Recession and the tech startup scene

Money is tight in the UK startup scene

The financial crisis has forced even the biggest firms to rein in spending, lay off staff and discontinue planned products. Although this may represent an uncomfortable situation for tech giants such as Sun Microsystems, SAP and Intel, small tech startups have experienced particular difficulty in navigating the murky waters of an uncertain economic future.

For example, the credit crunch has prompted venture capitalists to dramatically reduce investment levels in what, only a short time ago, was seen as a booming sector of tech innovation, in Britain and around the world.

Even the government's Digital Britain report, recently presented by Lord Carter, neglected to mention the UK startup scene, while the Federation of Small Businesses has repeatedly criticised the government for not doing enough to help small enterprises through the economic turmoil.

"The future of small tech businesses is bleak," said Alexander Straub, an entrepreneur and investor in young technology companies such as mobile VoIP startup Truphone. He added that "most companies have or will go under", while many have already reduced headcount by 95 per cent or given up completely.

The media also plays a role in the vicious cycle, according to Straub, with negative news fuelling the recession by encouraging venture capitalists to hold back and tighten their belts. This, he explained, is the wrong strategy because companies viable enough to make it through the recession could grow into " tomorrow's giants" with the right nurturing.

Straub's point is a poignant one when looking at firms such as Cisco, itself once a small startup, which grew through strong strategic acquisitions, or brands like Apple which has proved time and again how a company can innovate itself out of a crisis.

Deborah Magid, IBM's director of software strategy, and overseer of the firm's European Venture Capital Group, was less pessimistic than Straub, pointing out that "while the credit crunch makes funding harder, there are still deals being done".

There is still reason for optimism, according to Magid, especially for Britain which boasted 30 per cent of all European deals in the third quarter of 2008, and 27 per cent in terms of cash invested.

Ryan Carson, an entrepreneur who has built two successful web applications - DropSend and Amigo - and organises global web events and workshops under the umbrella of Carsonified, is even more upbeat.

"The drop in funding levels from venture capitalists won't affect web startups at all," he said, adding that it does not take much more than £30,000 to create a simple web application, a level of funding that can usually be secured from angels, banks or cashflow, even during a crisis.

Carson urged firms to examine the possibility of remunerating their teams with equity and revenue share, instead of cash, in the startup's early days, in order to get a more solid financial start.

He also advised web startups to consider looking to grassroots communities like OpenCoffee and Northern Startup for support, as well as to big firms like Sun and Microsoft, which run their own startup programmes, respectively Startup Essentials and BizSpark.

"Fundamentally the British startup scene is strong and alive," said Straub, insisting that it is not all doom and gloom in the small business tech scene.

After all, startups are, by their very nature, true engines of innovation, he said, and have often been considered critical to the success of economies in the past.

Whether we will see startups re-emerging in strength any time soon will depend largely on the markets bouncing back in terms of initial public offerings and fundraising, even if this takes several years.

In the meantime, companies determined to fight on through the financial storm will have to try and maintain enough of a positive cashflow position, and secure adequate working capital, in order to survive the downturn.