The pandemic, apart from being a human tragedy, has also caused major economic disruption, with countries facing soaring unemployment rates and stock markets hitting record lows. However, disruption and opportunity going hand in hand is a familiar concept for investors.
The collapse of the dotcom bubble, which took place two decades ago, spelt the end for many companies, but also provided room for newcomers like Amazon to grow, while Spotify and Uber were children of the 2008 recession. While undoubtedly catastrophic, the coronavirus pandemic will also provide openings for startups that seize the opportunity now to grow and flourish.
Powder in the keg
While some strategic investors may slow down, many VCs are sitting on a lot of dry powder and are likely to continue business as usual. With economic slowdown on the horizon, startups should strike while the iron is hot and secure funding now while VCs still need to invest from a pool of money they have already raised. Funds with capital to deploy will want to invest in companies with lower valuations – which is why startups are well-placed in this environment; a lot of data indicates that funds actively investing during an economic downturn have much higher returns than those in a bull market.
Investors across the UK startup ecosystem have made a point of emphasising that they are still “open for business”. It is clear that funds will be opportunistic going forwards. Several top-tier European funds, including Lakestar, Index and EQT Ventures, have announced new funds within the last six months, so there is evidently fresh capital out there, with only a fraction of that having already been deployed. This means VCs will be looking at investing for the long haul, so will still be interested in early-stage deals – though they may place more focus on adaptability and resilience and due diligence is likely to be more involved.
The advantage of the startup
During the relatively stable times of the past 10 years, the UK startup sector has benefitted from comparatively large and sustained levels of investment. In periods of volatility, startups also provide an opportunity where agility is much more valuable. Early-stage, pre-revenue tech startups become in relative terms less risky. They have zero exposure to the market and there is no supplier risk compared with revenue-generating companies. Investors will be looking for businesses they deem able to withstand a downturn, so innovation is key. Startups with a mitigation plan in their go-to-market strategy will be best placed to attract investment.
As such, founders should be working on defining their fundraising goals and timing, mapping out target investors and fundraising materials, and getting started organising investor pitches. With investors turning to digital tools to make deals via call and video conferencing, this is also a great opportunity to reach people globally, including those who might have more time on their hands since they’re at home.
Rapid adoption of online and digital services and shift in spending
Technology trends won’t stop moving forward in a crisis. But in many areas, they will accelerate. During the past few months, we have witnessed a massive increase in the adoption of online and digital services, and a shift in spending as businesses invest in remote working technologies and consumers spend on digital entertainment and online ordering options.
Tools that help enable these new trends in remote working and communication will thrive, which makes this fertile ground for technology start-ups.
Conditions are prime for development and hiring
The unprecedented crisis of the coronavirus pandemic has also catalysed an increased environment of collaboration among communities and businesses, with everyone needing to work together to overcome challenges thrown up by this difficult situation. Many businesses are offering their services, tools and expertise to one another free of charge, making this a good time to test products with reduced cost. Startups should, therefore, take this opportunity to develop products and offerings, and to grow.
A key challenge for startups is always how to attract the best talent, particularly when resources are far more limited than larger established businesses. However, current economic conditions with a large number of layoffs seen across the UK, Europe and the US means more high-quality talent is available globally to build a successful team, while there is also less competition for hiring with so many businesses struggling.
Government support for funding startups
The UK Government’s generous support schemes remain available to help startups attract funding; the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) are designed to encourage investment into startups and early growth-stage companies by offering tax incentives to investors. Investors can make an equity investment of a maximum of £100,000 per tax year under SEIS or £1,000,000 per tax year under EIS (with a higher annual limit for companies with more innovative businesses). Qualification for these schemes is straightforward and the vast majority of UK angel investors look for SEIS and EIS as a condition of their investment.
The government also recently announced a significant increase to the grant funding for the most innovative companies administered by Innovate UK. In parallel, the Future Fund continues to provide support to slightly later-stage startups looking to raise a convertible loan with matched funding provided by the government.
Startups must now be diligent, focused and strategic in their capital raising endeavours. Looking ahead, this is the moment to make good on the ancient idiom and “seize the day”. Tech startups that are agile and innovative are in a prime position to grow, especially those able to demonstrate a deeper connection to purpose and not just profit, or with sustainability at their core. People are now, more than ever, aware of the vulnerability of the planet and the need for business models that can help us rebuild for the better.
Michael Buckworth is the CEO and managing director of Buckworths, a law firm in the UK working exclusively with startups and high growth businesses.
Verdict deals analysis methodology
This analysis considers only announced and completed cross border deals from the GlobalData financial deals database and excludes all terminated and rumoured deals. Country and industry are defined according to the headquarters and dominant industry of the target firm. The term ‘acquisition’ refers to both completed deals and those in the bidding stage.
GlobalData tracks real-time data concerning all merger and acquisition, private equity/venture capital and asset transaction activity around the world from thousands of company websites and other reliable sources.
More in-depth reports and analysis on all reported deals are available for subscribers to GlobalData’s deals database.