the UK tech sector is in decline.
FOMO during the frothy days of 2021 drove UK VCs to deploy their funds faster and they’re now pausing investment to get back on track, says Henry Whorwood, head of research at data platform Beauhurst.
“It only takes a few [big rounds] for VCs to need to pause investing to get deployment rates back to averages,” Whorwood says. “The UK is a victim of its own success. More of the frothiest activity in Europe happened in the UK, so it had further to fall. It means our sober period now has to be a bit deeper.”
The amounts of cash startups were able to raise in the recent past has also impacted how quickly they need to gear up for another fundraise.
“Lots of our companies haven’t come [back to the market in 2023] because they were so well funded in 2021,” says one London-based late-stage VC who preferred not to be named. “It’s not a case of people not wanting to invest in the UK. It’s more a case of startups not wanting to raise with low valuations when they’ve got runway.”
But even long runways run out eventually — investors say that in the past few weeks they’ve seen more UK growth-stage companies start reaching out to them, and expect more to come to market in the second half of the year.
The problem is Europe-wide. Late-stage investment in the region has dropped further than in the US and Asia. “The entire European ecosystem is heavy on services like commerce and fintech — which need to spend a lot of money on customer acquisition. When there’s a downturn they’re in trouble,” says Yaron Valler, founder and partner at London-based VC Target Global.
Just six of Europe’s twenty largest funding rounds in the past two decades were raised by startups that aren’t services — and three of those belong to Swedish battery giant Northvolt. Services become less appealing to investors during a downturn because of the amount of money they need to scale.
“It’s definitely a cause for concern for Europe’s late-stage ecosystem. It has to become non-service orientated,” says Valler.
Broken Britain?
But that’ll be a tough ask for the UK, as its industrial and manufacturing sectors have been in decline for decades.
Projects like Britishvolt — which it was hoped would turn the UK into a global leader in electric vehicle (EV) battery production — have failed miserably. Its fortunes stand in stark contrast to Northvolt. While the UK had a world-class semiconductor industry in the 1980s and 1990s, it’s since been “devastated”, according to Valler.
According to some former ministers and manufacturers, the government’s lack of business strategy is a big part of that decline.
Homegrown semiconductor maker Pragmatic, which has raised a total of $186m and employs 211 people, according to Dealroom, has threatened to move to the US because of lack of government support. In May, solar power company Oxford PV which has raised $125m, said the UK was the “least attractive” market to build a new factory in.
Financial packages like a £1bn UK semiconductor strategy, £650m life sciences package, £350m deeptech plan and £100m AI taskforce have all faced criticism from founders who feel the promised cash is paltry compared to similar packages elsewhere. The founder of autonomous vehicle startup Wayve, Alex Kendall, recently said that the UK “risks lagging behind the global tech sector”.
Other governments have been willing to stump up far more cash. Last year the US announced the $369bn Inflation Reduction Act (IRA), which offers significant subsidies to battery makers, alongside its CHIPS Act, which provides $53bn for the country’s semiconductor industry. A similar initiative in the EU will provide $43bn.
The UK’s population is, of course, not as big as the US or EU, but countries like France and Germany have also pumped significant amounts of public money into their tech sectors.
Since 2016, French state investment bank Bpifrance alone has pumped €7.2bn into the country’s tech. The French “Tibi” initiative has secured €18bn in commitments for French tech from institutional investors including pension funds.
Last year, Germany drew up plans to invest €10bn in startups by 2030 and encourage more pension funds to invest in VC. It also managed to convince Northvolt to build a gigafactory in the country after promising state funds.
Investors say that access to cash from UK pension schemes is limited in comparison to countries like France, and there are growing calls from politicians and the government-backed British Business Bank to change this.
“The state’s role is fundamental to getting growth capital funding and cannot be underestimated,” says Nathalie Kornhoff-Brüls, London-based managing director at French VC Eurazeo. “France’s Tibi is the poster child for this. The UK would benefit from something similar.”
Bad press
International LPs have also had their confidence in European startups shaken in recent times.
“Negative press coverage — on the war on Ukraine, economic uncertainty and select company news — really influence international LPs' perceptions, often unfairly," says Kornhoff-Brüls. "We’ve seen international investors drop out of deals and it had nothing to do with the fundamental performance of the business."
And the impact of very high-profile startups not getting their way could be dire, says Valler. “If Revolut gets hurt it will further entrench negative sentiments in the market and put off investors,” he tells Sifted. “Investors are fed by the environment, and if one of these crown jewels suffers, it will have a knock-on impact.”
The hunt for late-stage talent
Hiring talent is another sore spot for late-stage UK founders.
“Brexit has had cascading long-term effects that are still in place and without a doubt it’s harder for European talent to choose the UK post-Brexit,” Hebel tells Sifted. “The government needs to do more to bring in entrepreneurial visas. It needs to look at this specific type of immigration as an asset.”
But other investors play down the impact of Brexit on hiring in the UK, and say the problem is Europe-wide. "In Europe, we have strong tech leadership, but a limited pool of go-to-market executives with scaling experience to recruit from," says Kornhoff-Brüls. "There are only a few CMOs, CROs and CPOs that have built billion dollar engines, so we often have to search for talent from elsewhere."
Despite all that, London is still the most attractive hiring market in Europe, says Morgan Kessous, partner at French late-stage VC Revaia, and the UK is often the first market US companies look to when they’re planning expansion to Europe. It's harder to hire and fire people in places like Paris and Berlin because of strict labour laws — whereas the UK looks more like the US when it comes to hiring rights, Kessous adds.
Still leading the pack?
In many ways, London is still the leading tech hub for late-stage startups in Europe.
The availability of capital and sharing a language with the world’s largest startup hub continues to give the UK an advantage in attracting investment over other European countries. Global tech companies have emerged from places like London, Manchester and Bristol, while in many European cities that track record is still being established.
And there are signs that late-stage deal activity is beginning to improve. According to another London-based VC who preferred not to be named, their deal flow is starting to pick up faster than colleagues in Europe.
But Europe may well continue to close the funding gap over the coming few years, say a number of investors.
“The UK was very quick in tech and created a funding gap, and other economies in Europe took time to catch up,” says Valler. UK tech companies raised 79 $100m+ rounds between 2010 and 2019, compared to a combined 65 in France and Germany. Since 2020, they’ve seen a bigger proportional increase in $100m+ rounds than the UK, raising 155 to the UK’s 168.
The pro-tech policies pursued by a number of European governments have laid the foundations for a comeback. There’s a sense among many on the UK tech scene that if the government continues to drag its heels on support packages — and progress in other European hubs continues at current rates in the coming few years — the country could continue to see its once unassailable lead nipped away at.
