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Bargains on UK startups could be on the table for VC firms in a position to take advantage

08 Aug Bargains on UK startups could be on the table for VC firms in a position to take advantage

As interest rates continue to rise, startups continue to face the pressures of underselling their business, providing a potential opportunity for VCs who are able to take advantage. According to data from Startup Genome, the failure rate of UK startups is at approximately 60%, with the primary reasons being either running out of cash or failing to raise new capital. In light of this, Claire Trachet, M&A expert and CEO of business advisory, Trachet, comments on how the fate of these UK startups could impact the M&A sector.

Whilst VC funding in the UK has suffered a shortage, with a report from PitchBook detailing how the opening quarter of 2023 observed VC funding in the UK fall to £2.9 billion, putting a strain on the declining value of startups as they continue to battle the consequences of the macroeconomic environment. This trend of startups selling parts of their business – or the entirety of it – could continue as various companies are suffering from having raised excessive funds and presenting unrealistic valuations. According to a report from Innoven Capital, approximately 55% of early-stage investors feel that startups were overvalued in 2022. As a result, these startups are often left with business models that are unable to tackle the current market’s challenges.

Turning to the present climate, Trachet explains that investors will no longer be frozen – knowing there is less of a reason to be risk-averse – as they know opportunities are presenting themselves and are ready to actively seize them. She further explains that successful startups and unicorns will also have the potential to capitalise on their competitors for lower rates.

Claire Trachet (CEO/Founder) comments on the future of the M&A sector for the remainder of 2023:

“With the Bank of England announcing an interest rate rise to 5.25% coupled with an inactive IPO market, scaling businesses will find it increasingly difficult to secure funding. As a result, this presents optimism for VCs and investors who will be able to capitalise on these startups.

“Acquirers know they will be getting a bargain from low valuations, potentially leading to a flurry of M&A deals, presenting a more positive outlook for M&A activity in the UK. Whilst these startups could sell out for less than what they are worth, it also presents a greater opportunity compared to failing as a whole.

“In addition, there is a growing number of investors who are sat on a dry powder pile having paused investments due to uncertainty in 2022. This means there are significant opportunities on the horizon, and now is the moment to prepare and get deal ready as optionality will increase in H2 of this year.