As the UK economy continues to tighten, startups continue to face uncertainty providing a potential opportunity for VCs to pick up cheap deals.
According to data from advisory company Startup Genome, the failure rate of UK startups is currently 60%, with the primary reasons being running out of cash or failing to raise new capital.
While VC funding in the UK is also struggling, with a report from PitchBook detailing how the opening quarter of 2023 saw VC funding in the UK fall to £2.9 billion, this has put a strain on the declining value of startups as they continue to battle the consequences of the macroeconomic environment.
Claire Trachet, M&A expert and CEO of business advisory, Trachet, comments on how the fate of these UK startups could impact the M&A sector:
“With the Bank of England announcing an interest rate rise to 5.25% coupled with an inactive IPO market, scaling businesses will find it increasingly difficult to secure funding. As a result, this presents optimism for VCs and investors who will be able to capitalise on these startups.
“Acquirers know they will be getting a bargain from low valuations, potentially leading to a flurry of M&A deals, presenting a more positive outlook for M&A activity in the UK. Whilst these startups could sell out for less than what they are worth, it also presents a greater opportunity compared to failing as a whole.
This trend of startups selling parts of their business – or the entirety of it – could continue as various companies are suffering from having raised excessive funds and presenting unrealistic valuations.
According to a report from Innoven Capital, approximately 55% of early-stage investors feel that startups were overvalued in 2022. As a result, these companies are often left with business models that are unable to tackle the current market’s challenges.
Monty Munford has more than 15 years' experience in mobile, digital media, web and journalism. He is the founder of Mob76, a company that helps tech companies raise money and exit. He speaks regularly at global media events with a focus on Africa, writes a weekly column for The Telegraph, is a regular contributor to The Economist, Wired, Mashable and speaks regularly on the BBC World Service.
