Next 18 months tough but not insurmountable for scale-ups

The past 12 months have represented some of the most challenging for startups, with the continuation of interest rate rises – most recently to 5.25% – and soaring inflation, meaning businesses have found it more difficult to access funding and deal with expenses.

As a result, new data from Carta has found that Q2 of 2023 witnessed the highest number of startup closures ever recorded. Whilst interest rates and inflation are expected to fall towards the end of the year, startups are still facing strong headwinds and as a result, face various challenges in the upcoming 18 months when trying to scale up. 

Are better times coming?

Despite this, I predict the end of H2 will represent a more optimistic period for startups, and the outlook will start to improve. There will be a growing number of investors who will be sat on a dry powder pile, having paused investments due to uncertainty in 2022 and the first half of this year. Falling valuations are likely to further catalyse dealmaking and investment activity, but it will be vital for startups that are looking to raise or exit to enlist expert financial support and advice to ensure they do so on the best terms possible. 

What’s happened this year?

Looking back at the year so far, the startup community has experienced various setbacks, particularly in terms of funding. There was the collapse of Silicon Valley Bank (SVB) which left startups across the globe in a serious financial situation. This was a devastating blow to startups, as SVB acted as a key player for startup growth and investment, being used by close to half of VC-backed startups in the US. When the announcement was made, it was extremely difficult for founders – they were stressed by the idea that they might not be able to make payroll within the next 30 days, not able to pay software providers, and so much more – this was the first of a knock on effect which saw First Republic Bank and Credit Suisse fall victim to similar fates.

For startups who did not have the luxury of falling into the safety net of international investors, this posed a difficult dilemma. At the same time, VC firms were also feeling the impacts of cash flow, making them less likely to invest in startups at such an uncertain time in the market. The downfall of these banks meant that many smaller startups struggled to find different forms of funding support for the growth of their business, making it even more difficult to reach a stage to go public. Around the same period we saw Tech Nation, a British staple for the startup ecosystem, lose its funding to Barclays Eagle labs. When it was launched, Tech Nation represented a new era for tech, away from institutional finance which many startups can’t rely on.

During these challenging times, where the economic outlook appeared quite bleak, ChatGPT brought about a wave of excitement, dominating headlines, and presenting a new opportunity for generative AI (AI) startups. Following this, we’ve seen the UK government pour investment into the sector with the hopes of cementing its position as a contender in the global tech race. The use of AI is also helping startups work more efficiently, by streamlining tasks that would otherwise take more time and effort, such as data analysis and automating repetitive tasks. Despite this, startups should be wary of the potential risks that AI can cause, with more calls for increased regulation. 

The UK’s scaling issue

In general, startups at different stages have been struggling to succeed, whether that be series A, B, C, and so on – currently, we’re seeing a difficult period for scaleups, particularly around the series B+ mark. Not only does this come from the economic challenges in the current market, but also a decade’s worth of generous lending, that heightened their funding rounds and led to lofty valuations which can lead to unrealistic expectations, inefficient use of capital, increased pressure, and difficulty securing additional funding at later stages if growth targets aren’t met. This has led to a number of startups failing, which we’ve seen countless times, most notably with the likes of Britishvolt. Cases like Britishvolt and the thousands of others who fall victim to these circumstances should be a lesson to founders. It’s so important for startups to readjust their business strategies to reflect investor priorities, which currently centre around prioritising profitability and product over growth at all costs. 

Dual track planning: fundraising and M&A

The best advice I can give to founders is to consider a dual track plan and begin to consider different avenues to carry out growth plans, prioritising optionality. In the current environment, it’s crucial for startups to potentially consider an exit alongside their next funding round plans. For those who choose to go down this route, there is the challenge of receiving difficult terms when trying to complete the deal due to the valuation crunch. 

Due to this, the need for an expert advisor has become critical in getting deals over the line. With the help of an expert, founders can navigate negotiations with an experienced professional who can ensure they get the best deal possible. In this sense, founders will feel supported during the negotiation process, leaving less pressure on them to accept a deal that may be undervaluing the business.

In conclusion

Founders must recognise the challenges they face, reflecting on both the present situation and the likely developments over the next six months. Despite these difficulties, I see an optimistic future on the horizon. As the year progresses, investors are expected to become less reticent, recognizing and actively pursuing new opportunities. This shift will favour startups resilient enough to weather the current challenges, positioning them more advantageously to secure funding. Getting deal ready now for the end of the year will be the key factor which will see scaleups thrive.

Claire Trachet - CEO and Founder of Trachet

The Trachet advisory team has been helping founders accelerate growth since 2016, utilising decades of cross-industry experience as one of the only female-led teams in the sector. Trachet also firmly believes in the importance of sourcing and matching the right buyers for their clients. Their people-first approach ensures that the businesses and founders they work with are able to secure finance or complete deals in a way that allows the company to achieve their commercial growth goals while fulfilling its mission. Trachet has significant experience of working across sub-sectors in Tech, such as CleanTech, DeepTech (AI, NLP, University spin-outs), TravelTech, FinTech, SaaS, marketplaces. Beyond Tech, they have provided its advisory services across a number of sectors including Chemicals, Infrastructure, Healthcare and Natural Resources.

Trachet