14 Nov 2022

Interest rate hikes spell danger for tech industry investment, but is there any cause for optimism?

Written by Joe Jordan, Account Executive at Spreckley.

With interest rates hitting a 15-year high of 3%, the UK economy could be on the brink of its longest recession since the 1930s. The hike is a response to rampant inflation, which continues to erode purchasing power – real post-tax household income is projected to fall by around £800 next year.

The business outlook is also fraught with danger. Cost of borrowing increases will put bank loans at a premium, while companies will get less bang for their buck thanks to high inflation. Expect to see expansion plans placed on hold as firms scale back on spending to bolster cashflows.

However, some are approaching the period ahead with cautious optimism, believing the coming months won’t be quite as challenging as the broadsheets would have us think. Some industries have grown despite the current downturn, and the UK economy has shown in the past it is robust and resilient enough to bounce back.

So, is the narrative of recession and hardship merely hyperbolic media doom-mongering, or are businesses really facing their toughest period in decades?

The warning signs don’t look good

When times are tough it’s easy to look back with rose-tinted glasses, but the months preceding the interest rate increase have hardly been a breeze – we have already seen funding in some sectors fall. UK fintech investment was down 65% in the first six months of 2022 compared to the same period last year, with spiralling inflation, geopolitical uncertainty, and supply chain disruption all contributing to the slump.

If the market responds to base rate rises the way the Bank of England hopes, borrowing will drop to curb high inflation, meaning industries already in decline will be put under further pressure.

Companies hoping Venture Capital firms will swoop in and save the day shouldn’t hold their breath; a rise in interest rates will keep investor cheque books lodged firmly in their back pockets. The penny-pinching has already begun, with venture funding for the third quarter of 2022 falling by 33%, and that figure is likely to plummet as the economic climate grows harsher.

For firms that do attract attention, funding rounds will take far longer to complete. Investors are sure to demand a clear outline of where their money is going, as well as a roadmap to profitability, and it will take time to come up with enough evidence to convince VCs to part with their cash.

Who will bear the brunt of the slump?

For high growth, low revenue tech giants that get by on stocks and investment, the long-term forecast is littered with challenges. Self-sufficiency is the key to survival during a recession, and businesses that need external help to stay afloat may find themselves short of willing benefactors.

Unfortunately, companies running unsustainable business models are likely to turn to job cuts to limit the damage. Ecommerce platform Stripe and ride-hailing service Lyft have already announced their intention to slash employee numbers, while Amazon has paused hiring for its corporate workforce.

The stigma around mass redundancies is beginning to lift – an ominous sign for employees of over-inflated and inefficient corporations.

Value will be rewarded

Businesses are right to prepare for tough times, but decision makers in desirable sectors can sleep a little easier than the masses. Companies offering the right tech in the right industry won’t struggle to attract suitors.

For example, climate tech has remained relatively unaffected by recent economic issues, with investment set to double in the sector this year after UK firms received $7.5bn in the nine months to September. This shows that tech companies positioning themselves in profitable markets will still draw interest, especially if they have a genuinely innovative offering that will excite investors. London-based electric vehicle infrastructure specialist Connected Kerb has proven this to be true, receiving a £110 million investment at the end of September.

With green tech investment still thriving, it’s clear that investors are flocking to booming industries in these uncertain times. Therefore, startups should try to align themselves with sectors that are governmental and social priorities, as this will inspire confidence in VCs.

Prepare for the worst to weather the storm

Recession has threatened to strike for months now, but the interest rate increase signals that it has finally arrived. Some industries will be hit harder than others, but generally speaking, the media are right to warn businesses of tough times ahead.

Investment may not be disappearing altogether, but VCs are certain to scale back, and businesses must ensure they have a plan B to fall back on to keep balance sheets in the black.