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What might 2022 hold for the UK’s startups? Which sectors are growing and how might the wider investment landscape affect your returns? Whilst it is impossible to predict the future, current trends and head/tailwinds can give an indication of where things might be headed. Below, our team at Bure Valley Group offers some reflections for investors.
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The UK startup scene
There are few places in the world as attractive as the UK for startups. Corporate tax rates are still comparatively low – despite the rise from 19% to 25% applying to companies with profits over £250,000. The country is also noted for its respect for intellectual property and the rule of law, encouraging the formation of new startup products and ideas.
London, in particular, retains third place amongst the world’s best technology ecosystems for startups (according to Startup Genome). The city continues to offer a wealth of talent to fill important startup roles, as well as nearby capital and investment sources. London is also very well connected to other overseas cities – e.g. New York – and is the only “top 5” city offering a “startup visa programme”. The city boasts an average seed round of $650,000 compared to the global average of $494,000 and is particularly great for tech startups due to the range of R&D anchors, research grants and tech meetups on offer.
The wider landscape
Despite challenges posed by COVID-19, Brexit wrangling (over the Irish border) and wider geopolitical risks (e.g. Chinese sabre-rattling), the UK’s startup scene has continued to thrive. In 2019 there were 636,000 new businesses created in the UK, which rose to 726,000 in 2020 – i.e. a 14% increase. This rise has partly been driven by a “wave of entrepreneurialism” which has swept the UK following furlough and lost work due to the pandemic.
Online retail business, in particular, has grown as more people have forsaken the highstreet for digital e-commerce solutions under repeated lockdowns. In Q1 of 2020, there were 4,613 new such businesses recorded – up 66% from the monthly average in 2019 (2,783). The beginning of January 2021 also witnessed a surge in UK online spending, with the proportion of overall UK retail spending hitting a record-high of 36% (nearly twice the levels seen before COVID-19).
Of course, the question remains over whether this latter trend will continue into 2022 as more people re-enter the office and frequent shopping premises. A lot hinges on the effectiveness of COVID-19 vaccines against new variants such as Omicron, and how the UK and other states respond. Further lockdowns in 2022 might encourage this trend as restrictions force people to do their shopping online. However, with interest rates rising (to help counter inflation) it will be more expensive for the UK to continue the lockdowns seen in 2020 and 2021.
More likely, the Government will face economic pressures to be less strict with quarantine measures – especially if, as current evidence suggests, the Omicron variant proves to be less deadly than previous variants (e.g. Delta) and can be handled by the health system.
2022 UK startup predictions
As suggested above, it seems likely that 2022 will witness increasing numbers of employees returning to the office (as things currently stand). We have also had the COP 26 summit in Glasgow recently, with global attention still very much on the climate crisis. UK companies will probably face increased demand from customers to demonstrate how they are helping the physical environment. The collective consciousness of COVID-19 also lends itself to startups which seek to create new vaccines and solutions to counter deadly diseases.
With COVID-19 leading to most countries implementing strict stay at home orders for long periods of time, many workers are now looking to move into tech roles. These help to provide job security should remote working orders be re-introduced in the future. It is possible that we could witness lower job mobility as people seek to stay in roles which offer longevity and job stability. In 2022, increasing automation to administer repetitive tasks could also encourage more creative roles where workers can experience greater satisfaction and improved mental health. Tech startups are particularly well-placed here.
More broadly, the economic landscape could lead to a “cooling” of stock market valuations. Rising inflation puts pressure on public company profits via higher input costs and could be countered with higher-still interest rates. This, in turn, is likely to increase the attractiveness of bonds to investors and put downward pressure on stock prices. As company investors seek high returns, early-stage companies could be attractive for offering good growth prospects.
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