UK startup investment surge could see business unicorns multiply

Following what has been a challenging period for many an SME and investor alike, emerging from the pandemic recent data suggests the UK startup scene is in its strongest position in decades, fuelling the expectation of record new unicorn companies in the coming years.

A recent study by UK tax-tech firm Ember found that 190,639 new companies were established in the second quarter of 2021 - a period that resulted in the most startups founded in Q2 in British history (averaging at 87 new businesses established per hour).

On course to top 800,000 new startups by the end of the year, 2021/22 is forecasted to break the previous annual record of the most UK startups formed in one tax year, set back in 2018/2019 in which 672,890 new British businesses were established.

Mirrored by equally inspiring investment figures that saw a record £13.5 billion invested into UK startups in the first half of 2021 (almost three times that witnessed a year before), experts predict the UK to be on course for an unprecedented surge in new unicorn businesses (businesses valued at over $1 billion) over the coming years.

In a period of significant opportunity for venture capital investors, analysing the possibility of unicorn potential across the UK’s startup landscape could prove incredibly rewarding, especially given the range of additional tax reliefs investors can come to expect.

The UK's growing unicorn companies

Since 2012 the average time it took for a startup to progress from founding to unicorn status was around four years. However, following the soaring startup creation, innovation and funding figures the UK has noticed over the past 12 months, evidence suggests this period could be shortening.

Of the 105 business unicorns the UK is home to, 20 hit unicorn status in the past 6 months.

To put this into perspective it took 24 years (from 1990 to 2014) for the UK to establish its first 20 unicorn companies, a duration in which - if translated into today’s growth figures - would see 960 unicorns established across Britain over the next 24 years.

Where it is impossible to predict exactly how many ultra high growth startups will emerge over the following months and years, professionals across the industry suggest we could be in the midst of a “unicorn boom” fuelled by growing internal innovation and foreign investment. 

Stephen Kelly, Chair of industry group Tech Nation, said:

The rate of growth in the U.K. tech ecosystem in the last 10 years has been immense and we are confident that there is more to come. The U.K. now has more ‘futurecorns’ than France and Germany combined, which demonstrates the extent to which the U.K. is leading Europe.

The increased need individuals and businesses have felt for rapid solutions to often unforeseen questions posed by the pandemic over the past 18 months has fuelled unicorn potential further, with agile, adaptive startups being the source of much of the innovation noticed in a 2021 branded by the Financial Times as “the strongest startup boom in a decade”.

Seen especially in the UK tech sector - partly due to accelerated rates of digital adoption and the heightened reliance on technology Covid-19 has intensified - 2021 has proven a standout year for startup funding across the industry. 

Accounting for 11 of the 20 UK unicorn startups realised in the first six months of 2021, the fintech sector specifically has been outlined as a key focus for many experienced investors in the coming years.

Speaking on the topic, Prime Minister, Boris Johnson, added:

Our tech revolution is creating jobs, driving growth and boosting investment across the country. We must continue to research, build and innovate as we cement our place as a world leader in tech and push towards another record-breaking year.

How can investors harness this growth?

In the midst of the highest level of startup investment in British history, and ahead of a 2022 that looks set to be another strong year, the present poses an unwavering opportunity for investors to harness the growth the next wave of UK business unicorns will undoubtedly bring.

Though it’s not always easy identifying Britain’s next $1 billion company or transformative startup venture, identifying the most effective VC tools for minimising the risk and maximising the growth of early-stage investments can give investors the best chance to do exactly that.

The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) often top this list. 

Hailed by The Chancellor as “World leading programmes” the schemes facilitate venture capital investments into promising early-stage companies for private investors, in exchange for an equity stake and a host of generous tax reliefs. 

Two of the most popular VC routes when investing into UK startups, the pair have raised a combined total of £25.4 billion in investment since 1994. 

Though not the only available investment routes targeting high-growth startups, the schemes’ long list of tax advantages (including up to 50% income tax relief, capital gains tax exemption and inheritance tax relief) and focus on the long term growth of individual startups, set them apart from less autonomous, more gradual growth alternatives like venture capital trusts (VCTs).

For investors aiming to identify one of Britain’s upcoming wave of ultra-high growth “futurecorns” such details can be key, and are frequently merited by industry leaders throughout the tech sector - not just for their return-generating benefits, but for their impact on the UK SME landscape as a whole.

Ron Kalifa OBE, Government advisor for fintech, and Chairman of Network International, said:

The Enterprise Investment Scheme, Seed Enterprise Investment Scheme and Venture Capital Trusts are called for to level the playing field for fintechs.”  Adding that the schemes would “act as a catalyst in developing a world leading fintech ecosystem. 

Though such venture capital schemes like the EIS and SEIS may target more experienced investors with potentially more ambitious growth goals, regardless of the route right for your portfolio, researching opportunities and vetting investment platforms thoroughly should be a key step in minimising the risks of investing in early-stage companies.

If carried out with diligence and patience, staking a claim in one of Britain’s next business unicorns can become an increasingly achievable feat for many an investor over the following few years.

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