Investment into UK start-ups and high growth companies fell in 2016, with the second quarter seeing especially large falls. Was the fall down to Brexit related issues, or was there another cause?
According to Beauhurst, total investment into UK start-ups and high-growth companies was £1.9 billion in the first half of 2016, marking an 11% decrease from the second half of 2015. But there was an even larger fall in deal numbers, down 22% to 557.
But while the period saw sharp falls, and deal numbers dropped to their lowest level since 2013, Beauhurst said: “Investment amounts increased at the seed and growth stages, due to fewer, high-value rounds,” while deals worth more than £10 million did see an increase.
Beauhurst said: “Overall investment in the first half of 2016 reflects that the money is still there, but fewer investments are being made, and so the average deal size is growing.”
The fall may at least be partially down to the fact that 2015 was exceptional. For example, the technology sector saw both deal numbers and total investments fall from the second half of 2015, but it nonetheless saw the second highest level of total cash investment ever recorded.
Among software companies, deal numbers fell, but the total amount invested was at a record high.
Beauhurst speculated that the increase in total investment into the software sector could be explained “by the maturing of a number of companies that are bolstering figures with large growth-stage investments.”
So what effect did the EU referendum and its final result have on these figures?
It is surely unlikely that the Brexit vote had a marked impact, as it came right at the end of the period. But uncertainty ahead of the vote may have taken its toll. Beauhurst said: “We cannot prove causation, but the uncertainty around the vote and future relationship with Europe will almost certainly have resulted in deals being delayed, or abandoned altogether.”
Beauhurst highlighted two areas in which the Brexit vote may cause ongoing difficulties.
Firstly, there is the European Investment Fund (EIF) which supports 144 UK venture capital and private equity funds. Beauhurst said: “Although the EIF has stated there will be no immediate change, “we doubt the EU will continue to fund the UK post-Brexit – though SMEs can certainly hope.” This is undoubtedly true, but Beauhurst did not mention that in theory at least, the UK could re-channel some of the money it may save from no longer contributing to the EU budget into a UK version of this fund.
Beauhurst also referred to a recent study by the European Start-up Monitor indicating that 44.8% of the UK's start-up employees come from EU countries”. Beauhurst said that this is “a sure sign of the shortage of tech talent in the UK” and suggested that “ending, or restricting free movement could have a serious impact on access to skills, productivity and innovation.” One possible solution to this particular challenge, and not considered in the Beauhurst report, may be to offer work visas to EU citizens looking to work in specific areas of the UK, such as London, an idea that has been gaining momentum of late.
Beauhurst did, however, say that “Brexit could also have some positive impact on start-ups and scale-ups. One silver lining could be, saying goodbye to EU State Aid rules. These limit the amount of help a country can give businesses in an effort to maintain competition across the EU, and affect VCTs and Innovate UK grants, among other schemes. Leaving the EU might see the UK able to provide more support to high-growth businesses in the future and leap ahead of other members. “