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State-of-the-art of the UK startup market
Recent historical market trends for startups in the UK
In spite of the ongoing global financial turmoil and economic challenges faced by Europe, for years, the business environment of the United Kingdom remained not only stable but also positive, forward-looking and open for business. For the last few decades, the UK government has shown commitment to supporting new businesses, which accounted for a private-sector-led economic recovery. As of now, the UK is the worlds sixth-biggest economy and ranks high among the worlds top manufacturers (OECD, 2019).
Among other metrics, it is worth a mention that the UK ranks second among the worlds largest services exporter, with the US being the absolute leader. Besides, the Western European country is the worlds sixth-largest trading nation (OECD, 2019).
The ease of doing business is what makes the UK the most attractive place in Europe for overseas companies to base their headquarters. Statistically, the UK has more European headquarters than France and Germany combined. As for starting new businesses, the UK is recognised as the best place to set up and run a business in Europe. As stated in a report by the World Bank, on average, it takes 13 days to start a company as compared to the OECD (Organization for Economic Co-Operation and Development) average of 15 days. Amid the European countries, this metric has yet to be outperformed.
Among the most fargoing initiatives by the UK government is the introduction of the startup visa in 2011. The new type of visa served as a replacement for the Tier 1 Graduate Entrepreneur visa program. To attract foreign startupers, the UK expanded the eligibility criteria beyond the EU, the European Economic Area and Switzerland. The visa applies to those who would like to set up a business in the UK that has the potential of being endorsed by an authorised body. The latter may include a UK higher education institution or a business organisation with a history of supporting UK entrepreneurs (House of Commons Library, 2018). The startup visa is reserved for business in early stages and unlike the Innovation visa, does not require investments.
Due to the aforementioned changes in legislation and economic ties, each year, the UK seems to be witnessing one record after another. For instance, between 2015 and 2017, the number of new, UK-based businesses has risen from 608,000 to 660,000, proving that the West European country remained unrivaled as a place for starting a company. Moreover, disruptive startups has become the key for the rapid economic growth (House of Commons Library, 2018).
The nature of disruption is introducing a product or a service that sets a new bar for the entire field and compels other industries to keep up or be left behind. In the case of the UK, it has already seen such products whose founders chose this particular country for their headquarters. Last.fm and its more well-known successor, Spotify, has changed the world of online music streaming.
The new milestone that the UK is now attempting to pass is to encourage more students and recent graduates to start businesses. As per most recent statistics, each year, disruptive startups contribute as much as 196 billion pounds to the UK economy. Yet, only 5% of university students and graduates to pursue the entrepreneurial path (House of Commons Library, 2018). The government acknowledges that more often than not, young people give up on a dream of having their own businesses due to the overwhelming need to find financial stability.
It is argued that new startups are being held back at the seed stage due to the lack of funding sources. At that, traditional funding methods seem not to be making the cut. Thus, the overall trend on the UK startup market is a search for new, innovative funding models. As of now, the government intends to test on-campus funding that would allow students to receive business loans on behalf of the government. The program is now operating in several universities across the UK. Another viable alternative that has been gaining popularity is crowdfunding and crowdsourcing. Lastly, young startupers many of whom are not done with their studies yet choose Lean Startup model. They aim at creating an MVP minimum viable product to attract the first customers and establish a customer base.
Experts from a large tech startups, SeedLegals, have outlined some more startup trends that are bound to shape the market in the years to come. First, UK startups no longer need to accumulate a large amount of money in investments and/ or group investors in order to be launched. Instead, the trend is that businesses fundraise continuously from their existing professional network even though it means receiving smaller sums of money each time.
Further, the UK is witnessing an evolution in startup advising. Namely, receiving business and legal recommendations is no longer limited to specific institutions that require application and approval. Knowledge regarding startups becomes democratised and available online. Lastly, as SeedLegals report, deal terms benefit founders more than ever while previously, investors had the last say in the game.
Main growth drivers and enablers
One of the main growth drivers in the region is probably the capital of the country itself that gained international recognition as a thriving business center. Numbers and figures speak louder than words: for instance, according to recent statistics, in 2018, in London, there were 1,563 businesses per 10,000 resident adults. This is 50% more than the national average of 1,059 businesses per 10,000 resident adults. As of now, every third UK-based business is located in London or the South East region in general (to be more precise, 1.1 million in London and 874,000 in the South East).
Today, London boasts a comprehensive network of tech clusters, business hubs and incubators. It may be argued that the challenges involved with moving to the United States, the classical business destination, to start a company as an immigrant has sparked the boost of incubator programs in the EU. A prime example would be Seedcamp that runs its programs across Europe and hosts its largest event in London where the organisation itself is currently based.
The importance of London was recognised by the UK Trade and Investment that makes part of the British government. In 2011, in an attempt to encourage a healthier, more robust business ecosystem, the institution established the Tech City Investment Organisation, previously known as Tech City, East Londons growing tech cluster. Since then, the government has involved a number of high-profile companies such as Cisco, Intel and Google by providing incentive to base their headquarters there. Another meaningful piece of statistics shows off the success of the initiative states that the number of high-tech companies based in the Tech City has risen from 15 in 2008 to 500 in 2018.
Another great enabler of growth in the region is the diversification of the economy. Since the 1970s onward, the UK economy has been successfully transitioning to a service based economy characterised by a steady decline of the traditional manufacturing base. As of 2019, the greatest share of the UKs wealth is derived from the financial sector. While there are still the remnants of manufacturing and heavy industry, the value from these sectors is barely comparable to the value derived from the services sector. Besides, the government itself expresses a clear commitment to building a so-called knowledge based economy the type of economy driven by science and innovation. Today, the UK does not shy away from investing into scientific fields with wider benefits and higher risks.
The diversification of the economy and its focus on the global trends means that up and coming startups as well as entrepreneurial-minded immigrants have enough space to find their niche. For years now, the UK has been capitalising on the so-called green economy and environmentally-friendly solutions. For instance, the UK has become a leading global player in wind energy and has pursued an ambitious agenda in the development of offshore wind. The countrys interest in sustainability makes supporting green startups mutually beneficial. While the UK provides founders with a platform for growth, it also takes advantage of the new technology and initiatives.
Other trends on the UK startup market include a new successful business model subscription. This model is quite straightforward: buyers can receive any product or service delivered to them as often as they please, which ultimately puts them in control. Apart from that, it is observed that many startups build AI-based business models. While big corporations may suffer from rigid structures not exactly allowing to implement machine learning and artificial intelligence methods, startups have more flexibility and space for risk-taking and testing. Lastly, the UK is likely to remain big on cryptocurrencies. As of 2017, the West European country had had a lead on cryptocurrency exchanges while mining, on the other hand, is focused between China and the United States.
Economic and financial regulations in the UK
It is argued that the UK owes its startup revolution that started less than a decade ago to a series of well thought-out governmental regulations that took part between 2010 and 2015. In 2010, the global financial crisis was in its last stage; the same year, David Cameron came into office and expressed an intention to cut down on red tape and reckless spending. Camerons commitment to making a change found a reflection in the 2010 Coalition agreement whose pillars were proclaimed to be freedom, fairness and responsibility. The government recognised business as the main driver of economic prosperity and innovation. Thus, it was seen as imperative to boost enterprise by easing regulations and allowing new businesses to emerge and grow. The following was agreed upon by both parties:
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One-in one-out principle: no regulation shall be introduced without limiting the power of another regulation, therefore, cutting down red tape and keeping the system transparent and as uncomplicated as possible;
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Sunset clauses : each regulation is reviewed for relevance;
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Creating the most competitive corporate tax regime in the G20. This entails simplifying reliefs and allowances to tackle avoidance and reduce headline rates. At that, the government expressed commitment to protecting manufacturing industries;
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Considering the publics opinions: citizens were given the right to challenge the worst business regulations;
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Reviewing employment laws to increase flexibility in the workplace, while ensuring fairness and transparency of work relationships;
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Moving toward the one-click registration mode: enhancing the ease of doing business by reducing the number of procedures and the overall duration of setting a new business. The end goal was to outperform other countries in the region and even globally, making the UK the most attractive platform for running a company or locating headquarters;
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Repealing the ban on social tenants starting businesses in their own homes;
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Implementing the Dyson review: refocusing the research and development tax credit on hi-tech companies, startups and small businesses. If implemented properly, that measure would contribute to making the UK the worlds top exporter of hi-tech products (HM Government, 2010).
The 2010-2015 business policies were characterised by the search for meaningful alternatives to governmental regulations that were often found intruding and impeding. The government stated that regulation would be a last resort when all other measures had failed. The following ideas were considered and implemented fully or in part:
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Using existing regulation;
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Simplifying or clarifying existing regulation;
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Ensuring the proper enforcement of existing regulation;
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Enhancing accessibility of legal remedies;
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Total inaction if appropriate.
Overall, authorities argued that intricate and harsh regulations strip entrepreneurs, businesses and customers of self-agency. Well-informed decisions by both parties (sellers and buyers) are only possible on the premise of information availability and education. For instance, customers could consult independent sources for recommendations, ratings and labelling. Apart from financial literacy, self-regulation, ownership and accountability could boost enterprise.
The government suggested that new businesses adopt their own codes of practice and promote ethical conduct. Co-regulation has some similarities with self-regulation but in this case, the government is involved to a certain extent. Authorities do not impose any decisions on an industry; instead, they might work together to develop a code of practice. Since organisations and professionals within an industry know their trade inside-out, they have a clearer picture of what needs to be done to make work processes more efficient.
Apart from the aforementioned measures, the UK government employs a variety of economic instruments to make sure that the business environment prospers and stays welcoming for new entities. Authorities affect their behavior by constantly changing and improving:
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Taxation and subsidies (ex.: Research and Development Relief for Corporation Tax);
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Quotas and permits (ex.: the European Union trading scheme for carbon dioxide emissions from electricity generation and the main energy-intensive industries;
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Competition by businesses from all industries.
What is special about business regulations in the UK is that they do not only exist on paper. It is quite the opposite through years of careful reinforcement, they seem to have yielded practical results. One of the most comprehensive rankings, Doing Business, takes into account many indicators to determine whether a particular country is a good place to start a business. For years, the UK has been showing consistently good results. In 2019, the UK ranked 9th out of 167 countries assessed (World Bank Group, 2019a). As compared to the countrys main competitors for the top of the list, the UK scored slightly less than the US (ranks 8th).
At the same time, the UK scored much better than its most powerful European neighbors. For the sake of comparison: in 2019, Germany, the strongest EU economy, only came 24th; Ireland ranked 23d and France ranked 27th. On a scale from 0 to 100 where 100 is an outstanding ease of doing business, the UK has scored 82.65 and by that, surpassed the regional average of 77.80.
As seen from Figure 1, the UK ranks differently across the various business topics analyzed by experts. So far, the UK shows the best relative results in providing businesses with electricity (7th), helping to resolve insolvency (13d), giving construction permits (17th) and starting a business (19th) (World Bank Group, 2019b). When it comes to absolute scores, the UK boasts the following outstanding metrics: starting a business 95.58, getting electricity 96.45 and trading across borders 93.76. However, it would be more compelling for us to contrast these metrics to those that were obtained pre-Brexit to see whether the UK has actually somewhat lost its standing.
As seen from Figure 3, pre-Brexit Britain seemed to be providing better conditions for starting a new business (17th to 19th) (World Bank Group, 2016). The UK appears to have made major improvements in providing electricity.
Registering business property has become slightly better by 2019. The metrics that are to temper optimism include protecting minority investors, paying taxes and getting credit. Strangely enough, ongoing Brexit negotiations have not yet had a negative effect on the Trading Across Borders metric instead, by 2019, the UK has made slight but tangible progress. What is interesting though is that when we look at Figure 4, we can conclude that some of the objective scores have not changed much. For instance, even though the UK scored 78 for protecting minority investors in 2017 vs 75 in 2019, it has lost 11 positions. This may be attributed to other countries making better moves while the UK sticks to its established regulations.
Fintech/ neobank sector
For the last few decades, the UK has been at the forefront of the financial services revolution. Statistically, the nations fintech industry contributes around 20 billion pounds to the budget in annual returns. Since 2016, Business Insider has been stating that FinTech in the UK could be bigger than ATMs, PayPal and Bitcoin together. A telling example is that while 2017 was not the best year for Bitcoin, Fintech businesses were exceptionally resilient to recession.
In 2017 alone, the countrys Fintech sector attracted approximately 1.3 billion pounds of funding (McIntyre, 2019). Fintech startups owe their success to bringing disruption to the classic banking business models. Fintech industry has been using technology to provide people and businesses with comprehensive tools for managing finances and making transactions and investments. These startups now can stand competition with established brands and lead the change in the entire industry.
In January 2018, the UK introduced open banking reforms so that the banks could provide their data to third parties. The legislation requires banks to allow their customers to share their transaction data through so-called APIs (application programming interfaces). Open banking lets customers reap the benefits of ever-emerging innovations and drives more competition in the sector that has been long dominated by a few big names. Besides, as FinTech thrives, it reduces the need for physical branches. It is projected that consumer visits to branches will drop by one-third between 2017 and 2022 (McIntyre, 2019). At the same time, mobile transactions will experience a rapid increase of 121% in the same time period.
Banking apps are as sophisticated as ever, allowing customers to make instant transactions, create new accounts, freeze lost and stolen cards as well as replacing old ones. Together with a wider use of machine learning, natural language processing and artificial intelligence, it is likely that customers will be talking to businesses using chatbots as opposed to contacting call centers or physical branches. One more trend is the introduction of biometrics as passwords and pin codes are becoming obsolete. As financial data is becoming as precious as ever, biometrics can become a new frontier in data security.
The rapid rise of FinTech in the UK seems to be attracting foreign workers. According to recent statistics, almost half of employees in the FinTech sector (42%) are from overseas. Digital tech companies in London are the most connected in Europe, second only to Silicon Valley for international connections. 25% of entrepreneurs across the world report having a significant relationship with two or more entrepreneurs in London, compared to 33% for Silicon Valley (McIntyre, 2019).
All these advancements have made the UK the most disrupted traditional banking market in the world. As of 2019, as much as 15% of revenue and over 30% of new revenue is generated by new entrants to the banking sector. What drives the emergence of new players is the combination of eroded trust in traditional systems and governmental regulations that stimulate competition. Some of the new financial institutions that have emerged as a result of these ongoing trends are Monzo, Starling, N26, Revolut and Marcus from Goldman.
For now, Brits are cautious of the new companies in the banking sector. For instance, less than 20% of their customers use their services as their primary checking. However, it is projected that given the growing popularity of the new entrants in the field of fintech, more people are going to switch to this option. Of course, these dynamics did not go unnoticed, and a timely reaction of the entrenched UK banks ensued.
As of now, they are trying to launch their own digital challenges (example: RSB must have six in progress) and upgrade their key digital services. It will soon become clear whether big companies with often more rigid structures but at the same time more resources are able to respond to the intrusion. The opposite scenario looks equally possible: in the upcoming year, the new entrants may as well gain enough momentum to yield positive long-term perspectives.
All in all, the future prospects for fintech in the UK seem bright and promising. The country is at the turning point between theorising and putting new solutions to practice. The UK is likely to further develop open banking, consumer-centric applications and new payment form factors. Yet, recent political events such as Brexit raise the question as to whether the UK will remain the same friendly environment for foreign entrepreneurs.
Investment in the UK
Financial Sector: Statistical Overview
In 2018 alone, the financial services sector made a contribution estimated at 132 billion pounds to the UK economy, which accounted for 6.9% of total economic output (Figure 5) (House of Commons Library, 2019b). At that, London generated almost half of the output around 49%. As compared to other countries, the UK financial services sector ranked seventh among the OECD countries on the criterion of its proportion to national economic output.
Luxembourg became the leader with a share of 26% of national economic output attributed to the financial services sector. The described sector created many jobs whose number had amounted to 1.1 million, or 3% of all jobs, by 2018. The economic excellence is reflected in the statistics on the export and the import of financial services 60 billion pounds and 15 billion pounds respectively. 43% of financial services were exported to the EU, and 34$ of financial services were imported from the EU. In tax, the sector made a major contribution of 29 billion pounds.
Despite these seemingly good statistics, there is still a lot that is unsettling about the current situation. The intention to leave the EU presents many challenges for the financial services sector. Before the UK voted to leave the EU, European businesses enjoyed their membership of the Single Market. Any financial business authorised in any Member State could conduct its operations freely within the European Economic Area (EEA). This policy known as passporting reflected the EUs political vision for economic growth. It was also in line with the UK governments intentions to make the UK business environment a friendlier place for foreign entrepreneurs and investors.
Unfortunately, the logic of Brexit compromises this common foundation. Since the UK has confirmed its decision to leave the Single Market, the EU responded with ruling out the passporting policy. This means that the existing benefits cannot be maintained (House of Commons Library, 2019a). As of now, the UK claims to be developing equivalent policies that would leave the procedure of taking ones business to the UK intact.
Theoretically, it is a sound and reasonable decision, and yet, in practice, the process is likely to be excruciatingly slow and subject to political considerations. Moreover, the UK will gain full autonomy on managing the equivalence policies, meaning that it can review or cancel them unilaterally. It does not appear exactly attractive as it creates uncertainty for foreign businesses (House of Commons Library, 2019a). Probably, one of the ways to evaluate how healthy the current business environment is in the light of recent events is to analyze investment trends and opportunities.
Investment in the UK: Statistical Overview
As of 2019, Brits seem to be big on investment: the number of people who give it a go seems to be much larger than expected. As many as two million people have invested money in stocks and shares. 12.4% of UK shares are bought and owned by individuals with almost half of them (43%) being women (Finder, 2019). Some other quick facts that could help to paint the full picture of the UK investment environment are the following. The total value of all stocks traded across the globe is estimated at $68.212 trillion. As compared to these metrics, the London Stock Exchange (LSE) is estimated at 5% of the global value (the total of $3.76 trillion). Below is a breakdown of who owns UK shares and what percentage of them precisely (see Table 1):
Table 1. UK share owners.
Despite the piece of statistics above showing clear interest of foreign companies and individuals in owning UK shares, other metrics may temper the optimism. One of the key metrics that help to understand the situation is Foreign Direct Investment (FDI). It is defined as the amount of money that UK individuals or businesses have invested in other countries (outward) or other countries have invested in the UK (inward).
As it turned out, as of 2019, outward FDI has been at an all time high and totaled 91.4 billion pounds. The UK companies and individuals have invested the most money in the US. At the same time, the UK has lost some attractiveness for foreign investors. Inward FDI fell from 192 billion pounds in 2016 (pre-Brexit) to disastrous 92.4 billion pounds. The greatest investor is Japan: it invested as much as 29% of the total value of inward FDI, or 27.1 billion pounds (Finder, 2019). At that, what could be telling for us and help us to analyze the situation further is the dynamics in the investment banking sector.
Investment Banking
Investment banking is defined as a subdivision of a bank or a financial institution that serves governments, corporations and institutions by providing advisory services on underwriting (capital raising) and mergers and acquisitions (M&A). Basically, investment banks are the key mediators between investors and corporations the former have money to invest, and the latter need funding to realise their projects and run their businesses. The UK traditionally had a strong investment banking sector, and yet, recent political events must have shaken the grounds and made it lose its standing.
By 2019, US investment banks dominated the rankings in the UK. At the same time native UK and European banks have shrinking market shares and staggering revenues. Experts emphasise how Brexit has weighed on deal making resulting in a 36% decrease in investment banking revenues as compared to the same period in 2018 (Clarke, 2019). Internationally, the only European bank that solidified its place among the top five is Barclays. The UK has always been central to Barclays transatlantic investment operations that were given a strong head start in 2015 (Clarke, 2019). For the first few years, the strategy was working out well, allowing the bank to gain more market share. However, in the first half of 2018, following Brexit negotiations, Barclays lost $135 millions and lost its standing.
When it comes to mergers and acquisitions, the UK is also showing results that are from optimistic. The total value of announced M&A in the UK has decreased by 66% even though the average decline across Europe, the Middle East and Africa is estimated at 34%. Globally, UK investment banks continue to lose competition to their Wall Street contenders. So far in 2019, European investment banks have received 25.3% of fees an all-time low while their US counterparts have pulled in 52.7% of revenues.
Yet, some argue that the UK has yet to make big moves to amend the situation. Positive changes could come from collaboration instead of competition. For instance, US-based Jefferies has shown good growth dynamics by jumping from the 25th place in 2018 to the ninth in 2019. The US investment bank has been building a strong UK and making significant investments in its European business, including in the UK.
Startup Funding in the UK
Traditionally, there were plenty of opportunities to receive funding for a startup in the UK. The most popular forms of funding included the following:
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IPO stands for an initial public offering (IPO), a process in which shares of a private corporation are offered to the public in a new stock issuance;
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VC, or venture capital, is a type of private equity, a form of financing that is provided by firms or funds to small, early-stage, emerging firms that are deemed to have high growth potential, or which have demonstrated high growth (in terms of number of employees, annual revenue, or both);
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Angel investment is an investment by a wealthy individual in support of a new startup, usually in its early stages;
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Private placement is a funding round of securities which are sold not through a public offering, but rather through a private offering, mostly to a small number of chosen investors.
Yet, in the light of recent political events, the UK vivid startup scene can be in danger. One of the reasons for that is the possibility of no-deal Brexit is very much alive. No-deal scenario means that instantly, the UK would leav
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