The UK tech sector enjoyed a bumper year for investment in 2021, with firms securing record levels of capital in the first half of the year alone. £26bn in venture capital cash, 116 unicorns and significant number of IPOs marked the year as a high-tide-mark.
Great news, yes, but data from Tech Nation has revealed that just 10 companies secured 20% of total tech investment from VCs in the UK in 2020. The investments that hit the headlines tended to be larger tech companies securing significant sums from VC funds rather than the ponies of the business world, the millions of small and medium-sized businesses, who drive our day-to-day economy. Businesses that contribute over £200bn to our economy.
We need to shift the focus away from the unicorns, sexy though they may be, securing large amounts of capital through high-profile VC fundraising and instead turn our attention to the SMEs that make up 99.9% of our business population, and are the backbone of our economy.
But a tech business can only support the economy by reaching profitability and by paying tax. However, many unicorns are chasing high valuations and not focusing on profitability. And so, we need to ask: how can we help our SMEs to reach or maintain profitability? And what type of funding do they need to achieve this?
A report from Innovate Finance and the Scale Up Institute highlights the long-standing funding gap, which has now doubled to £15bn annually, as a result of the pandemic.
This is concerning. Many innovative tech businesses are not reaching their potential when it comes to reaching profitability, which in turn means that they are not satisfactorily contributing to the UK economy through taxes. This is essential to pay for services such as roads, hospitals and schools.
We need to ensure that this country’s start-ups have the same access to funding as its scale-ups. And indeed, our scale-ups have the same access as unicorns: whether that is from their customers, debt, or private equity. This will be key to creating profitable tech companies across the board that will help to future proof our economy. This is especially important following the hurdles of the pandemic.
We must provide small and medium businesses with the knowledge and tools to get funding, and highlight the multitude of options available to them ‘ from start-up loans to angel investors.
Networking groups or even just talking to a fellow entrepreneur can be key to making this happen. It is important that budding business owners have mentors who can help them to navigate the funding process, talking them through the range of funding options available on the market, or a contact who could introduce them to potential investors who may be willing to back their venture.
By putting capital into only a small handful of large businesses, we are not seeing the wider picture: a big business may create a number of high-skilled jobs, but they make up just 0.1% of the UK business population and less than 40% of employment. A healthy economy needs businesses of all sizes to thrive. In turn this will pay for all the essential services our country needs to operate.
A greater range of profitable, smaller and medium-sized businesses will be the key to building back our economy ‘ not only through jobs, but through the taxes both these businesses and their employees pay, providing the funds to pay for our essential services.
We risk backing the few and forgetting about the many if we allow VCs to purely focus on unicorns. To build a vibrant ecosystem of businesses we need to support a range of entrepreneurs, not just a tiny percentage of tech founders who are deemed to be the next big thing.
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