Impact of COVID-19 on the Start-up Ecosystem

Regardless of what start-up sector you work in, the impact of COVID-19 pandemic has had upon the world’s ecosystem has been severe. At the start of the year, 2020 was billed as a “fantastic year” and the start of a “remarkable decade” for the UK by Prime Minister, Boris Johnson. The realities of the situation are not quite as the PM may have predicted.

However, as the old saying goes, adversity breeds opportunity and it is possible that the pandemic will permanently reshape the landscape for UK start-ups for the better.

Tech is king

Whilst the majority of industries have been hit hard by the effects of Coronavirus, those that have embraced and integrated technology at its core have seemingly thrived. The industries which have suffered the most are those that require the most human interaction, namely hospitality and travel. Whereas those that require little to no person-to-person contact have seen incredible growth and investor attention. In particular, there has been a marked success in areas such as e-commerce, digital education, e-health, public cloud, media and gaming.

It has been clear that those businesses with an online presence have fared better than those who were heavily reliant on the high street. A good comparison would be to compare ASOS and Primark. The latter, an older more established brand has no online marketplace and so struggled to generate revenue during lockdown. In contrast, the former, an online tech-driven business, has seen its revenues and share price skyrocket since the start of the pandemic.

Tech start-ups have always been seen as innovators, adopting and creating new technologies or ways of working before the bigger conglomerates. The pandemic is a catalyst for all businesses to modernise, but with tech start-ups driving innovation they will quickly become one of the most important players in the UK economy.

1984 or 2020 – the UK Government as a Big Brother for start-ups

On 20 April 2020, the Chancellor announced the Future Fund scheme as part of the Government’s support for high-growth start-ups. The Government earmarked an initial £500 million and by 26 July 2020, 500 businesses had been approved equating to £512.9 millions of taxpayers’ cash. That figure is expected to be far higher today as the scheme has been extended.

The Future Fund’s primary purpose was emergency funding relief for cash-strapped start-ups, but the long-term impacts of the Future Fund could be significant. Whilst primarily a loan, there are a multitude of conversion triggers which can covert the loan into equity. This means the Government will have an equity stake in a significant number of early-stage businesses going forward.

Whilst Government involvement in the private sector has always been limited, they now not only have a vested interest but also an opportunity to provide long-term support for start-ups and help grow UK businesses like never before.

What is perhaps of concern is the Government’s apparent disinterest in incentivising private angel investors to invest in start-ups who are struggling as a result of the pandemic. The existing SEIS and EIS schemes are generous and hugely important in encouraging investors to make high risk investments in start-ups. However, there are limits to the availability of those schemes, particularly for businesses that are in difficulty. The government has so far missed an opportunity to help out earlier stage start-ups unable to access the Future Fund.

A ‘Whip-Around’ for Investment

Certainly, within the London tach sector, there are two statements of facts that can be applied to most start-ups: firstly, they will be loss making, potentially for a considerable period of time, and secondly they will rely on continued investment as they build traction and move towards break even. Historically, investment has tended to initially be sourced from angel investors (high-net worth private individuals) and then later from VCs.

During the current pandemic, VCs have really come into their own. With angels impacted by the recession, and potentially being more cautious about their investments, larger angel rounds are few and far between.  It is consequently very difficult for a start-up to “level up” to the next stage of their development without VC funding and so VCs have become key for both progression and survival of a whole range of start-up businesses. Whether or not the previous balance between angels and VCs is restored as things return to normal is something that will dictate the shape of the UK start-up ecosystem in the years to come.

The Dreaded B-word

Coronavirus hasn’t been the only thing that has changed the landscape for start-ups in recent months. Brexit has had a massive impact. Start-ups have had to take significant steps to adapt and adjust to deal with the (unknown) challenges of Brexit over the past 4 years. It has been reported that one in four start-ups lost investment due to Brexit and many have had to source diversified funding or become more revenue reliant.

Access to the single market has been crucial to allow start-ups in the UK to export their goods and services to the EU easily and cheaply. Clearly a no deal Brexit (or “Australia- style” Brexit as the Prime Minister repeatedly alludes to) coupled with the disruption that Covid-19 has had on start-ups, risks making the export of goods far more difficult.

The result of the uncertainty and disruption caused by Brexit has been that many start-ups have moved from the UK to the EU, and many other businesses have set up in an EU jurisdiction instead of the UK. A huge number of founders of UK start-ups are not British, but European. Many founders of start-ups have minimal geographic limitations when it comes to where they live and work. It is perhaps not surprising that the anti-EU sentiment of the past years has discouraged founders from basing their business in the UK. However, the UK remains a fantastic place in which to set up a start-up and it shouldn’t take much to lure back those founders who have chosen to incorporate elsewhere.

Evolution or Stop Gap

The next few years will be difficult for the UK. COVID may well not go away entirely, and we may be forced to live with it. At some point, the Government will have to take financial steps to balance the books and repay the billions that have been spent over the past 6 months. UK start-ups benefit directly and indirectly from a raft of generous support from Government. The economics that underpin our ecosystem are complex and delicate. It is vital that Government protects the start-up sector by maintaining the various support and reliefs available to it.

Many start-ups have and will fail due to the impact of COVID. Yet, many start-ups have been able to pivot and have become less insular and more expansive in their thinking. Founders of start-ups that have failed will overwhelmingly pick themselves up, learn lessons from their previous business and set out on a new start-up journey. We believe that the start-up sector that will emerge (bleary-eyed) from 2020 will be stronger, more innovative, more resilient and better able to compete and survive than that which left 2019 full of optimism. 2020 has been a year of horrors; but the Prime Minister may yet be right: 2020 may be the start of a “remarkable decade” for the United Kingdom.

Michael Buckworth is CEO and managing director at Buckworths.

About Buckworths

Buckworths is the only UK law firm working exclusively with start-ups and high growth businesses. Founded in 2011, the firm has offices in London and Manchester and advises start-ups in a range of sectors with a particular emphasis on tech, fin-tech, and hospitality businesses.