KEEP THE MONEY FLOWING

UK start-ups raised $30 billion last year. While that’s a drop from the peaks of 2021, it was still 72 per cent higher than the 2020 total, according to Tech Nation in its last report. But with the landscape for investment funding tightening, can businesses still attract investment?

By Nicky Godding, Editor

With the very public demise of the USA’s Silicon Valley Bank in March, and many global technology firms resizing downwards after their pandemic boom, does this mean it’s more di cult for startups and scale-ups to raise the funds they need to grow?

Almost certainly. But for entrepreneurs completely invested in their technology innovations, while it may take a bit longer to raise the funding – seasoned and patient investors haven’t lost their appetite for a well-researched and developed idea which has real world benefits – look at the growing appetite for investment in fusion (see our interview with Tokamak Energy elsewhere in this issue).

According to the British Business Bank’s Finance Markets Report 2023, lending volumes grew in 2022 with challenger and specialist banks accounting for a record share of gross lending. But there are increasing signs of di culties in accessing finance, the report’s authors admitted.

And finance to support innovations are essential to deliver the long-term economic growth the country needs, it added.

The bank’s March SME Finance Survey revealed that gross bank lending increased by almost 13 per cent in 2022, but net lending fell by £8.5 billion in large part reflecting the repayment of Covid loans.

Green innovation is the way-to-go

For the smaller business equity finance market specifically, investment activity has slowed considerably since Q3 2022.

Recent years have seen larger equity deal sizes and increased company valuations but in recent months investors have re-evaluated their positions leading to smaller deals and lower valuations.

So what are investors buying into?

Green innovation, according to the report, with net zero deals outperforming the wider equity market. These deals currently make up 12 per cent of all smaller business equity deals compared to only five per cent in 2018, and deal values are rising even faster. The investment value of net zero-related deals rose by a hefty 184 per cent over the past year, soaring to a new record level of £1.7 billion.

Innovative businesses are more likely to use some form of external finance (65 per cent versus 58 per cent of non-innovators, according to the British Business Bank’s report). Smaller businesses seeking finance to innovate are also reported to be using a wide range of finance products, with many smaller businesses opting for grant finance, asset finance or bank overdrafts to help them develop and adopt innovative products and processes.

However, the availability and cost of finance remain significant barriers to innovation.