Tech City startups struggling to acquire capital for further growth

One-third of businesses in London’s Tech City are struggling to develop due to a dearth of capital and skills

One-third of businesses in London’s Tech City are struggling to develop due to a lack of capital and skills shortages.

According to the Tech Futures Report, which will be presented today at the Digital Shoreditch Festival, Tech City senior executives believe that this lack of funding is causing companies to miss out on business opportunities and preventing growth. Additionally, one-fifth of Tech City businesses said that they had to make people redundant because they were unable to secure funding.

The average startup business secures three sources of capital, including angel investors, venture capital (VC) and borrowing against personal assets. However, the research states money for further growth is where companies struggle.

The research conducted by research company GfK and business advisers Grant Thornton UK LLP said that of the 43% of firms that managed to raise further capital, 23% had experienced problems, including the time it took and investors or banks unwilling to take the risk.

UK startups seek funding overseas

Alastair Paterson, chief executive of tech startup Digital Shadows, said: “There’s such a momentum in London for startups, there’s all types of hubs and incubators, angel investors, government tax breaks – it is actually the best place to be.

“I think where we’ve got to work and develop is the next stage, so once you’ve had your seed investment, there isn’t a huge amount of funding still in the UK compared to the US. That's why you see companies heading over to the US to get their funding. We’re coming to that crossroads right now, and we're just assessing where the best place to take the money from is."

Steve Leith, who heads up Grant Thornton's early stage technology team in Tech City, agreed with Paterson: “This is in stark contrast to the funding community in the US where the cycle of tech entrepreneurs reinvesting in startups is fully developed and the VC community has a greater appetite for risk.

“UK government-supported initiatives, such as SEIS relief, the MMC London Fund and GrowthAccelerator, may prove part of the solution, but further innovative private sector capital structures will be needed to fulfil Tech City’s potential and avoid a loss of talent and investment opportunities to the Silicon Valley dollar."

The research echoes what the Science and Technology Select Committee warned back in March – that the government is failing to secure financial funding for startups.

According to a report by the Science and Technology Select Committee, this is forcing UK technology companies to seek financial funding from overseas. This often leads to small companies being bought up by larger foreign companies, rather than having the chance to develop into enterprises that would benefit the UK in jobs and wealth.

The committee’s report stated that, while there is government grant funding available, the application process is often highly bureaucratic and insufficient to allow startups to develop into fully fledged businesses.

Skills shortage

The Tech Futures Report also stated that 45% of businesses claimed that a shortage of skilled workers was their biggest issue, 77% of which said they would grow faster if there were more skilled people available. The skills gap is being filled mainly by temporary placements, 94% of companies use temporary staff, with only 17% preferring to do so.

On average, Tech City firms hire six people per year, but further growth is hindered as many of these recruitments have been to replace lost talent, rather than expansion.

Doug Ward, entrepreneur and CEO of Manchester’s Tech Hub, a community workspace for technology entrepreneurs, also believes the UK has a severe shortage of world-class developers.

Ward, who also co-created Tech Britain, an interactive map of the country which shows clusters of startups, investors, communities and accelerator programmes, said: “The UK should be trying to attract the smartest people in the world. My only niggle at the moment is the immigration laws. We have Chinese computer science students who come to the UK, but because of their visas they have to leave before they’ve even graduated.

“Feedback from China is that there are considerations of educating children elsewhere for this very reason. We want people from around the world to come to Great Britain because it’s important for the economy.

“It’s crucial for the economy to attract the best talent in the world to work with UK businesses,” he said.

Ward also believes the lack of software developers in the UK can be blamed on education, calling for schools to teach Mandarin and software engineering skills. 

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