Amidst a period of economic turbulence, with soaring inflation rates leading to the Bank of England’s 14th consecutive interest rate hike to 5.25%, there are significant concerns surrounding uncertainty shrouding the UK’s investment ecosystem. Notably the alternative investment market (AIM), primarily catering to smaller British companies, has seen a major decline with its value dropping a notable 30%. Despite this, overseas buyers are capitalising on the current market conditions, snapping up bargains and seeing value where domestic investors seem hesitant. Claire Trachet, M&A expert and CEO of business advisory, Trachet, comments on how current economic conditions can create significant investment opportunities for British investors – particularly in early stage businesses.

Despite the UK facing significant market challenges, it still leads Europe in various sectors including tech and financial services – boasting a strong increase in market share for foreign direct investment (FDI) investments to 26% of all European financial services projects. According to research by Kearney, the UK remains in the top 5 most attractive FDI destinations in the world highlighting its robustness. Yet, the UK holds the title of lowest number of business investment in the G7 according to IPPR. This highlights the risk averse stance of British investors within the current economic climate.

A combination of these socioeconomic and geopolitical factors has now resulted in a severely impacted startup ecosystem with company valuations dropping considerably at the point of exit. According to Pitchbook the average early-stage valuations (Series A to C) are down 23% from Q1 of 2022 – the start of the tech downturn – while late-stage valuations (Series C+) have fared substantially worse, registering a year-on-year decline of 77%. Nonetheless, the UK maintains a thriving ecosystem for innovative ventures, with world-class universities where it ranks 3rd in the world for published scientific research.

Trachet highlights that despite having boasted supportive government policies such as R&D credits and grants, there needs to be an added focus on incentivising local investors towards early stage businesses. Creating an ideal environment for entrepreneurial growth and cutting-edge technologies is something that needs to be carried out from the top down. The nation’s capacity for entrepreneurship and its dynamic startup community reflects a substantial untapped potential within its borders.

Claire Trachet (CEO/Founder) highlights the value in investing in domestic startups:

“The current economic climate is presenting major challenges for companies with limited cash reserves. The Bank of England announcing an interest rate rise to 5.25% coupled with an inactive IPO market, means scaling businesses – predominantly in tech – are finding it increasingly difficult to secure funding. This is a significant concern for even healthy privately-owned companies, as declining shares of similar publicly traded firms can lead to a decrease in their value. We know companies will have to make difficult decisions and give up a larger portion of their equity in order to raise the same amount of cash and expect this to result in a growing number of down rounds in the coming year.

“Yet, the UK remains a fertile ground for innovation. Entrepreneurship thrives, fuelled by world-class education and supportive policies. As the dust settles, these undervalued startups could prove to be very lucrative for those with foresight in the UK’s potential for innovation.”

“The UK faces significant structural challenges from a macroeconomic perspective. Despite deal volumes decreasing by 55% in the first half of 2023 compared to 2022, the UK remains the most appealing investment option for European investment. While it may not be the most vibrant global market right now, the UK presents an opportunity to acquire exceptional businesses at discounted prices – mitigating the impact of interest rates on leveraged buyouts from private equity. Therefore, I believe that the UK’s current state offers a unique chance for strategic investment presenting a clear opportunity for the startup and scale-up community, particularly in tech. Tech investment was a sector that was highly regarded for investors and lenders, and contributed to high revenue, however it has become evident for many investors this is now an investment the bank will not recover – this will likely spark a wave of M&A activity in the sector.”