Navigating the tech landscape

The UK’s businesses

There is currently a record number of active companies in the UK (5.3m). Does this mean that business is booming in the UK at the moment? It is not as straightforward as that. There are certainly green lights on the dashboard, but there are amber and red, too.

ONS data shows that the UK’s economy is growing: GDP is higher than before the beginning of the pandemic.¹ That’s slow growth, but at least not no growth. Where is that growth coming from? There are 268k companies that have seen rising levels of employment - that is only 13.2.% of companies for which a measurement was possible. A significant 39.7% of companies have seen their turnover grow - but that growth, in some cases at least, could be accounted for by inflation. A higher proportion - 41.3% have increased liabilities - essentially have taken on more debt. Taken together, these numbers suggest an economy that is stalling.

There are more economic signals we can look at that are relevant for startups and scaleups, in particular about external financing. Rising interest rates are making themselves felt here. Debt financing is less attractive through being more expensive, but equity financing is taking a hit too. The peak year for equity financing (including VC investment, but also angels, family offices and others) was 2021. This year will see the second consecutive annual decline. Changing interest rates not only means investors need to re-visit risk and reward profiles but also that a liquidity crunch is being felt throughout the ecosystem. Fewer exits means less liquidity, means fewer secondaries, means less liquidity, means fewer VCs funds and so on. It is certainly harder to run a tech startup now than it was 18 months ago.

Testing positive for tech

Although there are headwinds, support for tech companies remains strong in some quarters. The Enterprise Investment Scheme (EIS) is one of the best incentives globally to encourage investment in riskier firms. The grants provided by Innovate UK have supported 20k innovative firms to date. The UK’s R&D tax credit scheme goes further, supporting nearly 90k firms in the last year alone.²

There are improvements on the way for high-tech startups as well. Earlier in 2023, the Seed Enterprise Investment Scheme (SEIS) was extended; startups can now receive up to £250k of investment under the scheme, amongst other increases. That change is perhaps the longest-lived positive impact of the then Chancellor Kwasi Kwarteng’s “mini-budget”.³ More recently, a different Chancellor, Jeremy Hunt, has launched his “Mansion House Compact”. Already more favourably received by pension funds than the mini-budget, the Mansion House compact is a set of reforms to defined contribution pension schemes that aim to unlock an additional £75b for high-growth businesses while hopefully increasing a typical earner’s pension pot by 12%.⁴ Number 10 also made significant fanfare about the UK rejoining Horizon Europe. The UK has reaped substantial rewards from its involvement in Horizon Europe. Before its departure in 2020, British universities dominated the list of grant recipients, with Cambridge, Oxford, UCL, and Imperial College securing leading positions. Rejoining this programme not only reasserts the UK’s commitment to scientific innovation but also serves as a catalyst for research that has the potential to evolve into high-growth spinouts.

Red lights ahead

While the leaders of tech firms will be cheered by the prospect of increased availability of funding, the benefits from the Mansion House Compact will take some time to make themselves felt. In the meantime, there are plenty of other difficulties to navigate. Tax and talent are illustrative examples.

It is widely known that the tax burden in the UK is the highest it’s ever been in peacetime.⁵ There’s no solid sign that that’s likely to ease anytime soon. The watering down of Entrepreneurs’ Relief into the Business Asset Disposal Relief has put some entrepreneurs off. Mooted changes to Capital Gains Relief fill existing and prospective founders with trepidation. In combination, the message is not supportive or encouraging.

That there are nearly a million job vacancies in the UK speaks to the talent crisis companies are facing. A 2023 survey found that 94% of firms were struggling against a lack of talent.⁶

But talent is an issue at the founder level, too. The proportion of the UK’s fastest-growing companies that are run by immigrant founders has dropped in recent years from 49% to 39%.⁷ Despite record immigration numbers, the lure for top talent has dimmed. This is not helped when home-grown successes end up listing elsewhere. ARM is a recent example of something systemic that looks like it applies to more than just IPOs.

This status quo seems at odds with the impression one gets when looking at the fast-growing companies in this year’s Fast 50. This suggests that there’s an opportunity for the UK: with the right regulatory and political environment, even more growth would be possible.

FOOTNOTES

¹ GDP monthly estimate, UK: August 2023, 2023
² Corporate tax: Research and Development Tax Credits , 2023
³ SEIS/EIS updates from Kwasi Kwarteng’s “mini-Budget” 2022, 2022
⁴ Chancellor’s Mansion House Reforms to boost typical pension by over £1,000 a year, 2023
⁵ The UK’s tax burden in historical and international context, 2023
⁶ Tech skills shortage still a problem for employers, 2023
⁷ Job Creators: The immigrant founders of Britain’s fastest growing businesses, 2023