By Sascha O'Sullivan
Last week, Arm’s return to the stock market with a $54.5bn valuation ignited a wave of optimism in the UK tech community. Heralded as the biggest initial public offering (IPO) of the year, the British chipmaker’s listing on the NASDAQ generated hopeful whispers that the IPO drought may finally be coming to an end.
Since the boom of 2021, the global IPO landscape has suffered a prolonged barren period. The first half of this year saw a 36 per cent decline in value compared to an already challenging 2022, with only 615 companies managing to secure funding. So, when Arm announced its triumphant return to the public market last week, investors and market participants greeted the news with renewed hope that the offering was a sign of a robust appetite for UK tech firms.
Unfortunately, I’m here to burst that bubble. While many celebrated the news as a silver lining in a challenging year, the reality is that the UK tech sector faces complex and persistent challenges that cannot be solved by a small handful of success stories. Arm’s achievement should serve as a reminder that, to ensure lasting success, the systemic issues plaguing our sector must be addressed. Pinning the UK’s international tech credentials on one triumph will do little to further our standing on the global stage. Instead, the focus must be on nurturing a diverse range of tech businesses, from their inception to their growth stages, to ensure the promotion of a resilient and thriving tech landscape.
One glaring issue threatening our tech ecosystem is the lack of support and funding for companies at the mid-stage of the investment cycle. Currently, there are far too many viable companies either spilling out or disappearing. Although there has been a surge in the number of seed and Series A deals since 2010, there remains a concerning gap in the Series B stage of funding. According to Innovate Finance investment in early-stage growth rounds has fallen 38
per cent.
This funding gap has been termed the “valley of death” for the UK’s tech sector. To compound the problem, most Series A rounds are structured as ten-year funds with minimal flexibility for extensions, meaning that as these funds approach their end, investors shift into exit mode, neglecting to provide their existing portfolio businesses with the financial support they need to expand.
As a result, early-stage investments are going to waste, and innovative, viable start-ups are forced into a premature demise. A robust tech ecosystem requires investment in companies that have already demonstrated a track record of success. Companies that secure Series B funding are twice as likely to have a successful exit – making this investment gap an essential bridge for the UK investment sector to cross.
Although Arm’s listing offers some encouragement for the UK’s struggling tech landscape, it alone will not solve the complexity of the challenges confronting our sector. For the UK to secure its place as a global tech leader, we need more than just a few standout IPOs; we need a vibrant and supportive tech landscape that nurtures and sustains businesses from inception to IPO and beyond.
