Opinion

April 2, 2020

What will it take to save the UK’s startups and scaleups?

The UK government urgently needs to support startups and scaleups, to protect jobs now — and in the future.


Sam Dumitriu

5 min read

Rishi Sunak, the UK Chancellor, has rightly won praise from across the political spectrum for his bold interventions to protect incomes, jobs and businesses through the lockdown. But history will be the real judge. Sunak will need to prevent a recession becoming a depression. As the measures are lifted and life returns to normal, victory will be a V-shaped recovery with economic activity rebounding to its pre-coronavirus peak in a matter of months. Preserving businesses and jobs will put us in the best possible position to bounce back quickly. Each lost job and failed business will mean a longer recovery, as entrepreneurs are forced to start again from scratch.

Any recovery will depend on high-growth, equity-backed startups and scaleups. There are around 1,300 venture-backed businesses in the UK, a tiny proportion (0.35%) of the 381,000 new businesses founded every year; yet, they are disproportionately likely to be successful. According to Beauhurst, 32 of the 1,545 British companies that raised equity in 2011 went on to have an initial public offering (IPO). For context, that’s more than the total number of listings on the main London Stock Exchange in 2019. These businesses are the job creators of tomorrow. It should be concerning then that, so far, they appear to be missing from the Chancellor’s plans.

By insisting that only businesses that were profitable before the crisis hit can access the loans through the Coronavirus Business Interruption Loans Scheme (CBILS), most startups and scaleups are locked out. Venture-backed startups typically run large losses early on, as they invest in growth. 

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It’s a risky business model and many startups fail, but it pays off often enough for venture capitalists to invest. In fact, over the past decade in the UK, venture capital investment has increased more than seven-fold to £12bn in 2019.

Many early-stage businesses will need further investment over the next few months as their funding runway comes to an end. As VC interest dries up, with their investors (limited partners) pressuring them to hold off, many startups will be forced to cut staff or go bust. 

Tania Boler, founder at Chiaro, the business behind the Elvie kegel trainer.
Tania Boler, founder and chief executive of Elvie.

It’s not just early-stage startups that are frozen out. Elvie, one of Britain’s fastest-growing scaleups, with an eight-figure valuation and profitable product lines, told me that no bank would lend to them under the scheme. “Last year alone we grew revenue by more than 400% and we’re on track for similar growth this year. However, like other hyper-growth tech companies, Elvie is not yet profitable. This means we are unable to access any support under CBILS because of rigid affordability criteria.”

Elvie, one of Britain’s fastest growing scaleups, with an eight-figure valuation and profitable product lines, told me that no bank would lend to them under the scheme.

In normal times, innovative businesses like these are championed by the government. But because they choose to invest in R&D and focus on growth, they’ve been abandoned. 

So what can be done? Brent Hoberman, the cofounder of Lastminute.com, has called for the government to create a Runway Fund to give early-stage businesses up to £500,000 to take them to their next funding round. Startups would get the cash in return for loans that convert into equity at a discount at their next funding round. A £300m non-profit fund with co-investment from the private sector would be able to help 600 startups. To put that in context, that’s around half of all early-stage equity-backed startups in the UK. This shouldn’t come with a large fiscal cost either. In the long-run, venture capital is a high-performing asset class.

This scheme wouldn’t be sufficient for scaleups further along, aiming to raise tens of millions at their next funding round. But the Treasury could still help. They should revise the lending criteria for the CBILS loan guarantees. They could broaden the definition of viable to take account of unit economics on current products, past adherence to budgets and credit history. This would enable high-growth businesses like Elvie to access the loans.

High-growth startups may also be able to access more money from existing investors if the rules on how much companies could raise through tax-advantage schemes such as Venture Capital Trusts (VCTs) were changed temporarily. VCTs help close the early-stage equity funding gap by offering generous income tax relief for investors. In normal times, VCTs are restricted from investing more than £12m (£20m for knowledge-intensive startups) in a single company to ensure the scheme is targeted at businesses that otherwise couldn’t raise sufficient capital. If the limits were temporarily raised, the scheme could be repurposed to allow startups to raise bridging capital from investors they already work with. 

The least they could do is speed up the release of money from schemes like Innovate UK and R&D Tax Credits.

The least they could do is speed up the release of money from schemes like Innovate UK and R&D Tax Credits. It is not uncommon for startups to wait months to access the money they are already entitled to. A big push to release that money in the next two weeks could provide a necessary liquidity injection. 

It is hard to imagine the last few weeks without startup successes like Netflix, Zoom and Deliveroo. Yet under current policy, businesses adopting the same strategy of prioritising long-term growth over short-term profits have been left behind by the government. If urgent action isn’t taken, we could lose a generation of startups and the jobs they create.