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Following the Chancellor’s Mini-Budget release, the British pound (GBP) fell to a 37-year low of under $1.10. Nervous about how the government will afford the announced tax cuts (and control rising inflation), many investors signalled negative sentiment about the UK’s economic outlook. Whilst much of the recent news has focused on the fallout on publicly-traded stocks, less has been devoted to the possible impact on startups. Below, our investment team at Bure Valley Group explores how a weaker GBP could bear upon the early-stage landscape in the UK. We hope these insights are helpful.
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Why is the GBP falling in value?
It is important to set the declining GBP in context. Other currencies have also suffered in recent months, with the Euro dropping to its lowest level in 20 years in August (below the US dollar). The eurozone is facing a worsening economic outlook as it struggles with a lower supply of oil and gas from Russia; even a possible complete cut-off in the coming months. Meanwhile, the US dollar has been strengthened by the Federal Reserve’s decisions to raise interest rates, earlier than many other countries, to try and curb rising inflation.
The UK also faces these global forces, but confidence in the GBP has also been knocked by the government’s recent dramatic shift in economic policy. A 2-year energy price cap of £2,500 per year has been announced for October 2022 (to stop it from rising to £3,549 or more), thus passing the extra cost to government borrowing during a time of rising interest rates – meaning higher public debt. The tax cuts have also led many investors to worry that the UK is heading for a repeat of 1971, when Chancellor Anthony Barber also tried “gunning for growth” to try and control inflation – only to result in disaster.
What does this all mean for startups?
First of all, it’s important to stress that the September 2022 Mini-Budget contained nothing that sets up further regulatory barriers to startups. The Enterprise Investment Scheme (EIS) remains in place, for instance, and if anything the Chancellor sent many pro-business signals by getting rid of the planned corporation tax rise (from 19% to 25% on company profits over £50,000). The government’s plan, indeed, seems to rest on drawing more foreign investment and startups by offering a low-tax, low-regulation economy to thrive in. Secondly, investors should be cautious not to merely see current events as a repeat of the 1970s. Much is different between now and then (e.g. UK employment is still very high), and there are signs that the GBP may already be starting to recover from its initial panic over the Mini-Budget announcements. Further clarity may come from the Chancellor in the coming months – e.g. when he delivers his “Medium-term Fiscal Plan” for the economy in November – which could help to calm markets.
However, the fact remains that the UK currency is still at record lows. Both startup founders and angel investors must contend with this landscape and make decisions in the meantime. Here is a summary of how a weak GBP could affect startups, and some strategic implications to bear in mind as you move forward:
- Exports become cheaper. When the GBP falls, it makes it cheaper for foreign buyers to purchase British goods using their own currency (e.g. the USD). For UK startups with branches and/or customers overseas (e.g. SaaS businesses), therefore, the currency fall in the GBP may not be such an unwelcome development.
- Imports become more expensive. Conversely, UK startups which import a lot of materials and goods from overseas (to make their products) are likely to see their margins compressed as the buying power of the GBP falls relative to their suppliers’ home countries’ currencies.
- Higher inflation pressure. The falling GBP is likely to add further upward pressure on the overall cost of goods and services here in the UK. With inflation already at 10.1% and projected to rise further in 2023, this could lead to a harsher environment for startups as customers need more GBP to purchase the same amount of goods. If households face uncomfortably high levels of pressure on their overall household finances, this could make it harder for startups to sell their goods if these fall more into the category of “discretionary” rather than “staples”.
With all of this said, investors should be careful not to base long-term investment decisions on short-term currency market conditions (which could change dramatically in 2023 and beyond due to policy, global events etc.). In 2022, despite challenges lying ahead, there are also many opportunities for investors. Being part of a knowledgeable investor network can be helpful to bounce ideas. Due diligence and diversification are still key to building a strong portfolio. Make sure your risk tolerance, investment goals and time horizon are still accurately reflected in your asset allocation.
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