Gathering funds for growth and R&D is one of the hardest challenges for tech startups. As an integral player of the international startup scene, Early Metrics has had the chance to observe how recent developments in the EU-UK divorce have affected British startups and their chances of securing funding.
Let’s take a look at the different sources of funding available to innovative UK SMEs and how these might change in the near future.
Grants: keep calm and research on?
The EU offers a range of grants and funding programs that have been very beneficial to the development of new research and innovative businesses across Europe. The UK has been one of the top beneficiaries of these resources, with 14% of funds allocated from the Horizon 2020 programme going to the UK for instance.
The promise made by the government to match the funding provided by the EU to British businesses is honourable but holds little value. It’s uncertain what type of Brexit will unfold and therefore there is no guarantee as to the feasibility of this promise.
In the short term, the government should indeed have the means to make up for the loss of access to certain programs, such as the Horizon 2020. However, long term plans appear less solid. Moreover, in the case of businesses involved in research programs reliant on pan-european collaboration, it’s unclear how the grants would be provided and divided post-Brexit.
Hopefully, in the long run, the UK government would be able to redirect the funds previously contributed to EU projects to support innovative SMEs and researchers in Britain instead. The latest Spring statement given by Philip Hammond did offer some reassurances as to public funding that would be accessible to tech players and researchers. In particular, the Chancellor of the Exchequer cited laser technology, super-computers and low carbon energy as key areas of future public investment.
Investment: scale-ups more likely to suffer than startups
Mega deals will still happen as international venture capital and private equity funds will still be willing to invest in high-growth startups that have already met key milestones, regardless of the surrounding political environment. Business Angels, on the other hand, are generally more affected by local changes in tax breaks rather than macroeconomic events. So it is also likely they would keep supporting startups in pre-Seed and Seed rounds.
Nevertheless, young ventures raising in Series A or B rounds (usually amounting to £5 to 25 million) might face more difficulties post-Brexit. As the market loses in liquidity, investment funds might become more selective when it comes to supporting 3 to 5 year-old companies wanting to scale fast. In fact, although the UK was still first in Europe in terms of VC investment in tech startups, 2018 still saw a drop of 28% in funding compared to the previous year due to political uncertainty.
One particular factor that might scare investors is the loss of access to the single market which would complicate any startup’s plan for international expansion in the EU and potentially hinder their speed of growth. Lack of skilled international talent is another factor that could hurt the attractivity of growing businesses to investors.
Essentially this implies that scale-ups might be more impacted by Brexit than startups. They will therefore have to adapt their growth pattern and strategy. For instance, by re-adjusting their growth forecasts on longer time frames, by focusing on gaining local market shares or by favouring alternative funding sources.
Loans: as banks get stingier, which alternatives remain?
If a no-deal Brexit triggers a slowdown in the economy, SMEs could potentially struggle to pay back loans which is why several banks have been lending less and less. A report published this week by Hadrian’s Wall Capital (HWC), highlighted that 74 out of 132 postal areas of Great Britain saw falls in the value of outstanding bank loans to SMEs in 2018. Therefore, if startups can’t turn to banks for financing, what alternatives do they have?
Digital-first alternative lenders that cater specifically to innovative startups and gig economy workers are becoming increasingly popular. They generally offer funding in the form of invoice financing, business lines of credit or even term loans. Another option is crowdfunding which has the advantage of serving as a marketing tool as well as a funding source.
Bootstrapping for as long as possible and focusing on attracting early clients remains the best funding path for SMEs. Especially for those that do not require massive amounts to fund R&D (such as retail, fintech and startups), avoiding dilution in the early years can be a strong competitive advantage in attracting investors at later stages.
by Antoine Baschiera, CEO and co-founder at Early Metrics