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Recession and its impact on Soonicorns

Any startup ecosystem is built by the willingness of its entrepreneurs to take enormous amounts of risks on new-age technologies. Silicon Valley has been the startup capital of the world for almost 4 decades and to build companies like Tesla, Uber and Google, the appetite for failure and risk, needs to be decorated in society.

The government is working to improve the R&D spending and has increased their investments to £20bn by 2024–25, which would support universities and businesses. The new chancellor Jeremy Hunt’s goal to make the UK the next Silicon Valley’ would require massive investments into scientific technology and attract highly skilled talent. The low-interest rate environment inflated the technology boom in the last few years ultimately producing billion-dollar businesses like Revolut, Starling Bank, Cazoo etc. But value is not created by just higher valuations or successful IPOs but by the efficient functioning of the entire ecosystem. And resilient ecosystems defy all short-term fluctuations and macroeconomic factors. Passion for entrepreneurship, access to venture capital, accelerators, incubators, mentorships, etc. have helped in the evolution of the technology industry.

Companies in the UK have raised $18.7bn in venture capital financing in the first half of 2022, an amount higher than Germany, India and France. Around 950 startups and scaleups raised funding which took the UK to the second position in the globe for VC investments behind the USA. The amount of venture capital investments raised by companies in Europe for the initial 9 months of 2022 was $83.5 billion out of which the UK contributed a massive 28%. Although a vast majority of startups that raise funding have headquarters in London, new technological hubs are coming up like Cambridge, Manchester and Bristol.

Currency fluctuations

The “mini” budget created a domino effect in the financial markets in London which led the pension funds and institutional investors to sell British assets. Substantial selling led to the pound reaching an all-time low as compared to the dollar in the last 5 years.

Covid 19

The pandemic forced businesses to digitally transform themselves. Businesses and small-scale enterprises that have not been able to digitally transform themselves were hit the hardest.

Inflation

Inflation still stands in double digits because of the Russia — Ukraine war. The conflict has pushed energy prices to soar levels which is taking a toll on the economy in the form of inflation. The Bank of England is using all monetary policies to tame inflation but no immediate effects can be seen. Higher costs have ultimately led companies to bleed more and thus reduce their profitability.

Taxation

From next year onwards there is going to be a freeze in the personal tax allowance and the slab for the 45% tax rate has been reduced from £150,000 to £125,140. Oil and gas companies would also pay an extra 35% headline tax on their profits. The exemptions for dividend, inheritance and capital gains tax will also be brought down.

Interest rate hikes

The Bank of England has started increasing the interest rates and currently, they are at 3%, their highest since 2008. Higher cost of capital leads to fewer investments by businesses.

Fiscal austerity and recession

The government is expected to cut down on capital investments and fiscal spending in the upcoming autumn statement. With the government in austerity mode, it could lead the country into a recession.

Industry: Market research and Analytics

Headquartered: London

Last valuation: $850m

One of the first companies we would be considered for our list would be GWI which was founded in 2009. GWI is a market research and analytics company and they are disrupting the traditional offline research market by using data contributors and mobile surveys to gain consumer insights. It is an audience marketing company that helps marketing firms to understand their current and potential customers. GWI works with clients like Google, Twitter, FB, Redbull, WPP and Spotify. There are around 750 employees working across offices in London, New York, Prague, Athens and Singapore.

The company was bootstrapped for a long period of time and raised its first round of Series A in 2018. Till now the company has raised $220 million in funding. It has taken 13 years for GWI to reach unicorn status.

Industry: Fintech

Headquartered: London

Last valuation: $900m

Stenn is a fintech company based out of London. It provides an online platform that provides financing to small and medium-sized enterprises that are primarily engaged in international trade. It provides financing services in 74 countries and is one of Europe’s top ten fastest-growing businesses in the fintech space. The company provides cross-border capital within 48 hours. The capital is provided by huge banks like HSBC, Barclays and Natixis. They have financed invoices, to the tune of $10 billion so far. There are around 130 employees and the company uses technology to provide quick access to growth capital. Stenn has been in existence for around 7 years.

The company has raised debt financing to the tune of $825m from investors like Centerbridge Partners, Clayhill Capital and Natixis and was recently valued at $900mn.

Industry: Recruitment

Headquartered: London

Last valuation: $800mn

Beamery is a talent operating system company working in the recruitment space with a new approach to sourcing, hiring and retaining people. They utilize technology to analyse the bigger talent picture in an organization. The revenues in the fourth quarter of 2021 grew by 337% during the pandemic and they partnered with Fortune 100 companies. Enterprise customers like Nasdaq, AstraZeneca and Autodesk use their platforms to fill in positions. It has also been recognized as the 10th fastest-growing company in the UK by Deloitte Fast 50. The company has offices in the UK, US, and Germany and there are 450 employees working across various locations globally. The company has been in existence for almost 8 years and is near to becoming a unicorn soon.

Beamery has raised a total of $173mn in venture capital from investors like Ontario Teachers Pension Plan, EQT Ventures, Index Ventures and Edenred Capital Partners.

Industry: Insurtech

Headquartered: London

Last valuation: $800mn

YuLife is an insurtech company that follows a new path in the insurance industry. They sell insurance policies that provide financial security to customers and their families. This is done by attracting customers to lead a healthy lifestyle by providing them with fitness plans via gamification. Keeping the customer engaged on their platform helps them to increase revenue through wellness services and deals. There are more than 500 major brands like Jaguar, CapitalOne, Santander, Del Monte, etc. that provide YuLife products to their employees. YuLife covers group life insurance and critical illness protection policies and they plan to expand to dental insurance and financial services. They have also expanded to the US market.

YuLife sells policies directly to companies in a B2B model. The company has recently raised $120mn and brings the total funding to $206mn. YuLife has been in business for 6 years.

Industry: Fintech

Headquartered: London

Last valuation: $720mn

Freetrade is a fintech startup that started in 2017 and has 300 employees. The company provides a stock trading app and has more than a million users on its platform in the UK. The app helps in buying and selling shares and also provides the option to buy fractional shares. They do not charge a commission for trading orders, instead a foreign exchange fee for stocks in the US. They offer ISA and SIPP accounts which help in tax planning.

Because of the tightening of the monetary policy by the central bank, they could not raise funding at higher valuations. To date, they have raised $135mn and have a very good possibility to become a unicorn.

Conclusion

As the Bank of England keeps on increasing the interest rates, the easy and cheap money raised by venture capitalists from pension funds, endowments, institutional investors and family offices will keep on plunging. This will lead VCs with a limited amount of funds earmarked for riskier startup bets.

With the hike in interest rates, limited partners in VC funds would be looking out for low-risk investments such as government debt and bonds for higher yields. Investors would become extra cautious in funding deals and would be conducting due diligence with discretion. Raising venture debt won’t be an easy option for startups anymore. The fundraising activity in the coming years could dwindle down and it would take a toll on massive unicorn companies. Only a few of the unicorns would survive with a majority of them either being acquired or shut down. The valuation bubble would burst and the startup industry would see a transformational shift in how new-age companies flourish.

The message currently that is coming out from boardrooms is that companies now need to focus on revenue increments and profitability. In the coming future, startups that are prudent enough to save on costs and generate a profit will be ones that will attract further funding rounds. Winter is coming and a lot of companies might not survive the harsh funding winter.

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