In the next 12 months
In 1-2 years
In 3-5 years
In more than 5 years
Not considering
Capital insights
The UK tech industry needs to adapt quickly to the higher cost of capital environment
UK tech businesses are in a phase of adapting to the return of a higher cost of capital, with 57% of respondents reporting lower levels of debt compared to six months ago. 17% indicated they had increased their amount of debt compared to six months ago, a decrease from 41% in our 2023 survey.
The decrease in borrowings among UK small and medium businesses reflects a trend of using free cash flow to reduce debt, which fell by around 12% between September 2022 and August 2024, according to the Bank of England. Small businesses with revenue under £10m were most affected, with 71% reporting less debt compared to six months ago, versus 52% for larger businesses.
While this reduction provides cash flow headroom, it may limit growth and investment opportunities. UK tech businesses are set to benefit from interest rate easing cycles into 2025, as inflation returns to around 2%.
However, with medium-term interest rates forecast to stay at 3.75% (at end of 2025), tech businesses must focus on improving operational efficiencies and optimising capital allocation to maximise enterprise value. Notably, 51% of respondents are considering an exit within the next two years.
How does the level of debt that you have now, compare to the debt you had 6 months ago?
We have a lot less debt now
We have the same amount of debt
We have a lot more debt now
We have slightly less debt now
We have a little more debt now
We did not have debt 6 months ago
Obtaining new funds in the UK has continued to remain challenging for tech businesses
We found 33% of respondents had been easily able to access funds in the UK. This contrasts with the remaining 67% who managed to obtain funding but encountered difficulty (40%), while 27% were unable to access any funding in the UK. This is a slight improvement from around 31% unable to access funding in 2023. Funding challenges persist, reflecting the overall higher cost of capital and higher interest rate environments in the UK and globally, limiting the availability of credit.
Over the last 6 months has your business been able to access the funds in the UK that your business needed?
No, we could not access the funds we need in the UK, or internationally
No, we could not access the funds we need in the UK, but we have internationally
No, we could not access the funds we need in the UK and have not looked elsewhere
Yes, but it has been difficult to access funds
Yes, we have been able to access funds easily
Institutional funds and high street banks are the key sources of funding
The tech industry heavily relies on debt, with only 1% of 300 respondents reporting no debt. UK tech companies get funding from various sources, mainly institutional funds (45%) and high street banks (45%). Additionally, 37% have debt from challenger banks, highlighting diverse funding options.
For larger businesses (revenue over £50m), institutional funds are the primary source (50%). Smaller businesses (revenue under £50m) mainly rely on high street banks (49%) and challenger banks (42%), with only 27% receiving funding from institutional funds.
Does your business currently have borrowing/debt?
We have debt from institutional funds
We have debt from a high street bank
Our UK business has a debt facility provided by our overseas parent company
We have debt from other "challenger" banks
No, we don't have any current debt
International expansion and R&D high on the funding agenda
Of our respondents, 47% indicated funding would be deployed to support international expansion (notably with Europe and North America considered to be the most strategically important).
Closely following international expansion, management teams continue to remain focused on product investment, with 46% indicating fundraising would be used for research and development. This is particularly relevant as the industry looks for ways to implement generative AI to gain advantages over competitors through a combination of enhanced product features and margin accretion.
Only 35% planned to spend funds raised on sales and marketing, a decrease in priority compared to our survey last year (43%). However, it was a higher priority for AI businesses (43%) compared to software businesses (24%). The decreased focus on sales and marketing, notably within software, reflects a combination of higher capital costs impacting firms’ abilities to fund customer acquisition, a more challenging customer acquisition landscape as economic and geopolitical uncertainty drive longer sales cycles, and the diversion of spend onto AI-related projects, together with an increasing focus on operational efficiency and the rule of 40.
Higher interest rates and political uncertainty have slowed global acquisitions in 2023 and early 2024, with only 33% of respondents planning to fund acquisitions. Despite reduced M&A activity due to these factors, there is some optimism. The Labour government's budget modestly affected Capital Gains Tax (CGT) and private equity (PE) managers' carried interest rates.
M&A activity is expected to benefit from increased political stability following the 2024 US and UK elections, anticipated interest rate cuts, and the strategic need for private equity investors to realise returns from ageing portfolios. Additionally, corporates may find opportunities to accelerate growth or divest non-core assets.
In which areas does your business intend to spend any funding secured in the next 12 months?
International expansion
Research and development
Sales and marketing
Acquisitions
Workforce
Tech businesses continuing to consider funding rounds and exit events but over a longer horizon
Looking ahead to 2025, we anticipate tech businesses will accelerate plans for fundraising rounds and exit planning. Access to debt funding is likely to become easier and cheaper due to the further forecast interest rate cuts in 2025. M&A activity is expected to rebound due to the improved economic and political stability, lower interest rates, strategic need for PE managers to realise returns for their investors, and as businesses seek to incorporate AI into their businesses, which together will support stronger valuations for exiting founders.
Is your business considering any of the following, and if so, in what time frame?
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A fund-raising round
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Planning an exit
In the next 12 months
In 1-2 years
In 3-5 years
In more than 5 years
Not considering
Is your business considering any of the following, and if so, in what time frame?
A fund-raising round
In the next 12 months
In 1-2 years
In 3-5 years
In more than 5 years
Not considering
Planning an exit
In the next 12 months
In 1-2 years
In 3-5 years
In more than 5 years
Not considering