As a crisis-riddled 2020 draws to an end, the UK early-stage ecosystem is left struggling and needing increasingly more support.

2020 has been a bad year for business across the board, but some are worse off than others. While there has been a lot of support to struggling businesses from the government and investment community, seed-stage companies have largely been left out in the cold.

With investors choosing to fund existing investments and to place cash in more mature businesses, seed-stage companies, the innovators of tomorrow, have been overlooked.

Santa Claus got stuck in my chimney

Back in April, seven of the UK’s leading tech industry lobby groups warned Treasury Chancellor, Rishi Sunak that ‘a generation of startups would be wiped out’ if the government didn’t step in to help them out.

Since then, the Treasury has stepped up to back over 50,000 businesses through the Coronavirus Business Interruption Loan Scheme (CBILS) and thousands more with the Bounce Back Loan Scheme.

However, the measures have had limited success in supporting seed-stage businesses. Companies that register losses, like a large number of seed-stage and fast-growing startups do, didn’t qualify. The schemes were unattractive to angel investors, since the Enterprise Investment Scheme (EIS) requires funds to be used for growth and not working capital.

All I want for Christmas is …growth capital

Private early-stage UK companies this year have seen a diminished investment landscape, but one which seems to be picking up as the year draws to a close. Whilst overall deal value (as monitored by Beauhurst) fell in Q1 and Q2 2020, it remained higher in Q3 at £2.7bn, just a 1% drop since Q3 2019.

There has, however, been a shift in where funds are directed, with investors focusing on portfolio companies, as well as a shift in investment towards more mature companies. This trend has made things even more challenging for seed stages businesses.

Whilst the number of seed investments remained steady between Q4 2019 and Q2 2020, it fell 20% between Q2 and Q3 2020 as money shifted towards mature, lower-risk opportunities.

The number of newly registered businesses remained fairly stable up to and including Q2 2020. In Q3 2020, however, the number fell 32%.

According to the Enterprise Research Centre, 21,000 more UK businesses failed in March 2020 compared to March 2019, an increase of 70%.

Source: Companies House

This spells trouble for the next generation of growth businesses. Without the capital they need to move from the concept state, many great ideas will never get off the ground – and that is a shame for a country that holds a strong international reputation for innovation.

We’ll take a cup of kindness yet

Angel investment in new businesses has been scarce and the number of deals closed in 2020 has fallen. Economic uncertainty has taken the largest toll on seed-stage businesses in the UK and, for the first time since 2008, the country’s very entrepreneurial spirit is under threat.

As the year comes to an end, It’s hard to predict what 2021 will bring. Investors are moving towards more established businesses and supporting companies in their portfolios, and that’s not likely to end as we begin nation-wide vaccination.

Now more than ever, high-growth companies need support from angel investors, mentors and NEDs and they need to be investment-ready. Successful companies make sure that their valuations are realistic, that their business plans are well thought out and reflect their unique opportunity, and that they’ve put together a winning team.

Seed-stage companies play a vital role in the economy, so much so that this shortage of finance is likely to severely impact the innovative sectors on which the UK economy depends.

Nevertheless, they are the ones that will lead the country out of the current slump. They’re resilient, and they’ve done it before. Giants were born in the last recession, and it’s likely that it will happen again. As long as we support them.