How is your portfolio doing? For many UK investors, the outlook in 2025 currently seems quite muted. Fortunately, you do not have to resign yourself to a year of underperformance. There are still opportunities to be found if you look carefully.
In particular, the UK’s early-stage landscape still holds many innovative startups with enormous potential. Below, we explain how these opportunities can be found, especially amongst firms that qualify for the Enterprise Investment Scheme (EIS).
The UK’s 2025 landscape
The Chancellor, Rachel Reeves, is facing a lot of pressure at the time of writing. Her first budget in November 2024 failed to prevent the UK from flatlining its GDP growth in the fourth quarter (Q4). Then, in February, the Bank of England (BoE) revised its forecast for UK growth in 2025, halving it to 0.75%.
Others have been more optimistic, such as the National Institute of Economic and Social Research (NIESR), with a 1.5% growth prediction. However, there are concerns about the supply capacity of the UK economy, which could add inflationary pressure in 2025.
Many businesses plan to cut staff, raise prices and lower investment, especially to offset tax rises from the Autumn Budget (2024). The threat of tariffs from the US is also contributing to declining business confidence, which is already at a 2-year low.
Overall, it’s not a positive picture for many investors. However, this is not to say investors are destined for poor outcomes in 2025. Indeed, the conditions could present unique opportunities that may not be available at other times.
The power of EIS in a downturn
The Enterprise Investment Scheme (EIS) offers investors a tax-efficient way to invest in qualifying UK startups and other growing companies. For instance, up-front Income Tax relief is available (up to 30%). Ongoing relief, such as capital gains tax (CGT) deferral, is also available.
These tax-saving mechanisms can be especially powerful during difficult economic conditions, which can favour certain startups. A case in point is layoffs. These often become more common as firms cut staff to help protect margins. As talent becomes more available in certain sectors, startups can attract top talent at lower costs, strengthening their teams.
In 2025, sectors with a high risk of layoffs include retail, hospitality, and the service industry. Higher education is also facing cuts as universities seek to plug funding gaps. While it is tragic that individuals lose their jobs, this trend could provide opportunities for mutual benefit as startups look for skilled employees to grow their teams.
Another brutal reality of downturns is they force weaker competitors out of the market. Startups that remain standing can capture greater market share once the economy recovers. Here, an investor can benefit if they have done their due diligence when selecting resilient startups for their portfolios. Take another look at your investments and check if their budgets are lean. Are they prioritising profitability, and how sustainable are their business models?
Investors should also remember that economic challenges often lead to changes in consumer behaviour and industry needs. Startups that address new pain points or innovate in response to market shifts can thrive. People become more attentive to prices and lean towards cheaper options. This can make consumers more willing to take a chance on lower-cost options offered by startups rather than habitual purchases with established, costlier brands.
Riding the recovery
Investors should remember that “boom and bust” is the nature of capitalism, and long-term returns can be found if they ride out economic storms. Perhaps the UK will perform better than many are predicting in 2025. However, if the country struggles, investors could still benefit by holding stakes in companies that are well-positioned for growth as the economy rebounds.
Of course, investing in startups during economic challenges carries risks. This is where EIS can add some protection. The “loss relief” mechanism helps to reduce an investor’s “at-risk capital” when committing to qualifying investments. For instance, if an additional rate taxpayer commits £10,000 to an EIS company that later fails, the loss would be £3,150 after up-front tax relief is taken into account.
Many venture capital firms and institutional investors often become more risk-averse during downturns. This can give individual investors with capital (e.g. angels) a stronger negotiating position and access to better deals. Simultaneously, startups often struggle to raise capital, leading to lower valuations. Investors can secure larger equity stakes for the same investment amount, improving potential returns.
Invitation
This article stresses the importance of an investor’s mindset during a potential UK downturn. Opportunities are still available, even if you might need to look harder.
It is, of course, unwise to ignore or downplay the risks involved with investing during challenging economic times. However, opportunity costs can be incurred if investors shrink back out of fear.
Want to speak to us about our early-stage opportunities here at our exclusive investor network? Get in touch today to explore our startup projects here at Bure Valley Group.
