As tech investors become more conservative, UK innovators face increased pressure to find new sources of funding. How will they adapt?
In the run-up to London Tech Week, Dealroom and Tech Nation announced that UK tech companies had secured more than £13 billion in VC funding in the first five months of 2022, more than double the amount acquired by any other European country.
These figures are the latest in a string of data detailing the pace at which British innovators are attracting equity capital. Under normal circumstances, they would breed optimism for the future of the UK’s thriving startup ecosystem.
Unfortunately, Britain’s funding surge stands in contrast to a near-global slump in investor confidence. It now seems only a matter of time before the capital crunch plaguing the US and Europe tech scenes finds its way to the British Isles.
Indeed, with VC funding falling 32.7% in July, and deal value shrinking 43.6%, the crunch may already be here.
The capital crunch closes in
The roots of the capital crunch trace back to the well-reported issues facing the global economy.
The cost of living crisis has curtailed disposable income and reduced consumer confidence, with sizeable ramifications for the performance of publicly-listed technology businesses.
Since the start of the year, the NASDAQ stock, which serves as a reliable barometer for market sentiment towards mature tech companies, has fallen by more than 30%, impacting established behemoths and relative newcomers alike.
Weaker public market performance translates to smaller returns for early-stage investors looking for portfolio companies to one day IPO. As a result, investors are no longer willing to prop up the kind of mega valuations we’ve seen in recent years.
With the UK suffering from the same economic hardships as the United States and the rest of Europe, it seems to be a question of when, not if, equity investment will begin to recede here as well.
Consequences for British businesses
A more cautious investor class will have several consequences for UK innovators. Firstly – and most obviously – startups and scaleups will find it harder to access funding. Earlier-stage startups will be particularly hard hit.
Investment terms will also be less generous, with investors asking founders to accept lower valuations and relinquish more equity for less capital. Due diligence will also become much more thorough.
The net effect is that the process of finding, negotiating, and acquiring equity funding from VC firms will become much longer and tougher. In response, companies will need to find ways to stretch their cash reserves to withstand protected negotiations. One of the ways they will do that is by tapping other forms of funding.
There are a range of funding options available. For innovators without reliable revenues or leverageable assets, government-sponsored programmes like R&D Tax Credits and Innovation Grants will be particularly appealing. As will services like Advance Funding, which lets companies access their tax credits and grants at a time that suits their business.
Extend your cash runway with R&D Advance Funding
R&D Advance Funding from GrantTree lets you access up to 80% of your R&D Tax Credits windfall up to 12 months ahead of schedule.
With Advance Funding, you don’t have to wait for your financial year-end to invest your R&D Tax Credit – you can spend it whenever it suits your business.
You can access Advance Funding as soon as you’ve finished your first financial quarter. If you invest your R&D Tax Credit in additional development work, you could boost your end-of-year R&D Tax windfall by as much as 36%.
To find out more about Advance Funding, book a call with one of our funding specialists below.