As UK Gov reaches out to tech, investors threaten to ‘pull capital’ over M&A regulator over-reach

UK competition regulators are spooking tech investors in the country with an implied threat to clamp down on startup M&A, according to a new survey of the industry.

As the UK’s Chancellor of the Exchequer engaged with the tech industry at a ‘Chatham House’ style event today, the Coalition for a Digital Economy (Coadec) think-tank released a survey of over 50 key investors which found startup investors are prepared to pull capital over the prospect of the Competition and Markets Authority’s (CMA) new Digital Markets Unit (DMU) becoming a “whole-economy regulator by accident”. Investors are concerned after the CMA recommended the DMU be given ‘expanded powers’ regarding its investigations of M&A deals.

Controversy has been stirring up around the DMU, as the prospect of it blocking tech startup acquisitions – especially by US firms, sometimes on the grounds of national security – has gradually risen.

In the Coadec survey, half of investors said they would significantly reduce the amount they invested in UK startups if the ability to exit was restricted, and a further 22.5% said they would stop investing in UK startups completely under a stricter regulatory environment.

Furthermore, 60% of investors surveyed said they felt UK regulators only had a “basic understanding” of the startup market, and 22.2% felt regulators didn’t understand the tech startup market at all.

Coadec said its conservative estimates showed that the UK Government’s DMU proposals could create a £2.2bn drop in venture capital going into the UK, potentially reducing UK economic growth by £770m.

Commenting on the report, Dom Hallas, Executive Director of Coadec, said: “Startups thrive in competitive markets. But nurturing an ecosystem means knowing where to intervene and when not to. The data shows that not only is there a risk that the current proposals could miss some bad behavior in some areas like B2B markets whilst creating unnecessary barriers in others like M&A. Just as crucially, there’s frankly not a lot of faith in the regulators proposing them either.”

The survey results emerged just as Chancellor Rishi Sunak convened the “Treasury Connect” conference in London today which brought together some of the CEOs of the UK’s biggest tech firms and VCs in a ‘listening process’ designed to reach out to the industry.

However, at a press conference after the event, Sunak pushed back on the survey results, citing research by Professor Jason Furman, Chair, of the Digital Competition Expert Panel, which has found that “not a single acquisition” had been blocked by the DMU, and there are “no false positives” in decision making to date. Sunak said the “system looks at this in order to get the balance right.”

In addition, a statement from the Treasury, out today, said more than one-fifth of people in the UK’s biggest cities are now employed in the tech sector, which also saw £11.2 billion invested last year, setting a new investment record, it claimed.

Sunak also said the Future Fund, which backed UK-based tech firms with convertible loans during the pandemic, handed UK taxpayers with stakes in more than 150 high-growth firms.

These include Vaccitech PLC, which co-invented the COVID-19 vaccine with the University of Oxford and is better known as the AstraZeneca vaccine which went to 170 countries worldwide. The Future fund also invested in Century Tech, an EdTEch startup that uses AI to personalize learning for children.

The UK government’s £375 million ‘Future Fund: Breakthrough’ initiative continued from July this year, aiming at high-growth, R&D-intensive companies.

Coadec’s survey also found 70% of investors felt UK regulators “only thought about large incumbent firms” when designing competition rules, rather than startups or future innovation.

However, the survey found London was still rated as highly as California as an attractive destination for startups and investors.

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COVID-hit UK startups cry out for help, as UK gov trails Europe in its response

The UK government is reportedly looking at a range of options to support the startup industry, possibly involving a co-investment model involving state-owned funds (via the British Business Bank) and private VC funds. Investors have been warning that typically loss-making, early-stage startups are at risk of collapse amid the coronavirus crisis. But the moves come far later than generous packages put together by Continental European governments to support their startup sectors.

Ministers understood to be keen to support the strong UK startup and innovation sector and options allegedly being considered include convertible loans, which could either be later repaid or turned into equity stakes owned by the state. This would require matched co-investment with VCs, ensuring only existing venture-backed startups would be eligible.

The FT reports that ministers want to do this on a case-by-case basis and only after companies have first sought fresh capital from private investors.

Also being considered is additional grant funding via InnovateUK, a government body providing support to innovative businesses, and an expansion of R&D tax credits.

However, the scale of any government intervention is expected to be far more modest than the government’s previously announced support for small, medium and large companies and their workers, given investors are normally deep-pocketed and tech startups typically employ far fewer people than traditional industries. By contrast, the French and German governments committed €4bn and €2bn in relief for their respective tech startup sectors.

The proposals under consideration include ones put forward by a number of significant players in the UK tech industry, who jointly launched a campaign over the weekend to pressure the government into creating a support package to aid startups struggling to deal with the COVID-19 crisis.

The move comes in the wake of moves by other European countries, such as France and Germany, which have announced significant initiatives.

The Save Our Startups (SOS) campaign published an open letter to British prime minister Boris Johnson warning the country could “lose a generation of startups and high growth businesses to COVID-19.”

It claims more than 30,000 startups employing some 330,000 people do not qualify for existing support measures and are therefore in jeopardy if new policies are not developed to help them.

The campaign was launched by crowdfunding platform Crowdcube and industry body Coadec, and is supported by leading tech figures including Brent Hoberman, the co-founder of Lastminute.com; Alex Chesterman, the cofounder of Zoopla, LoveFilm and Cazoo; and Arnaud Massenet, cofounder of Net-a-Porter.

It is also joined by organizations including The Entrepreneurs Network, Draper Esprit, Virgin Startups, Vala Capital, Innovate Finance, UK Business Angels Association (UKBAA), EISA, Tech London Advocates, Capital Enterprise and Seedrs .

Jeff Lynn, executive chairman and co-founder of Seedrs, who was a signatory to the letter, commented: “The growth of the startup ecosystem has been one of the great successes of the UK economy over the past decade. All that work is now threatened by COVID-19, and that’s why it is essential that the government step in to help at this precarious time–just as the French and German governments are doing. The Save Our Startups campaign sets out three sensible and crucial requests that will make all the difference in ensuring that our startups can continue to be European and world leaders in the decade ahead. I am very pleased that Seedrs and Coadec, both of which I co-founded and chair, are Founding Partners of the campaign, and I hope everyone in the ecosystem will sign onto it.”

The open letter said: “These businesses are making a huge contribution to the economy but are often yet to make a profit because they are investing in their people, technology and bringing innovative products and services to market. They are highly unlikely to qualify for the Coronavirus Business Interruption Loan Scheme (CBILS), which was introduced to provide financial support for SMEs during this pandemic.”

The letter points out that the French and German Governments have already worked to craft support for startups.

Save Our Startups has a three-point proposal for the government, calling on it to:

• Provide an equity-based liquidity package suitable to save startups at risk. While CBILS covers a proportion of UK businesses, the majority of startups and high-growth companies will be excluded and as a result, unsupported.

• Fast track payments to startups from public funding schemes – in particular, R&D tax credits and Innovate UK funding grants. Private sector liquidity has taken a major hit during the crisis with angels and micro-funds unable to provide startups and high growth businesses with bridging money.

• Change EIS, SEIS and VCTs to stimulate private equity investment into startup and high growth businesses, since many startups are losing access to debt or equity support.

However, some investors are cool on the idea, pointing out that the government could end up owning stakes in companies that would not otherwise have raised private-sector money, and that there should be a natural falling-off of weaker companies at a time of public crisis.

Investor Robin Klein of Localglobe commented on Twitter that: “The UK Govt has done an incredible job supporting the startup ecosystem” but he called the SOS campaign a “knee jerk” reaction and although he was “100% in favour of rapid BBB and other govt support” this would be through established tools.”

Luke Lang, cofounder of Crowdcube, which initiated the campaign with Coadec, commented: “Other European countries have raced to rescue its startup and tech communities, with French and German Governments committing €6bn in funding. The UK is sluggish by comparison, and further delays are unforgivable and threaten thousands of promising startup and high-growth businesses with huge potential.”

The full letter by Save Our Startups can be read here.

Top 100 Signatories:

Darren Westlake – Co-founder & CEO, Crowdcube
Luke Lang – Co-founder, Crowdcube
Brent Hoberman – Executive Chairman, Founders Forum
Alex Chesterman – Founder & CEO, Cazoo; previously Co-founder LoveFilm and Zoopla
Arnaud Massenet – Co-founder, Net-a-porter
Mike Fuller – Co-founder, ARM
Anthony Fletcher – CEO, Graze
Tania Boler – Founder, Elvie
Giles Andrews – Co-founder, Chairman, Zopa, MarketFinance, Bethnal Green Ventures
Adam Dodds – CEO, Freetrade
Jorge Armanet – CEO Founder, HealthUnlocked
Jamie Ward – CEO, Hussle
Samuel O’Connor – CEO, Coconut
Peter Kelly – CEO, Imployable
Lee Strafford – CEO, ADV
Kirsty Ranger – CEO, IdeaSquares
Gem Misa – CEO, Fullgreen
Doug Monro – Co-founder & CEO, Adzuna<br />
Jeff Lynn – Co-founder & Executive Chairman, Seedrs
Stephanie Melodia – Director, Bloom
Tugce Bulut – Founder, Streetbees
Saurav Chopra – Co-founder & CEO, Perkbox
Daniel Korski – Founder & CEO, PUBLIC
David Dunn – Chair, UK Tech Cluster Group
Philip Salter – Founder, The Entrepreneurs Network
Andrew Tibbitts, COO, TechHub Charlotte Crosswell – CEO, Innovate Finance
Robert Walsh – Managing Partner, Q Ventures
Jenny Tooth OBE – CEO, UKBAA
Jonathan Sibilia – Partner, Draper Esprit
Dom Hallas – Executive Director, The Coalition for a Digital Economy (Coadec)
John Spindler – Co-founder & CEO, Capital Enterprise
Mark Brownridge – Director General, EIS Association
Natasha Guerra – Co-founder, Runway East
Andy Fishburn – Managing Director, Virgin Startup
Russ Shaw – Founder, Tech London Advocates
Alex Davies – Founder & Chief Executive, Wealth Club
Bruce Davies – Director, UK Crowdfunding Association
Andrew Roughan – Managing Director, Plexal
Jasper Smith – Founder, Vala Capital
Gaby Hersham – Founder, Huckletree
Carlos Silva – Co-founder, Seedrs
Yacob Siadatan- CEO, Ventoura Ltd
Nazim Valimahomed – CEO, Kroo
Katie Vanneck smith – Co-founder, Tortoise Media
Adrian James – CEO, Monily
Paul Naha-Biswas – CEO, Sixley
Oliver Oram – CEO, Chainvine
Rohit Shetty – Co-Founder & CEO, ArtBrowser
Richard Cooper – Chief Executive Officer, Novosound Ltd
Sam Lehane – CEO, M.Y.O
David Murray-Hundley – Chairman, E fundamentals
Russell Quirk – Co-Founder, PropergandaPR
Silas Adekunle – CEO, Reach Industries
Matthew Bradley – CEO, Mjp technologies ltd
Charlotte Roach – CEO, Rabble
Ankush Bhatia – CFO, Hussle
Matt Latham – Co-founder, Tickr ltd
Joseph Crabtree – CEO, Additive Manufacturing Technologies (AMT)
Robert Wakeling – CEO, Wadaro Solutions Limited
Joe Sillett – CEO, The Funky Appliance Company
Mike Bristow – CEO, CrowdProperty
Mulenga Agley – CEO, Growthcurve LTD
Kim Nilsson – CEO & Founder, Pivigo
Martin Kievit – Co-founder, Metasite OpenCloud limited
Sam Ducker – Co-founder, Calling Anyone
Neha Khurana – CEO, The Legists
Matt Brooke – CEO, Meet.mba Limited
Manoj Ganapathy – CEO, SalesTrip
Adam McVicar – Co-founder, The Resilience Factor
Bikesh Kumar – CEO, Annexon
Ricky Shankar – Chairman, Clear Factor Limited
Sarah Merrick – CEO, Ripple Energy
Dan Wakerley – CEO, Pillar
Demos Demetriou- Co-founder, blazon
Eoin Cooney – CEO, ARROE Limited
Mattt Milligan – Co-founder, Uhubs
Suchit Punnose – CEO, Red Ribbon Asset Management Plc
Laurence Guy – CEO, We Are Pentagon Group
Fred Soneya – Co-Founder & Partner, Haatch
Dana Denis-Smith – CEO, Obelisk support
Neil Harmsworth – Chief Operating Officer, Hussle
Nigel Winship – Co-founder, People Matter Technology
Cathy Norbury – Co-Founder, InterAxS Global
Shadi Razak – Co-founder and CTO, CyNation
Hassan Bashir – Co-founder, HealthSteer
Dr Yusuf Vali – Co-founder, Healthsteer
Farid Haque – Co-founder, AssetVault
Brad Goodall – CEO, Banked
Dan McGuire – CEO, cube19
Gaute Juliussen – CEO, Toraphene
Mark Musson – CEO, Humn.ai Ltd
James Gupta – CEO, Synap
Mat Megens – CEO, Hyperjar
Jason Bullock – CEO, Numerous Technology
Tim Gentles – CEO, Hatriq
Marcus Greenwood – CEO, UBIO
Gary Mc Donald – CEO, Limitless Insight
Ryan Gralia – CFO, Fidel Limited
Darrell Coker – Co-founder & Head of Product, Flair
Inga Mullins – Co-founder Fluency
Ian Smith – CEO, Being Guided
Kevin Beales – CEO, Refract
Damian Goryszewski – CEO, Colossus Capital Ltd
Mark Milton – CEO, Amberlight Partners
Randel Darby – CEO, Airportr

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