M&A and U.K. start-ups: where next for the beginners?
The U.K has a vibrant start-up culture, with an estimated 600,000 new companies set up in 2015. A whole host of factors have powered this part of the economy. Many U.K. industries are world leaders, for example the recruitment sector, while the E.U. freedom of movement drew on human capital from across the continent. The development of new challengers in different industries and sectors plays a key role in stimulating M&A activity, with buyers attracted for reasons from exciting IP to up-and-coming talent. Established companies may find it difficult to truly innovate in-house, so M&A may also give the opportunity to roll-out acquired new products or services in support of their existing operations.
Whatever the reasons for acquiring start-ups or relatively young companies, it is clear that larger organisations thrive on the development of smaller operators. In this blog, we take a look at the potential trends or challenges which U.K. start-ups may experience this year, and how this may reduce the numbers of available M&A prospects for SME and mid-market acquirers.
Tech talent shortages?
The recent announcements that London is to add hundreds of new jobs from tech giants Google and Facebook has been met with concern by the capital’s start-ups. While the impact of the Brexit decision is still yet to fully take shape, there are fears that increased red tape could make it more difficult, and increase the length of time it takes, to recruit from abroad in a notoriously competitive sector. These are ingredients which may cause a drop in innovation within the tech sector. While the likes of Google have the resources to fund research and development on an unrivalled scale, consolidation rarely delivers the kind of advances we see from so-called ‘digital disruptors’.
As smaller companies are squeezed for talent, it may also reduce the options for potential acquirers. For SMEs and mid-market companies in particular, the gains made by the companies at the top of the market regarding talent could have an impact on their growth ambitions if their smaller competitors don’t have the human capital to develop and grow.
U.K. Government industrial strategy
The Autumn Statement from the U.K.’s chancellor, Philip Hammond, announced investment in research and development as part of the long-term industrial strategy. Up to £2bn will be made available in the next five years. This investment will come in the form of new institutions and research grants, as well as changes to taxation.
The streamlining of grant-making bodies into one, which will be named Innovate UK, alongside the increase in funding, may allow start-ups in particular to take advantage and weather the financial pressures associated with new businesses. Elsewhere, entrepreneurs are currently able to claim tax relief on certain business activities; new R&D tax relief may further bolster the opportunities available to start-ups, and ultimately attract more activity in this area.
Can 2017 match the recent past?
The pace of expansion to the start-up sector is dependent on a range of competing interests. What is clear is that the next 12 months will see these start-ups operate in quite a different commercial and funding environment from the last. M&A from SME and mid-market companies will thrive if start-ups can continue to grow and develop, introducing welcome market disruption and new ideas.
Stay tuned to our blog for industry M&A analysis and remember to get in touch with our experienced team with any questions you have about the M&A process and how Benchmark International can help you.