By David Mott, Founder Partner, Oxford Capital
As we reflect on 2022, it’s been another year of challenges in the broader economy and within our own sector. While many early-stage companies have continued to experience significant growth, valuations have been impacted and founders are facing multiple challenges.
The current landscape for early-stage companies
According to the Guardian, UK startups are finding it harder to secure funding and potential investors, as warnings of a ‘lost generation’ of small businesses emerge from the cost of living crisis. Some smaller businesses are also finding it harder to attract talent or export digital services to the EU post Brexit. However, the UK government has remained committed to building an innovation-based economy (as outlined in the Autumn Statement), despite recent fiscal tightening, and there will still be great opportunities in 2023 for investors and founders.
What priorities should founders focus on in 2023?
1. Extending their cash runways
We’ve been encouraging our portfolio companies to build their cash runways ahead of a potential market correction. We experienced a stellar two-year period in 2020, 2021 and into 2022, in which capital was readily available and growth at all costs became the mantra. In the current economic environment, we are seeing companies becoming more prudent and preparing themselves for a down cycle.
That does not mean that investors should be put off entirely, as the valuations come from a peak, potential investors can use this time to seek more attractive entry valuations while still holding on to the potential for long-term gains. Inflation is expected to normalise within the UK, although exact timescales are unknown.
2. Flight to quality
Expectations for value growth are likely to be more realistic in 2023, but founders will need to consider that investors may have a reduced appetite for risk. Though the UK may be entering a recession, not every sector will be feeling the effects of this. In a downturn there is always a flight to quality, and capital will likely be concentrated on opportunities that are seen to be higher quality. Businesses which are counter-cyclical, have the best teams or have strong pricing models have a higher chance of success despite a market downturn and will look more attractive to investors. A central focus for 2023 should be securing the right investors, to foster growth and profitability.
3. Consolidation is key
Access to talent will improve, as more people are released into the job market who may not have considered moving roles in any other circumstance. We predict that 2023 will be a year of consolidation for many smaller companies, whether that be through attracting the best talent or through acquiring other startups in the same sector. This is the best time for startups to redefine their respective sectors. It is also ideal for upskilling and innovation, meaning we expect to see a flurry of new startups emerge as market pain points are addressed by new founders taking advantage of market conditions and the opportunity to start an entrepreneurial journey. While tech layoffs will cause concern, innovation is often bred in the face of adversity, so we expect to see new ideas and tech developed as this talent is released back into the market. Some of the biggest global companies have emerged from previous downturns, both AirBnB and Netflix thrived in the 2008 recession according to Startup Savant.
We do not expect the pace of tech development in the UK to slow down any time soon, it’s more likely to accelerate, as innovation continues to be at the forefront of the narrative within the UK. Consumers have developed a dependency on technology and ecommerce, some of which will thrive during the recession.
At Oxford Capital, as early-stage investors our commitment to our companies goes way beyond the initial investment. Our aim is to back founders throughout all stages of building their companies from seed stage and beyond, through the numerous challenges they will face on their path to success. We will continue to see many new companies being funded in 2023, and we certainly intend to make several investments in the coming year and continue to invest across cycles. R&D tax credits, innovation grants and initiatives such as EIS will help to support founders, and to foster their ideas, as well as creating diverse, future proof portfolios for investors who seize the opportunity.