Supporting our Startups
tl;dr — UK Government needs to provide some form of support package to the startup ecosystem, and needs to provide it quickly. Why? Investment is slowing down, corporate capital/ revenues are drying up and, without something being done, prospects for a vital part of the UK economy are grim. We urgently need to work together to figure out what this something is.
You don’t need me to tell you that it’s been a pretty crazy few months — both here at home in the UK and further afield around the world. And yes, I’m aware ‘pretty crazy’ is a bit of an understatement…
Personally, my partner and I have been self-isolating for the last few weeks after I developed a fever in mid-March. I’m ten days clear of the worst and thankfully my partner’s not had it too tough, either. But it was very unpleasant — unlike any other illness I’ve ever had.
Anyway.
While doing what I can to get (and then stay) healthy, avoiding the 24hr news cycle of doom and the ever-increasing positive test counts (and worse), worrying about jobs and family and everything else going on, I’ve been watching what the UK is doing to support our startups.
For reference, I’m part of the management team at the ATI Boeing Accelerator. We’re a Seed to Series A stage accelerator for innovative startups building software solutions for the UK aerospace sector. We have 9 incredible startups (more on those a bit later) on our first cohort. The programme’s supported/ funded by industry — Boeing and GKN Aerospace — and the ATI (via the Department for Business, Energy & Industrial Strategy).
Outside of the ABA, I’ve been designing and delivering startup accelerators across the UK for the last 3yrs+ (I ran my own startup before that) and I’ve personally invested in ~15 startups over the last 5 years or so.
The UK Government have done wonders quickly designing and then rolling out support packages for profit-making businesses, full time employees and the self-employed since COVID-19 got serious in the UK. They’ve also listened and responded to feedback — for example, with the update to CBILS (announced a month ago) late last week. For that, they should be applauded.
However.
Startups need more, and we need it now
As numerous voices in the UK startup ecosystem have flagged, there’s work to be done for the loss-making, growth-focused, early stage businesses I’ve worked with for the last five years. Unlike the French and German Governments, the UK still hasn’t announced a support package that supports these startups: the high growth businesses of tomorrow.
To give you some context to our early stage ecosystem: Beauhurst/BVCA data from 2018 suggested there were ~1,300 startups in the UK who’d survived long enough to raise external capital. Zooming out a bit, the estimated 30,000 startups/ scaleups (high growth businesses) in the UK employ over 3M people. That’s no small economic contribution from UK businesses developing potentially world-leading R&D.
As Seedrs Chairman Jeff Lynch says:
“There were 62 unicorns in the UK last year according to Dealroom, and there are countless more successful, fast-growing businesses below that level. As these companies have emerged and grown, they have created a wave of jobs across the country, put the UK at the forefront of innovation in a number of industries, and introduced a generation of investors to the returns potential of this asset class.”
The nature of a startup means you plow your money into high growth for that potential high return. At the early stages, that generally means you’re a loss-making business, which means you don’t qualify for things like CBILS.
As times are tight, and are likely to get much tighter, we’re seeing investors advising their portfolios to drastically cut costs to increase cash runway to summer 2021, or even 2022, where possible. Investment hasn’t yet dried up (although rounds closed dropped 22% in March) — but the funding landscape has started becoming more competitive and, according to Dealroom, we’re already seeing less international growth money being spent in the UK.
All of that is before you start looking at commercial relationships/ revenues slowing down, as established business pauses spending activity or reduces non-essential spend.
Scary times.
Looking on the bright side of life
Closer to home, the 9 startups from ABA’s first cohort are doing what they can to weather the COVID-19 storm. And, as it’s always important to note in tough times, it’s not all bad.
One of our teams has, in the last four days, pivoted into the Coronavirus and built a new product that is already being utilised in the UK’s ventilator challenge. Another has been supporting the effort to 3D print PPE for frontline healthcare workers. Another two have been working on a Proof of Concept to track (legitimate or otherwise) test kits across the supply chain. The startup spirit epitomised: well done all!
But, as always, there’s a caveat.
We’ve, so far in April, had one funding round fall apart with Corporate VCs pulling the plug to focus expenditure elsewhere — with 10+ jobs now on the line. Another two raises appear to be stalling (one halfway through a round, the other as it’s getting started). New POC relationships are either so small they’re not worth the time it takes to execute or they’re being postponed left, right and centre. This obviously risks expected revenues the startups now need to make up with (cold) new business efforts elsewhere. It’s also worth mentioning all but one of these startups are post-product and generating revenue, but none are profitable.
One founder told me:
“We raised VC investment in Q1 2019 and have grown at 400%. After successive quarters of sustained growth, we were about to raise another round of investment in order to continue scaling. Due to the effect of COVID-19, aerospace and automotive sales have fallen by over 50%. This, combined with the general uncertainty, means that VC investment is not an option at this time. In order to extend runway, we have furloughed 70% of the workforce and the rest have taken 20% pay cuts.
Another said:
“Thanks to the ATI Accelerator and others supporting us, we’ve just come to the end of a 7 year sprint to find our product market fit. We now have great clients, a good growth profile and a strong team. COVID-19 threatens all of that: clients can’t pay, others won’t join and our team still needs to make a living. If we don’t get significant support in the next 30 days, we risk losing everything we have worked for over the last 7 years.”
Another added:
“Being a young startup operating in the Aerospace sector, we have been hit particularly strongly by the current crisis. We were about to close two contracts with international aerospace companies, but now everything has been put on hold due to the COVID-19 crisis. This severely impacts our revenue projections for the next 12 months and hinders our capability of raising further funding from investors. Without support from HMG, we are at serious risk of going under. This situation can result not just in loss of high-value jobs for the UK economy but also loss of innovation potential and competitiveness for the UK Aerospace industry as a whole.”
So what do we do?
Extending the Runway
The recently-proposed Runway Fund (go here and search ‘Runway Fund’ for more detail) could go some way towards alleviating these issues. £300m, funded by the British Business Bank/ other investors and overseen by an impartial and independent group of startup ecosystem parters, invested across 600 of the UK’s startups via unpriced SAFEs to help short-term cashflow and mitigate some of the COVID-19 unpleasantness.
What would this mean in practise for one of our teams? The founder said:
“The Runway Fund (Gov supported £500k) would allow us 12 months additional runway, continue growth on the same trajectory (inc. additional hires) and crucially to delay our raise until the markets are in recovery.”
It’s clearly a start; but it may not be the silver bullet everyone’s looking for. It also doesn’t seem like a quick initiative to get off the ground. Startups invariably fail — it’s the name of the game — so funding any and everyone because times are tough isn’t an effective use of taxpayer’s money (as the response has suggested). But providing an opportunity for the viable ideas, teams or products is.
So what’s an alternative? Buy-in from pre-existing investors and match funding, something else entirely? It’s clearly a work in progress and something that can’t be rushed.
The SOS campaign suggests other initiatives, which sound both sensible and relatively quick to get going:
“The Government must fast track payments to startups from public funding schemes — in particular R&D tax credits and Innovate UK funding grants. Private sector liquidity has taken a major hit during the crisis with angels and micro-funds unable to provide startups and high growth businesses with bridging money. It is within the Government’s power to provide these companies with immediate liquidity by expediting the release of these funds.”
So what’s next; and what’s the ask?
We’re in a challenging landscape that changes, day by day, at the moment. But when some of these early-stage startups have days left to survive, they need all the support they can get.
As another of our entrepreneurs said:
“As we transition to a post-coronavirus world, we will need innovative companies who can rebuild our economy and, as one of our clients put it, ‘COVID-19 is digitisation by force’. Startups will be essential in building whatever comes out of the other side.
“Nobody is thinking about flying right now. But, as we return to service and some level of normality, how do we make sure that there are still startups to support the aerospace sectors?
“There are definitely winners and losers amongst tech companies from the situation we find ourselves in; if you are video conferencing your outlook will be better than a dating app, for example. Any support should help startups not just survive, but also prepare to help for what will need to come after. It should not just support companies that are already winning from the situation.”
Government needs to (continue) working with the startup ecosystem to build initiatives that work but, most importantly, it must do so on a sensible timescale. It’s been a month since the first business support packages were announced, and we’re not much closer to anything applicable to startups.
This needs to be done quickly — so that we don’t push already at-risk businesses into insolvency; especially given the country will need this R&D and innovation if we’re going to get out of the COVID-19 unpleasantness quickly and relatively unscathed.
As a founder, you should speak up and talk to the people who can put your feedback to work. Capital Enterprise, COADEC, PUBLIC, TEN etc. — these are all stakeholders who should know what you and your business needs. If you’re trying to raise, Chris has some great advice in his latest blog.
If you’re an aerospace founder, lean on the support structures, like the ATI and ADS, that are already connected to Government. You can also contact the ABA team and we’ll do what we can.
And remember to hold these entities accountable: it’s on you to share (loudly) what you need, but it’s their job to represent your interests — so make sure your needs are listened to and acted upon wherever possible.
Government, if there’s ever been a time to be agile and #bemorestartup, it’s now.
Stay healthy, stay safe and stay home x
If you’re a founder looking for advice, support or anything else in these challenging times, you can book a chat with the ABA team and I by signing up here. We’re also going to be running a few webinars to support the wider ecosystem. If you’d like to be notified about these, subscribe to our newsletter and follow the team on Twitter.
If, like me, you’re finding the whole situation a bit bizarre (and occasionally utterly miserable) and need someone to talk to — as always — my DMs are open.
Lastly, if you’d like to learn more about the work we do with the ATI Boeing Accelerator, or you’re an investor looking to connect with our portfolio, drop me an email. If you’d like to discuss accelerators more broadly (especially virtual programmes!), Gabriela and I would love to have a chat.
