Is anyone investing in startup companies at the moment? Well, according to a report published by London workspace and innovation center, Plexal, the amount of equity capital invested since the start of Britain’s lockdown is significantly higher than in the same period last year. But before we all get too excited, there is an important caveat. While the sums have increased, deal numbers are down sharply. Some startups are facing real and potentially fatal funding problems.
So let’s start with the good news. In collaboration with market intelligence company, Beauhurst, Plexal has analyzed investment activity from March 23 to April 27 with the aim of creating an evidence-backed snapshot of the United Kingdom’s startup community. As Plexal’s Managing Director Andrew Roughan explains, the aim is to continue with regular weekly updates through the course of the crisis.
At first glance, the findings so far are surprising. Deals have certainly been taking place during the lockdown period – and on an anecdotal level, I’ve spoken to a number of founders who have successfully secured capital – but it has been reasonable to assume that overall investment in startups is down.
The report from Plexal and Beauhurst suggests that through one particular lens, the opposite is true. Startups secured £663 million over the period covered, representing a rise of 34 percent from the same period a year earlier.
Admittedly it’s been a rollercoaster ride. The week following the announcement of the U.K. lockdown saw the lowest levels of investment since March 2106 and when measured against the same week in 2019, investment was down 89 percent. However, the figure for the total period covered by the report suggests a recovery in investor confidence.
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But – and this is a very big but – that headline figure presents only a partial picture of what is actually happening. According to the report, much of the increase can be attributed to a response to the Covid-19 crisis, with investors committing extra funds to ensure that portfolio companies can weather the storm. “A lot of what we’re seeing is follow on finance,” says Andrew Roughan. “Investors are shoring up companies they feel confident in,”
In other words, rising investment was because of the pandemic rather than despite it. Of the £633 million committed, just over £50 million went to companies that had not raised money before. “The remaining £612 million was follow on finance,” adds Roughan.
Falling Deal Numbers
Overall, the number of deals being completed has fell by 39 percent year-on-year. This isn’t at all surprising but it is worrying. The report suggests that while some startups – particularly those working in the fields of fintech, digital security, artificial intelligence and blockchain – have maintained access to capital a lot of others have not been so lucky.
And as Roughan points out: “The number of deals is the best measure of the vibrancy of the marketplace.”
Meanwhile, pressure is mounting on SMEs. The report notes that nearly 1,000 small businesses are in administration or liquidation. Without second guessing the future numbers, Roughan expects this figure to rise.
So where does that leave us? Well, it seems likely that some startups will fail to secure the investment that they need. This, in turn, raises survival questions. The U.K. government has moved to alleviate the situation. Chancellor (Finance Minister) Rishi Sunak last week announced a “ £500 loan scheme (dubbed the Future Fund) for high growth companies and a further £750 million of support for SMEs focused on research and development.
Roughan welcomes support from government but cautions that the amounts put on the table may not be enough to counter the impact of the Lockdown on the startup community. And there are, he says, some points of concern for businesses seeking to access government funding. For instance, the loan convertible to equity arrangement put together for Future Fund may not be appropriate or desirable for all startup founders. Meanwhile, the first phase of money for R&D focused companies will go to businesses that have already made applications for support – about 2,500 in all. “That’s great for the two and half thousand,” says Roughan. “But we are looking at 30,000 companies.”
Roughan says there are other things the U.K. government could be doing. “We are hearing businesses screaming out for market stimulation,” he says. “We are lobbying government to do that.” Stimulation could take the form of government offering contracts to startups and/or encouraging larger organisations to provide support.
Will this be enough? A lot depends on how easy it will be to access those funds – and whether such funding is appropriate. This is a crucial time for Britain’s startups.