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January 5, 2023

Is this the year UK tech start-ups bounce back?

Thousands of newly laid-off tech workers and optimistic VC firms might revive the sector. But significant hurdles lie ahead.

By Afiq Fitri

Last year was a difficult and confusing year for the technology industry. After the heady highs of 2021, which saw historic levels of funding poured into the sector, investors began shutting off the tap at the sight of rising interest rates, inflation and ongoing instability from the war in Ukraine. Thousands of tech workers on both sides of the pond soon found themselves out of a job, as the big beasts of the industry began restructuring their respective companies to survive the economic downturn – sparking fears, among some, that the sector was headed for terminal decline. 

Now there are some faint signs of the UK’s tech industry bouncing back after taking a battering last year. Investors are preparing to inject life into the sector through a surge in early-stage funding for the UK’s tech industry in the new year, according to a survey published by Digital Horizon, a London-based venture capital firm. Its investigation found that 56% of UK investors are planning to increase their venture capital allocation for 2023, with one in five firms planning ‘significant’ investments. In a strong vote of confidence in the UK’s tech sector, 35% of those surveyed indicated their plans to invest in the country next year, just second to North America. 

"Against the backdrop of tumbling tech valuations, political upheaval, and an impending recession, it’s incredibly encouraging to see that institutional investors retain a strong appetite for venture capital," said Alan Vaskman, founder and managing partner at Digital Horizon. ‘As we enter 2023, there is a clear desire among LPs to increase VC allocations and a demonstrated preference for early-stage investments, with the majority stating they envisage their portfolio being mostly early-stage next year.’ 

Scrambling out a deep hole

He added that despite the economic and political turbulence in the UK, there is a "strong sense that optimism in the region remains". It remains to be seen whether that optimism is enough to revive a sector which saw thousands of layoffs and tumbling levels of investment last year. As Tech Monitor explained late last year, what statistics are available in lieu of data from the final quarter of 2022 reveal an industry that has to scramble out of a surprisingly deep hole. 

A total of 518 UK-based start-ups received funding in the third quarter of last year, a 24% decrease from the previous quarter and a 20% decline year-on-year, according to Beauhurst, a data platform which tracks industry investments. Meanwhile, UK start-ups received just £2.76bn in Q3 2022 and while that might not exactly be loose change, it is striking that this figure was less than half of the amount raised in the same period during the heady days of 2021. 

As such, revisiting the giddy heights of 2021 in terms of investment is unlikely, not least given the threat of recession currently looming over the UK economy. What might happen instead, though, is a return to the pre-pandemic investment environment where funding levels saw a steady increase over the years rather than a dramatic revival surge. ‘VC deal activity growth has been considerable year-over-year (YoY) during the past decade,’ pronounced Nalin Patel, lead analyst for EMEA private capital at Pitchbook, back in November. ‘We believe a flattening could take place in 2023, rather than a sharp decline.’ 

New innovation potential in UK start-ups

Despite these funding issues, the UK’s start-up scene might well see a surge in innovation as a result of layoffs last year. While the level of layoffs in London did not reach the scale of the purge in Silicon Valley, where more than 150,000 staff from Meta, Microsoft, Twitter, and Snap were put out of a job, one can hardly ignore the potential of thousands of unemployed UK-based tech workers to start their own companies. According to layoffs.fyi, more than 2,000 UK tech workers from companies in e-commerce, fintech, and video conferencing were laid off last year.

The wider tech sector may also benefit from this release of talent from big tech into the wider job market. As it stands in the UK, long-established companies such as Jaguar Land Rover and Barclays appear to be swooping in on this talent pool of newly-unemployed tech workers whose skills are valued by such industry giants keen on pursuing their digital transformation strategies. 

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Whether the UK will see a surge in start-ups this year akin to the US as a result of industry layoffs is unclear. However, but a renewed sense of optimism on the part of venture capital firms in the UK might serve as the impetus for a new generation of start-up founders. After all, as Harry Nellis, partner at US-based investment Accel recently told Reuters, "Many great companies have been created in relatively dark times."

Read more: UK start-up jobs are disappearing at a rate of knots – except in cleantech

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