Pandemic causes record spike in collapse of tech startups

More than 1,000 technology startups in the UK have filed for administration, liquidation or dissolution since the start of lockdown, market analysis reveals.

Conducted by co-working and innovation space company Plexal and UK database for fast-growth companies Beauhurst, the analysis shows that, of the UK’s roughly 30,000 startups, a total of 1,067 have filed for administration, liquidation or dissolution since 23 March.

Of these, 273 fast-growth companies made filings in September alone – a 181% month-on-month increase from August – making it the highest monthly figure for a decade.

Some 388 of the startups that have gone into administration since March were based in London, which also recorded a 217% rise in filings between August (30) and September (95).

A similar pattern is reflected in Scotland, with 48 startups filing in September, just under half of the entire number of filings (97) made since the start of April.

According to Plexal managing director Andrew Roughan, filings were kept artificially low during the early months of the pandemic by various government support schemes, but their effect is starting to diminish.

“The government commendably offered a number of startups a lifeline at the peak of the crisis,” he said. “But despite the slowly improving funding picture, we are now starting to see the pent-up effect of the pandemic on UK businesses – in particular early-stage startups.

“Government support has artificially kept companies afloat and delayed the true impact. We are only now starting to see more severe damage to UK startups that puts the survival of an entire generation of innovative companies at risk.”

Roughan added: “Government initiatives alone are not sufficient to support startups most in need of funding and cashflow in the current economic climate. It’s these businesses that will provide the innovation and jobs that will drive the UK’s economic recovery, and they need our urgent support.”

Computer Weekly revealed in April that about 83% of UK startups were ineligible for Future Fund loans because of prohibitive entry conditions – such as the need to have raised at least £250,000 in equity investment from private, third-party investors in the past five years – which most early-stage companies simply could not meet.

While the government separately pledged £750m of targeted support for the most research and development (R&D)-intensive small and medium-sized firms, most of this support went to Innovate UK’s 2,500 existing customers and was only offered to about 1,200 “not currently in receipt of Innovate UK funding,” according to HM Treasury.

It should be noted that September’s spike in startup “deaths” occurred before the official conclusion of the Future Fund and other government support schemes, such as the Coronavirus Business Interruption Loan Scheme and the Bounce Back Loan Scheme – all three of which have been extended until 30 November.

Henry Whorwood, head of research and consultancy at Beauhurst, said: “We have never seen a month with so many startup deaths as we did in September. While the number of filings has naturally grown as the number of high-growth UK businesses increases, our data clearly shows a sustained reduction in these companies filing for administration, liquidation or dissolution as a result of the government’s financial support schemes for small businesses.

“The sudden spike that follows, however, signals that their impact is waning. The coming months could be crucial for the future of the UK startup community.”

The analysis said that since the UK was placed into lockdown, high-growth startups have raised £5.37bn in investment, but most of this has been directed to already-established firms – just £458m went to first-time fund-raisers, representing a 55% year-on-year decrease.

This trend has been present since the start of the pandemic, with previous research by Plexal and Beauhurst from May showing that only £52m of just over £1bn raised at that point was going to early-stage startups and entrepreneurs who had never raised money before.

Plexal’s Roughan said at the time: “While tech companies are still raising funding in the UK, we risk losing a generation of tech entrepreneurs at the earliest stages of their startup journey. By only backing companies that have already raised funds, investors are ignoring the very companies that will define the future success of the British economy.”