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.