British startup founders have warned that access to funding is drying up as potential investors become more risk-averse in light of the escalating cost of living crisis.
Startups are among the businesses struggling with higher costs as soaring energy bills and the highest rate of inflation for 40 years threaten to plunge the UK economy into recession.
There have been warnings of a “lost generation” of small businesses as soaring gas and electricity prices begin to hit cafes, restaurants, shops and salons, while tech firms say Brexit has made it harder to attract talent and to export digital services to the EU.
Startups, however, face particular challenges. Here, four founders at different stages of their careers tell the Guardian about a lack of support for first-time business owners, a dearth of growth funding and harsh terms from investors stifling startups in the UK.
‘UK investors would do well to nurture bright ideas from the beginning’
Solomia Boretska, 31, worked as a research scientist before she founded her first startup.
Her company Lendo Labs is building technology to facilitate the shift to a circular economy by making it easy for customers and businesses to find rental products locally.
Its current focus is on renting out medical equipment across the UK, with plans to add more products, such as furniture.
“Our goal is to raise £500k to £1m this year but with the downturn of the markets, venture capital investment is slower than ever. The focus of investment has also shifted.
“Fast returns on investment have become a priority for investors rather than long-term strategy. But brilliant ideas don’t just appear; they require testing and lots and lots of mistakes.”
Lendo Labs has applied for a number of grants worth between £50 and £80,000, and the founders hope to apply for larger ones in future.
Boretska says scaling up a new company in the UK is particularly difficult. “The funding may be there to build a piece of tech or do a pilot project, but if you want funding to commercialise or ramp up your growth via marketing, there’s not much of that currently in the UK.”
While Boretska says there are many new grants available for sustainability startups, she, like others, bemoans a lack of targeted support for first-time entrepreneurs.
“There’s that disconnect between the beginnings of an idea and being deemed ready to apply for big grants. There’s not enough personal support to nurture new ideas, which can be even more useful for new startups than just money.”
‘It’s quite literally do or die to hit our climate change goals’
Even founders with a record and more established businesses than Boretska’s say that raising capital to get their solutions off the ground is incredibly hard.
Michael Evans, 56, an experienced serial entrepreneur from Cambridge, has launched a cleantech startup developing carbon capture and mineralisation technology. Cambridge Carbon Capture aims to suck carbon dioxide from the air and turn it to stone to be used in construction.
In May, Evans and his business partner landed a £3m government contract for a two-year project to build a pilot plant.
“We’re working with some of the world’s leading climate experts. Our £3m contract is a tiny, tiny fraction of what’s necessary to undo the environmental damage of the past 100 years in the next decade.
“The investment that’s needed is huge; we have to produce an industry that’s at least the same size, if not bigger, than the current oil and gas industries. That’s trillions and trillions of pounds’ worth of capital equipment and infrastructure,” he says.
The company is planning to raise between £5m and £10m by the end of the year, then £150m in the next two years.
UK investors, he says, are much more willing to fund software startups, and often do not sufficiently understand the risks of hardware products, which may take longer to hit the market and generate profits.
“We’re probably 10 years away from making returns, but we predict profits of £300 per tonne of CO2 that we capture. But many investors expect a return between three and five years.
“There’s a lot of money sloshing around for quick-turnaround, low-risk investment opportunities, but very little for the big, important ideas. A sensible government would understand that and act instead of focusing on headline-grabbing policies here and there.”
‘We had to move to the US to raise capital’
Nick Browne, 39, is one of three co-founders of Devyce, a company with 10 team members building a phone system for hybrid working.
“We struggled to get seed funding in the UK, and had numerous long meetings with UK venture capital financiers before receiving some offers on harsh terms. In the end, we had to move the company to the US, where we got $500,000 from an accelerator off the back of a 10-minute call. We’ve now got about 30 conversations lined up with US investors.
“We were just staggered by the difference between UK and US investors and the things they were interested in. In the US, they asked: ‘How are you going to become a billion-dollar company?’ They see the bigger picture. In the UK, they asked: ‘How many new customers did you gain in March?’ before saying: ‘If you hit £40k revenue a month, give us a call.’ It all comes down to risk appetite, which is very, very low in the UK.”
Applications for UK investment, Browne says, were incredibly laborious, and UK investors asked for bigger shares of the company than their US counterparts, who accepted high company valuations instead.
“Unfortunately, the UK is a relatively small market. A startup launching in the US has five times as many customers without having to export, and Brexit has made it harder to export even digital services to the EU, and to attract talent.”
However, Browne says the UK is a much easier place to set up a company. “You can get listed on Companies House in a few hours, and running costs are also a lot lower here.
“Whoever is going to be in government next has to encourage investment in UK companies. I don’t think UK VC funds will be getting more relaxed. The UK tech scene is brilliant, but you need that cash injection to lift off, and getting that is incredibly hard here – it’s largely doom and gloom.”
‘The next generation of entrepreneurs face much harsher conditions than I did’
Even highly successful entrepreneurs such as Robin Stephens, 45, from Cobham, who has extensive experience of founding companies with fresh ideas, believe that the future for UK business looks rather bleak unless the current funding system changes.
He completed a degree in politics and worked in marketing before embarking on a career as an entrepreneur. “I am on my third startup now, having sold the first two companies,” he says.
“I raised a million pounds of seed funding for the first business, a platform connecting barristers and solicitors, founded in 2007. It was an awful experience and I vowed not to do it again.
“My second business, Vuture, was a professional services startup which I and my co-founders seed-funded ourselves in 2006, before we used bank facilities and credit. It was risky as our houses were collateral, but we built it into an international business and sold it for tens of millions 18 months ago.”
Stephens says they did not even consider using a UK investment bank to sell the company, and used a US bank instead. “Britain has some really successful industries, but also a lot of ideology about how business should work, which holds many companies back.”
His current venture, Cirrom, is an artificial intelligence platform spotting errors such as mismatched email addresses in client databases with an AI.
“We are lucky to have the capital from the last business because raising money in today’s climate is very difficult.
“Credit lines and banking facilities don’t seem easily available to startups any more. Back in 2007, the banks were very sympathetic; we got a £20k overdraft from the get-go, although we just had one client.
“The government has made it much less attractive to start businesses, for instance, with the removal of entrepreneurs relief, and an unfriendly tax system for startups. Differences in certain standards since Brexit, such as GDPR, will be problematic for any UK technology business.
“We used to hire the very best developers from Europe – they’d get on a plane and start working the next day – but that’s a thing of the past.
“I’m expecting neither Liz Truss nor Rishi Sunak to do anything positive for UK business. My prediction is we have economic chaos coming up.”