Business

2016: A perfect storm of bad news for UK startups

By Oliver Smith 10 March 2016
Storm
Summary

Brexit, funding gaps, a global market slowdown and skills shortages are looming for Britain’s small digital businesses.

Today optimism among the UK’s entrepreneurs and small digital businesses has fallen to a half-decade low.

Just 58% of small private technology businesses expect 2016 to be better than 2015, according to Silicon Valley Bank’s UK Startup Outlook survey, that’s down from 79% who were optimistic about their futures in 2013.

“Entrepreneurs we speak with, while remaining naturally optimistic, are adopting a new attitude: Be prepared,” said Greg Becker, Silicon Valley Bank CEO and president.

“They are pulling the reins tighter on operations and retooling strategies.”

The reasons for the new cautious attitude amongst startups?

The key points are Britain’s upcoming referendum on Europe (72% of respondents said Brexit would hurt their businesses in 2016) and the ongoing challenge of finding the right talent (which 95% named as a key issue).

Another key issues on the horizon worrying startups is the slowdown in venture capital funding.

Investor slowdown

Yesterday it was reported that the huge valuations placed on Uber ($62.5bn) and Airbnb ($25.5bn) combined with the plummeting valuations of Snapchat (falling from $16bn to $12bn) and Dropbox (whose $10bn 2014 valuation is thought to have fallen) is causing startup investors to hold on to their money.

“Right now, we don’t really know what things are worth,” Mike Volpi, a partner at one of the world’s most successful venture capital investors Index Ventures, told Bloomberg.

In Silicon Valley Bank’s survey 80% of the small private tech companies asked said the current fundraising environment for startups in Britain is somewhat or extremely challenging (up from 75% who were downbeat on fundraising in 2014).

Market turmoil and new goals

Meanwhile even those digital businesses that have ‘made it’ and sold shares on public stock markets, like Twitter and payments group Square, have had a rough ride, leading startups to rethink their plans.

Silicon Valley Bank’s survey shows just 17% of Britain’s tech companies are aiming to sell shares on the stock market, but a far larger group (79%) are planning to either stay private or be acquired.

“[Startups] are anticipating a more balanced funding environment. They are considering M&A [mergers and acquisitions] an even more viable exit strategy,” added Silicon Valley Bank’s Greg Becker.

“In 2016, access to capital will get harder.”

Part of the reason for the changing attitude amongst Britain’s small tech firms is that global markets have had a terrible start to the year and are only just starting to recover.

Britain’s FTSE 100 stock index of the biggest UK companies fell over 10% in the first two months of 2016 and remains down 2% for the year-to-date. The so-called FANG group of the biggest tech companies in the world, Facebook, Amazon, Netflix and Google, bore the brunt of this downturn with their shares falling 17% in February.

For startups and investors this means they might have to look elsewhere once they need fresh funds or are looking to sell their businesses.

As this perfect storm of bad news for UK startups approaches, the days of easy money might be coming to an end.