Bure Valley Group is an investment introducer platform which links successful investors with exciting, innovative UK startups seeking funding. This content is for information purposes only and should not be taken as financial or investment advice.
For many years, the UK has been a global hub of startup innovation – fuelled partly by schemes such as EIS, which offer generous tax breaks to investors. The UK’s early-stage ecosystem is highly diverse featuring rising stars in fintech, healthtech and more. Looking ahead into 2023, what can investors expect from the UK’s startup landscape? Which headwinds and tailwinds should they look out for? Below, our team at Bure Valley Group highlights some key investment trends for early-stage investors to consider as they build their portfolios in the months ahead. We hope you enjoy this content. To find out more about our investment opportunities, visit our portfolio page here. To enquire regarding our latest projects and funding, you can reach us via:
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Financing is key to the success of any startup. Historically, venture capital has been the major source of early-stage funding in the UK. In 2023, however, the trend is pointing to rising democratisation of financing – e.g. through the rise of peer-to-peer (P2P) finance opportunities. In Europe, the roll-out of the European Crowdfunding Service Provider Regulation (ECSPR) is an indication of the region’s direction of travel. This intends to unite all nationally-regulated P2P and crowdfunding platforms in Europe in one place. Around 12m crowdfunding campaigns are expected this year – nearly double that of the previous year. Globally, the crowdfunding market is projected to grow to $300 billion by 2030. The average pledge is $88 US.
Inflation & devaluation
It is no secret that the UK and other major economies have struggled with higher inflation since 2022. At present, the CPI (Consumer Price Index) stands at 10.1% and the UK base interest rate is now 4% following successive rises since late 2021. Whilst inflation is expected to start coming down by the summer, interest rates are unlikely to return to their near-zero levels for a long time. This means a more difficult environment for startups to raise money (e.g. by taking out a bank loan). Startups will be forced to consider alternatives such as angel investment and also may need to tighten their belts as they face higher input costs compared to previous years.
A merger is one potential exit strategy for UK startups. Yet the merger landscape has been impacted by the COVID-19 pandemic since 2020, and more recently by the uncertainty created by the Russian invasion of Ukraine. There is some evidence to suggest a slight increase in the overall value of UK companies acquiring foreign ones. however, the Bank of England reported that, for 2022, “Merger and acquisition activity appeared to be slowing from its previously high rates”. In Q2 there were 333 completed M&A transactions – 116 fewer deals compared to the previous quarter and 167 fewer than in Quarter 2 2021. This market weakness is likely to continue into 2023, particularly as US buyers face increasing borrowing costs.
The COVID-19 pandemic ushered in a new era of working from home. In 2023, there has been more of a return to normality as more workers go back to the office. However, UK workers now largely expect a “hybrid model” where they have a degree of flexibility about where they work. This means that startups need to prioritise their “digital HQ” as much as their physical one. In this respect, early-stage companies are perhaps better positioned to adapt compared to larger ones due to less cumbersome infrastructure and entrenched cultural norms.
The UK has recently been facing a talent shortage and this is expected to continue into 2023. In August-October 2022, the leading reasons were being a student (27%) and having a long-term illness (27%). 13% had retired and were not looking to re-enter the workforce. New immigration rules following Brexit may have further restricted supply. Declining population growth might also be a factor (driven by lower net EU migration). 70% of UK technology employers are reporting a skills shortage this year with shortages most keenly felt in Yorkshire (73%), London (62%) and the North (55%). Cyber security, in particular, is a skill set in high demand.
Productivity & mental health trends
Mental health is now largely viewed very differently amongst UK startup employers compared to a few years ago. COVID-19 brought a greater awareness of the importance of mental health to everyone and the link it has to productivity. In 2023, therefore, many employers are more ready to allow workers to slow down, rest and rejuvenate. Whilst this might, on the surface, seem to reduce productivity, a better work-life balance is likely to improve it over the longer term as staff have more energy, morale and loyalty to their employer. Workers, overall, seem less interested in gimmicky workplace perks (e.g. ping pong tables) and are more likely to value employers who offer wellness stipends, support for caregivers and parents. Offering appropriate breaks, mental health support programmes and therapy could also be helpful.
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