In a global tech downturn, startups have a mountain to climb

Tech startups in the UK have had a rocky time. London faces competition from US and European markets, and there are still struggles with raising funds. But those who survive could emerge more resilient, writes Russ Shaw

Of all the well-publicised challenges facing the UK tech sector right now, the vast majority revolve around three big themes: the economy, digital sovereignty and diversity.

Today, the TLA & GTA Investor Showcase at Here East’s innovation campus in the Queen Elizabeth Olympic Park brings together Europe’s leading investors to discuss what can be done about these macro issues. It will be fascinating to hear what companies have in mind to solve these matters.

We’ve experienced job cuts, chip shortages and international banking collapses. Regrettably, the post-pandemic tech boom has passed and companies, large and small, are feeling the impact. Looking to the future, the important question is whether this downward trend will continue into the next year. Perhaps the industry’s trajectory has reached a bottom, and companies which survived could emerge leaner and more resilient on the other side.  

Early-stage companies have been hit particularly hard by the global tech downturn. Venture capital funding of start-ups has plunged by more than 50 per cent in the past 12 months, as worsening economic conditions cooled interest in riskier investments. 

Moreover, perfectly viable early-stage tech businesses in need of capital to stay afloat were forced to accept falling valuations, take on damaging levels of additional debt – or face insolvency.

So when news of the collapse of Silicon Valley Bank broke last month, it posed an existential threat to the thousands of UK startups that relied on the bank for borrowing. The funding ecosystem for young technology companies – already operating on shaky foundations – was severely rocked.

Thankfully, a solution was found with the HSBC takeover and there were clear lessons for startups and investors alike to learn. Founders will be thinking about how they can avoid putting all their financial eggs in one basket and ensure their accounts are diversified, opening the door for angel investors and VCs to expand their portfolios. 

Another issue causing ongoing uncertainty, and undermining confidence for investors in tech, is the lack of good news emerging from the UK semiconductor industry. 

Despite Tech London Advocates leading pleas from the tech industry, and promises from ministers that a plan is in the works, there is still no sign of the long-awaited semiconductor strategy. 

In recent months, the Treasury has repeatedly championed London’s credentials as  “the world’s most international financial centre.” But Britain is finding it increasingly difficult to retain ownership over the technology companies that start here.

Take Arm, the ‘crown jewel’ of UK tech. Despite the government’s best lobbying efforts, the Cambridge-based chip manufacturer was sold to Japan’s SoftBank for £24bn in 2016 and last month announced plans to list on the Nasdaq stock exchange in New York.

Arm and Acorn co-founder Hermann Hauser said the UK has “no chance in hell” of being technologically self-reliant, stressing the need for European countries to have their own access to critical technologies so they are less dependent on the US.

With tech sovereignty at stake, many key emerging technologies currently entering the market are set to dominate the next decade and beyond. In the Spring Budget, the Chancellor announced plans to devote huge sums of capital to deeptech such as AI and quantum.

Time will tell whether these resources are being deployed effectively. What is clear for now is that when it comes to protecting digital sovereignty, the UK has much to learn from others. With the EU’s European Chips Act and the US’ CHIPS and Science Act both passed last year, the absence of a comparable strategy for the UK is even more conspicuous, and emphasises the risk of the sector being left even further adrift of international competition. 

As well as a sovereignty issue, the tech sector suffers from a diversity problem. With the current downturn in funding and economic growth, many investors and founders are concerned that things could get worse. All-female founding teams accounted for 6 per cent of all funding rounds in 2022, but for only 1 per cent of the funding raised, according to Atomico’s State of European Tech report. It’s getting worse: it was 3 per cent in 2020.

In the investment sector, the picture isn’t much better – despite increasing efforts from VCs and tech firms to encourage diversity, it seems little has changed. Many VCs have hired more women investors, but women continue to be underrepresented in senior decision-making positions.

Plenty of mentoring programmes for underrepresented founders have launched, but those founders still lack funding opportunities. Ultimately, change starts with measurement – and investors need to get better at benchmarking and tracking diversity metrics for their portfolio companies.