Starting with some good news: 2021 was a record year for investment in the UK’s start-ups and scale-ups. There was a record amount of investment and a record number of deals done. The same was true in the US, and across the globe. Just six months ago, things had never looked better for start-ups – and, in particular, tech start-ups. But a lot can change in six months, as life seems to be teaching us with increasing frequency.
Across the pond, murmurs started at the very end of last year that a period of belt-tightening – to put it mildly in some cases – was facing tech firms that had only known nigh on a decade of ‘easy money’. Earlier this year, high-profile tech companies began to fire staff. Peloton announced 2,800 staff redundancies; Robinhood 350; and Cameo 87, to name just a few examples. Staff cuts may be the most material signal of distress, but there were other signals too, such as sharply reduced valuations.
Publicly quoted tech stocks have fallen by around a quarter, on average. Private company valuations – usually slower to respond to market sentiment – have also taken a hit. Philadelphia-based DBT Labs raised at a valuation 33% less than it originally sought. Instacart proactively lowered its valuation by almost 40%, even ahead of raising. Many more haircuts will have been made behind the scenes.
American lessons
What we’re seeing in the US strikes a discordant tone, even with our very latest data at Beauhurst. The first quarter of 2022 was another record quarter for UK start-ups and scale-ups. Some £8.79bn was invested in businesses in just three months. There were more ‘gigadeals’ (deals worth £100m or more) in Q1 of this year than in the whole of 2021. The actual number of transactions being completed was in line with the number we saw in the same period last year – which was itself a record for any three-month period.
However, it must be noted that because of the number of gigadeals, it’s the later stage of the market that is driving these positive signals. There are also encouraging signs among smaller companies that are at the very earliest stages. Last year, Beauhurst’s research warned that the number of new companies raising external finance was declining (and had been since 2018). We published an update to this research in March this year, which found that the decline had been arrested. These investments, which usually benefit from the Seed Enterprise Investment Scheme, tend to peak at the end of March, to fit into the UK’s tax year.
In addition, there has been a record number of new funds and investors entering the UK market. We have found 605 investors made their first investment into a UK private business in 2021, compared with 551 the year before. These investors include all types: from new angel networks set up to fund under-represented founders to old family offices making their first investment in what for them is a new asset class. It also includes corporates and hedge funds, as well as new VC funds, with more dry powder than ever.
Those numbers do not, however, include individuals who invest in private companies (except for the people who are part of the angel network). But there’s promising news for this class of investor, too. In 2021, there were a record number of exits. Some 781 private companies, exited through either IPO or acquisition, were bought by corporate acquirer or by a financial buyer (such as a private equity fund). These exit transactions will hopefully make angels out of some of those successful entrepreneurs. They will also, in some cases, free entrepreneurs to start new businesses.
These are some strong tailwinds, in the UK at least, despite the headwinds. I remain hopeful that, on balance, the UK’s start-ups and scale-ups will continue to progress – albeit at a slower pace – despite the storm.
About the author
Henry Whorwood, head of research and consultancy, Beauhurst, a publisher of data and analysis on UK high-growth and ambitious companies, and a member organisation of the Corporate Finance Faculty
