A growing ‘valley of death’ funding gap facing the UK’s tech sector could scupper the government’s Silicon Valley ambitions as firms struggle to raise cash and fuel growth, tech investors have warned.
Venture capital funding into the UK faltered last year amid a global slowdown as soaring inflation and market volatility caused investors to pull back from dealmaking.
So-called seed funding rounds held up more steadily throughout the year but the slump was felt keenly for firms at the growth stage of their business.
Data from fintech industry body Innovate Finance last month highlighted an investment “polarisation” in the UK as late stage and seed stage jumped upwards, while funding for early growth stage rounds plunged 38 per cent to $1.7bn and later stage deals fell 16 per cent to $7.1bn.
Tech groups in the UK say economic turbulence in the past 12 months has brought an existing growth gap into sharp relief.
“I think when you look at Series B and beyond at the moment, there is a bit of an issue in the UK,” Gerard Grech, the chief of tech body Tech Nation, which announced it would be winding down earlier this month, told City A.M.
“Institutional investors have definitely tightened up and so it’s a little bit more difficult for Series B and beyond. Companies may not have raised [money] last year, but will have come in to fundraise this year and it will take longer to raise, which means that growth may take longer to take off,” he said.
Grech told City A.M. that loosening pension rules could be among a raft of measures from ministers used to close the funding gap and allow the UK’s tech sector to grow.
Growth gap
Tech groups in the UK have long warned that a lack of funding for growth firms is hobbling the UK’s tech ambitions. A 2020 report from the Scale Up Institute and Innovate Finance found that the UK was facing a £15bn growth capital gap that was stifling the sector’s ability to grow.
Chancellor Jeremy Hunt laid out plans to make the UK a new “Silicon Valley” by supercharging growth in its tech businesses, but some policy changes have been called into question by the sector. Ministers have also been mulling tweaks to pension fund rules to allow capital to flow more freely into start-ups rather than big listed firms.
Coadec, a tech lobbying group, similarly said last year that freeing up pension cash would be crucial to closing a funding gap and ensuring nascent areas like climate technology could grow.
“We’re a world leader in invention, with a healthy supply of talented people, ideas and policy that incentivises starting an innovative business, but we’ve got work to do in making sure these firms can scale up,” Charlie Mercer, head of economic policy at start-up lobby group Coadec, told City A.M.
“Our recent work in climate-tech in particular uncovered a huge gap in bridging pilots to commercial products, and the reality is that companies then falter, fail or flee to markets that offer what they need,” he added.
A report from the firm called on government to loosen a charge cap on pension funds which was preventing money from flowing into tech firms via venture capital, due to the higher money management fees. Minsters published fresh plans in October to free up the flow of capital into previously out of reach asset classes.
However, Sarah Barber, CEO at Jenson Funding Partners, told City A.M. that a growing funding gap facing tech had some upsides, as investors were made aware of the shortfall facing some areas of the tech ecosystem.
“The economic climate is certainly highlighting the “Valley of Death” but in a way, this is a positive as it brings greater attention to the underserved, early stage landscape,” she said.
