Monday 30 March 2020 6:00 am

Why the UK's startup sector is worth saving

Daniel Korski is a former special adviser to Prime Minister David Cameron and a Vice-President of the Jewish Leadership Council.

Covid-19 has already destroyed so much. Lives, livelihoods, freedom of movement. For those on the frontlines, whether in the NHS, social care or supermarkets, or in the country’s many sick beds, the battle is fierce.

As the dominoes of our economy have tumbled, the government has quickly stepped in. First to safeguard business. Then to support workers. Now to back the self-employed. Chancellor Rishi Sunak has had the most extraordinary baptism of economic fire. But one group has so far been left to fend for themselves — the country’s startups. They now need help.

For the last 10 years, the UK’s technology ecosystem has grown at a very impressive rate. Where there was once very little seed-stage investing, the UK is now Europe’s best place to start and get financing for a technology startup. And it is not just a London phenomenon — from Bristol to Birmingham, through Leeds and Manchester, to Belfast and Edinburgh, the UK’s digital economy is up there with Silicon Valley, Tel Aviv and Shanghai.

This has created thousands of well-paid jobs, allowed the UK to be at the forefront of innovation in sectors from financial services (Monzo, Revolut, Pockit), retail and ecommerce (Ocado, Boohoo) and cyber (Darktrace), and created a flow of inward investment unparalleled globally.

As Prime Minister Boris Johnson noted in the annual Tech Nation report, technology investment in the UK soaring by 44 per cent to over £10bn — more than France and Germany combined.

Startups have also shown how vital they could be to an eventual viral victory. Last week we launched Techforce19, a joint effort between NHS and Public, the venture firm I run, to get the country’s innovator to offer solutions for the Covid-19 frontlines.

In just 24 hours thousands of startups got in touch offering to pivot
their product or focus on the challenges identified by NHS experts. Similar efforts are going on up and down the country.

But all this is now at risk. For the Covid-19 crisis threatens to underdo 10 years of progress, destroy countless solid companies and burn through VC as an asset class. Startups are being hit by a slow-down in orders, closures of offices, problems getting staff. But unlike other businesses they need fresh capital injections frequently because even the best of the bunch are normally loss-making as they grow. They are investing in growth and innovations.

This crisis threatens to dry up capital. Angel investors will likely conserve cash, not least for their own lives. Many VCs will be under pressure to slow down investing — either because they do not know how long the crisis will last or because because their investors, so-called limited partners like pension funds of family offices, have taken a bath in equity markets and so may not honour commitments made or be interested in backing new or followup funds.

As the well known investor Fred Destin has said: “Whether we hit pause for two weeks or two months I don’t know yet.” He is not alone in stopping to invest and focusing on shoring up existing portfolios.

Some companies will undoubtedly come out of the crisis stronger, for example those focused on healthtech and deliveries. But many companies that have solid business models and no reason not to succeed in a post-vaccine future, will collapse.

Even many companies that are delivering to the NHS right now will struggle. Because of the short cash runway of many of these companies — there’s a real risk of a huge number of companies (1,324 startups have raised between £100,000 and £2m in the past two years) going bust.

This will affect both early stage startups, who may not have found product market fit yet; or who have and were hoping to raise money on the back of that; as well as companies who were counting on further rounds of funding to support their growth.

There is a real risk of a triple tumble — with a slowdown in new companies as people favour secure jobs rather than entrepreneurial risk; a collapse of many companies that have just gotten going; and a stalling of companies that had real traction but who cannot now develop. After the dotcom crisis, it took nearly two years for the taps to be turned on again.

The Treasury has in the course of the crisis become the “Department of Yes”, forced to dole out support to a collapsing economy. It can understandably not support everyone. But to survive a crisis it is critical to continue to move forward, to invest in new services, new products. Stand still and you will move back.

For this reason the government should provide a package of support for the country’s startups. They are developing the innovations that we will live off in the future as everyone else battles to just keep the status quo.

In practical terms, the government should push for a seizable intervention, following the steps taken by the French and Danish governments. This is probably a £1bn action. Any solution needs to do several things. It needs to help the early-stage end of the market; it needs to support growth-stage companies; and it needs to back startups outside of London.

Co-investment by the private sector might be part of the solution but it is unwise to assume the same appetite to match funds as in normal times. It will also be important to work with existing schemes. This is no time to build new institutions — although it may be worthwhile supporting new funds.

The British Business Bank, set up during the Cameron administration at Vince Cable’s urging, has supported the UK ecosystem by funding countless venture funds.

This state-owned bank is the best vehicle to distribute funding, support new funds and get money into the hands of startups.

Backing the country’s Silicon Valleys, fens, glens, canals and roundabouts is likely to return money rather than just lose capital, even if returns will be much lower than normally. Most importantly, it will help ensure that the UK can come out of the crisis having not just survived but with new products and new services to offer a post-Covid-19 market.

Daniel Korski is the co-founder and chief executive of Public, a venture capital firm focused on helping technology startups transform public services.

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