Start-ups and Slow-downs: Delivering growth in a declining market
Share on
Investment in UK tech start-ups has increased at record rates as the global economy slows after the coronavirus pandemic.
Between January and May 2022, British technology companies raised more than £12bn in investment. This record fundraising brought UK start-up investment to the top of the pack, trailing only behind the US, and surpassing Chinese investment for the first time in recent history.
Home to more tech start-up unicorns than any country other than the US and China, the UK is experiencing unprecedented growth in its tech sector.
However, this meteoric rise is set against the backdrop of a post-pandemic economy, and signs of a fall back to earth are imminent. The global market is slowing, and base-rate rises by central banks means loans are increasingly expensive.
Many start-ups formed during the pandemic (like grocery delivery services and virtual conferencing platforms) had sky-high valuations but are now fighting to prove their post-pandemic worth.
Venture capital investment firms, who too raised unprecedented funds during the pandemic, are increasingly sceptical of backing start-ups and unicorns as it becomes more expensive to invest. A now common trend in UK post-pandemic VC is “haircutting”, when start-ups raise at a higher rate than previous rounds of investment but still receive far less funding than anticipated based on valuation.
What does this mean for start-ups and VC firms in the UK?
There are now more UK tech start-ups than ever, funded by an extraordinary amount of domestic and international money. But this crowded marketplace is backed by global investors, and overseas markets are experiencing a distinct downturn.
So, start-ups must separate themselves from the pack, establishing not only feasibility but also prominence in a populous market. Meanwhile, VCs must be more selective in their investment while vying for the most viable start-ups (and ensuring that the start-ups they have already funded succeed).
In both cases, public relations and reputation management can contribute to success. For start-ups, strategic relationship- and identity-building serve to pinpoint their purpose. In the UK, investment in purpose-driven start-ups has increased to $3.5bn in the past decade.
Additionally, there is a positive correlation between strategic reputation management and revenue, key to building credibility as start-ups seek VC investment. Media coverage of start-ups has been shown to increase VC investment, performance during IPO, and long-term survival chances.
For VCs, establishing marketplace security through reputation development is key to succeeding in a post-pandemic economy.
Reputable VCs, or VCs that have a strong public presence that reflects the success and trustworthiness of the firm, benefit from less costly and larger fundraising and are more likely to invest in successful start-ups.
Reputation and public relations have been found to be more significant indicators of VC success than the age of the firm, its investments, or its connectedness in the market.
As liquidity tightens, it can seem counterintuitive at first glance to spend valuable cash to fortify reputation and fund or portfolio company profile; however, investment in PR might very well be the difference between success and failure as the market starts to turn.
Sources:
Journal of Financial Economics
