The Bank of England is to raise interest rates to their highest level in 14 years.
The central bank said today that interest rates will increase from 3.5% to 4% amid sky-high inflation, leading several tech industry figures to warn of consequences for startups and scaleups alike.
The ongoing economic consequences of COVID-19 have led startup valuations to suffer. The current economic downturn poses a concern for tech startups, as the industry relies heavily on raising capital as the main tool to fuel growth and gain investor confidence.
Claire Trachet, CEO and founder of business advisory Trachet, advocates a need for change in startup funding models – highlighting the importance of focusing on product and profitability over growth.
“The pandemic-fuelled fundraising bubble that raised the value of young companies has, fortunately, deflated instead of bursting,” she said. “However, as a result, many loss-making startups who were chasing the ‘unicorn dream’ are now scrambling for funds to stay afloat.
“The fundraising process has become more difficult due to a drying up of venture capital, caused mainly by the worsening situation in Ukraine, coupled with the energy crisis, high inflation and interest rates, which all led to declining valuations.
“This has put founders in a tough position, having to choose between accepting investment at a lower valuation and giving up a significant portion of their equity, or, holding off on fundraising and potentially running out of resources – many founders have chosen to wait.”
However, she added: “There is now a growing number of investors who are sat on a dry powder pile having deferred investments in 2022. This means there are significant opportunities on the horizon, and now is the moment to prepare and get deal-ready.
“Indicators suggest early-stage startups will have an advantage in this current market, as growth investors are seeking to invest in earlier stages, from seed to Series A, with smaller amounts of capital to sustain their businesses. These startups have a lower burn rate, giving them the potential to come out as dominant competitors if they can withstand the challenges.”
Small businesses’ financial security may suffer throughout 2023 following the rate hike. With higher interest rates, borrowing will be even more expensive for businesses already struggling to balance both surging operating costs and the impact of the cost-of-living crisis on demand.
“The UK has already seen several changes to national interest rates in recent months, with this latest increase to 4% being the 10th adjustment in a row – adding yet another level of financial strain to businesses across the country that have just settled into the previous interest rate,” said Connor Campbell, a business finance expert from American personal finance tech firm NerdWallet.
“With the country firmly on the brink of a recession, tweaks to the interest rate are somewhat expected in an attempt to bring down inflation. However, with 2022 proving to be such an economically unstable time for businesses throughout the UK, this news is likely to be unwelcomed by business owners.
“This latest 0.5 percentage point interest rate hike will make borrowing more costly for businesses, alongside increasing mortgage rates for business premises, meaning that many are likely to be unable to grow organically this year as they face further budget restrictions to keep their books balanced.
“And sadly, it doesn’t look as though a return to normality is on the horizon, either.”
Mohsin Rashid is the CEO and co-founder of ZIPZERO, an app which earns users cash to pay bills when they shop.
“Many had hoped the IMF’s sobering analysis earlier this week, revealing that the UK is to be the only major economy to shrink in 2023, would inspire the Bank of England to hit the brakes. Instead, the MPC’s latest increase marks the 10th in a row since 2021 and a devastating blow to British consumers and businesses,” he said.
“With the outlook on Britain’s growth so bleak, the Bank’s latest step is likely taken with great reluctance and yet taken, nonetheless. Clearly, the Bank of England has no faith in the government’s ability to tackle inflation alone, which has remained in double-digits for months.
“Yet such increases are simply not sustainable. As the Chancellor continues to shout about making Britain the next Silicon Valley, interest rates now stand at their highest level since 2008 and life continues to get harder.
“Abandoned by their government and faced with great uncertainty ahead, consumers and businesses must band together and provide mutual support. For businesses, that means restraint, they must avoid passing rising costs onto consumers and focus on incentivising loyalty, through which consumers will return the favour.”