How has COVID-19 affected the tech sector?
Coronavirus has dominated headlines across the world for months now, and the impact it has had on businesses in a variety of sectors has been devastating.
One of the most affected sectors has been within the tech industry, with funding drying up, mass layoffs and a reduction in levels of innovation seen prior to COVID-19.
Business Leader spoke to some of the country’s leading businesses within the tech space to find out what has happened, and what the future holds.
Samuel Huber, co-founder at Admix (SH)
Seth Ward, co-founder of PYNK (SW)
Michael Buckworth, founder of Buckworths (MB)
David Bentley, CEO of Solutionize Global (DB)
Al Gerrie, co-founder of ZigZag (AG)
Chris Connell, Deputy Vice President of Global Sales and Director of European Operations at Kaspersky (CC)
Michelle Ovens MBE, Founder, Small Business Britain (MO)
Mikael da Costa from Leadoo (MDC)
Ken Mainardis, SVP & Global Head of Content, Getty Images (KM)
Benjamin Simon, Associate, Wiggin LLP (BS)
What impact has the COVID-19 crisis had on the tech sector since the lockdown?
SH: COVID-19 has had a dual impact on the tech industry. On one hand, the general paralysis and uncertainty slows sales down, making it harder to get funded or to hire staff. On the other hand, the situation has emphasised our dependency on the digital world. People have been spending more time online (for example, Vodafone reports 50% increase in internet consumption in the UK during lockdown) and this has led some sectors of the industry (like communication tools or gaming platforms) to boom.
SW: I think it has been very much a mixed bag so far. Many of the big stock companies such as Amazon, Netflix and Google have fared exceptionally well, whilst bricks and mortar companies have rushed to provide their employees with laptops in order to facilitate a more modern, decentralised approach to work.
An approach which many are now realising just may be the way forward, the sector will need to adapt to a post-COVID ‘new normal’ in the coming weeks and months (and probably years) and so creating the foundation for this has created opportunities and highlighted critical weaknesses in the sector. Some of the big tech stock companies do clearly stand to benefit from lockdown and likely aftereffects – people watching more Netflix and ordering home deliveries through Amazon. Others are less clear and could be more to do with artificial stimulation of the markets.
With regards to the fintech sector, which is somewhat more in my wheelhouse, the sector is coping well. Many of the new breed of fintechs have long since understood the relative merits of a decentralised workforce and have managed to maintain, as close as possible to, business as normal. This applies to us – arguably we’re getting more work done right now without having to have travel for face to face meetings, although we are all missing each other and meeting people in person. As with any crisis, the companies that have fared well have been those who have had the dexterity to adapt quickly but the real winners could be the ones who don’t need to adapt at all.
MB: COVID-19 has had positive and negative impacts. On the positive side, it has encouraged innovation and creativity. Start-ups have been temporarily free from the day-to-day confines of progressing their business plans as agreed with their investors. By necessity, many have had to innovative and pivot (albeit temporarily) to ensure that their business is relevant and optimised to take advantage of the lockdown.
Demand for the services of many of our clients has rocketed as people work from home and spend more time online. This has allowed certain businesses to onboard large numbers of new clients massively boosting their profile and revenue.
But this success has also caused challenges: more clients means more development cost to ensure that the platform or software can continue to scale as user numbers increase. As a result, many tech start-ups have found their staff costs increasing through the lockdown period.
A reduction in new investment has left many start-ups in a dire financial position. VCs have generally been pretty good at doing bridge funding for their more successful portfolio companies, but those less successful companies, and earlier (pre-VC) stage start-ups have struggled to raise investment. At the beginning of the crisis angel investors largely pulled back from the market. The lack of incentives to encourage angels to invest in struggling start-ups, exacerbated by the exclusion of EIS from the Future Fund due to State Aid rules, has resulted in angels largely holding off on returning to the market. Many start-ups have also struggled to access COVID-19 reliefs.
This reduction in finance has already, and will continue to, cause the insolvency of tech start-ups. Some of these will inevitably be businesses that have received significant investment over several rounds and yet have been unable to adequately deliver a sustainable business model. However, many earlier stage pre-VC start-ups which are dependent on angel funding for growth are also failing. This massively impacts the strength of the UK tech scene and its place in the wider start-up ecosystem at a time when the sector is already under pressure from challenger cities such as Paris, Madrid and Berlin.
DB: COVID-19 has had a wide-ranging effect on the tech sector. From the beginning, this manifested itself in supply chain issues – with travel and manufacturing being the industries that were most severely struck. Equipment, hardware and other peripherals were delayed, scarce and sometimes extremely difficult to procure.
When countries first started to enforce lockdown measures, entire workforces went remote as well as the education sector. This all put an incredible strain on IT infrastructure and many applications struggled to cope with the increase of demand.
For example, Microsoft Teams’ active users increased by 70% at the end of April, to 75 million daily users. And, in the UK, on the first Monday of the school closures, Hegarty Maths – the application used widely across secondary schools for setting work – crashed due to volume. Home broadband, and many other internet services, were severely strained as they adjusted to the huge influx of users working from home.
With the increase in usage of these services comes renewed cyber risk. This meant that not only did staff need to be reminded of the dangers of cybercriminal activity, but software organisations – and other suppliers – had to ensure their products were more robust than ever before as criminals explored loopholes.
All this has set the scene for companies to look at longer-term networking strategies – like SD-WAN, for example. The technology industry has, from the start, been strong with its messaging and creative around what is needed for business continuity. This has been hugely positive to see people and organisations rising to the many challenges that the ‘new normal’ has created. From online events to customer support, what has shone during these strange times has been the importance of people coupled with tech.
AG: COVID-19 has further accelerated a move towards eCommerce and shifted consumer behaviour forward a number of years, highlighting the importance of online shopping and returns to a business’s success. ZigZag manages returns for retailers globally – our clients include Topshop, Superdry, GAP, Selfridges and boohoo amongst others. We have seen a dramatic spike in web orders over the last three months as more and more consumers shop from the comfort and safety of their own home. Tech companies that will not only survive but also thrive in the lockdown and beyond will have to be responsive to these changing consumer demands, as we are facing Black Friday volumes every day at the moment.
The pandemic has made tech companies stop and take stock of their operations, with additional importance being given to work life balance and health of its workforce. Technology that helps facilitate companies working from home, operate online more efficiently and effectively, improves a customer’s online experience, manage their logistics network, or tech in industries such as entertainment or health will be well positioned to thrive in a post-COVID-19 world.
MO: The pandemic crisis has generated a digital revolution among Britain’s small businesses. Research that we conducted in partnership with BT Skills For Tomorrow showed that 42 per cent of small businesses across the UK have moved their services online. It has also revolutionised how they operate – over a quarter of small firms now run their businesses remotely with video conferencing and more than a third now operate from home. This digital lifeline has been a saviour for many businesses and no doubt given the tech sector a huge boost, placing it at the heart and soul of powering the recovery. This of course includes many small tech firms helping to support businesses make this transition.
What impact has it had on new innovations?
SH: Innovations generally come into existence as a solution to problems or limitations. For example, being at home created opportunities to innovate and improve remote tools. Similarly, gaming platforms like Roblox or Fortnite have capitalised on the lack of real-world events to host virtual concerts and parties that have attracted millions of people.
SW: It’s early to tell for sure but in times of massive change I think those prepared to make bold, innovative decisions will win the day. It’s easy to suspect it could slow down innovation, but I think the opposite may be true. Necessity is its mother, after all. I can see progress being made in areas that will facilitate, simplify and empower our societal move towards a post-COVID reality. ‘Lights out’ manufacturing, automation of supply chains and streamlining of delivery processes; smart IoT technology to empower us all to work together whilst we are apart.
Of course, the main innovation I’ve been impressed with is how quickly companies have pivoted and started collaborating on innovations to help with all kinds of aspects of health and safe, remote work. We’ve seen innovations in testing, treatment and vaccines that normally take years to come to market bound forward due to an unprecedented amalgamation of resources. For many a vaccine might be the ‘reset button’ they are hoping for and it will be fascinating to see where we ‘reset’ to when we all, finally do emerge, blinking into the sun.
MB: Speaking with our tech clients through the lockdown period, it has been a tale of two cities. The first group have been incredibly busy, riding a wave of innovation, creativity and unbridled enthusiasm. For them lockdown has broken down barriers – most notably between start-ups and big corporates – and driven people of all ages online. Many businesses have pivoted (albeit temporarily) to provide goods and services that are relevant to the lockdown period; some have found that their pivots are viable in the long term.
The second group have been less busy. Perhaps in a weak financial position before lockdown, the need to raise funding to survive has been the primary focus. For tech start-ups operating in markets that have been completely closed (such as hospitality and recruitment) a pivot would be a more significant (and expensive) move that may not seem worth it in the grand scheme of things.
Once the dust has settled on COVID-19, I expect that 2020 will be recognised as a period of huge innovation impacting every aspect of our lives. Much of this innovation will have been led by tech start-ups seeking to take advantage of the new world in which we have been thrust. The role of entrepreneurs is to solve problems and take advantage of opportunities – a global crisis should never be wasted.
DB: COVID-19 has sparked a digital transformation at scale, and at a speed that companies have never experienced before. The simple truth is organisations that couldn’t, or were unable to, adapt may struggle to come out of the pandemic and still be operational.
Healthcare is an obvious candidate for fast and far-reaching change in response to the health crisis engulfing the globe. Innovations, including applications that were in development, have had to be pushed out and the sector has seen a mass rollout of new services. A BBC report last month reported how GPs were seeing just seven in 100 patients face-to-face too – which was a huge change in usual practices.
The NHS was quick to roll-out a WhatsApp information service chatbot – at the end of March – which has been used to update the public on key Coronavirus facts, along with a daily text messaging support system to check-up on patients with symptoms.
AG: Retailers now want to move faster than before. There have been some inevitable changes to priorities during this period, and there is now a sense of urgency to focus on improving online operations including returns. Before the pandemic, ZigZag was building several innovations to improve the experience of both our retailers and their customers, and that is still the case. In particular we have just released Exchanges which means consumers who order the wrong item can swap it for another, which saves the sale for the retailer. There has been a lot of interest in that solution, particularly as some consumers cannot go into stores to exchange – or may not want to use changing rooms in future. We have also accelerated the roll out of locker solutions so that consumers have a contactless returns experience.
We have also seen retailers asking for help to return products from stores as they have millions of units of stock in the wrong place either because it is going out of season or because it is needed back in the warehouse to fulfil eCommerce orders. ZigZag built a solution for store returns which by accident has ended up being in high demand due to retailers needing to shift large amounts of stock out of stores at this time.
In the editorial space there has been some very creative application of drone photography for news, meanwhile in entertainment photographers have been experimenting with capturing intimate, high-end portraiture via Zoom and FaceTime. Getty Images was also the Official Photographer for Global Citizen’s virtual “One World: Together At Homes” event, undertaking intricate technology preparation and collaboration amongst production teams around the world to produce imagery of the world’s biggest celebrities from their homes.
In the creative space, our expert team of art directors has been issuing photographers with isolation-friendly briefs which target the unique characteristics of daily life during the global pandemic reality. Photographers have been encouraged to shoot while stuck at home, creating images ranging from literal depictions of remote work, schooling and home lockdown adjustments to innovative conceptual interpretations of new terms like ‘social distancing’. This content has been selling very well as brands and businesses work to communicate to their customers with visuals which are relevant to this time.
How do you feel this crisis will affect the tech sector in the long term?
SH: Overall, the crisis has sped up our adoption of certain tools and practises, like VR meetings and remote working, which were already on the horizon. We believe some of these effects will persist even after the lockdown is lifted.
SW: In his 2016 Book, The Fourth Industrial Revolution, Chief Exec of the World Economic Forum, Klaus Schwab, proposed that technology was leading us into a new industrial epoch. With that in mind, I think the biggest change will not be in the output or in the innovation but in the methodology of work. COVID 19 has vastly accelerated the move towards remote working and will further empower automation in sectors like manufacturing.
A trend over the centuries to increase humanity’s ability to collaborate is only going to continue. And it seems obvious that removing the restriction of physical proximity will continue that further. Once all these systems and technology are in place, systems which have probably cost hundreds of millions of pounds globally to set up, I fail to see why many will move back towards the old, hierarchical, bricks and mortar approach. Technology is ushering in a new, automated, decentralised era of interconnectedness and COVID-19 has somewhat wedged the technology in place to facilitate and accelerate this.
MB: I think the UK tech sector will continue to thrive and will become an increasingly important part of the UK economy. However, I do think there are two medium term threats to the sector.
The first is funding. UK tech start-ups have become used to being able to access cheap money, particularly in the start-up hubs of London and Cambridge. A savvy tech founder with an innovative product or service should be able to raise at least a pre-seed and seed round with little difficulty. A global recession could impact the availability of funding. In the short term, government COVID-19 reliefs are not reaching certain cross-sections of the tech sector including earlier stage start-ups who have not yet raised £250,000.
The second threat is sentiment which is directly driven by government policy. It has been noticeable throughout this crisis how the focus of government funding has been on innovative larger (VC level) start-ups. The Future Fund is only open to start-ups who have previously raised £250,000; CBILS is not available for “businesses in difficulty” which includes businesses that have accumulated losses equal to more than half their paid-up share capital i.e. most growth stage start-ups. The government’s focus on bigger start-ups sends the message that earlier stage start-ups and SMEs are not a priority.
The government has long been trying to move the emphasis in the UK tech sector towards more innovative start-ups. Over the past five years, eligibility for the Enterprise Investment Scheme (EIS) has been gradually restricted for “normal” tech businesses and extended for “knowledge intensive” start-ups. This move was emphasised during lockdown when Rishi Sunak allocated a further £750m to Innovate UK to support the UK’s most innovative (primarily biotech) start-ups. Whilst an emphasis on innovation makes sense, the government must ensure that it does not appear to be anti-less innovative tech.
DB: This crisis has proven that there is no substitute for the depth of human connection, and that the technology industry has an essential part to play in the whole ecosystem we operate within.
Post-COVID-19, smart tech will be needed for many things such as an increased demand in no-touch technology, remote health monitoring, improved connectivity and cyber security. There’s likely to be a new slant on education and potential long-term changes in retail – including smart technology usage to monitor footfall, enable customers to ‘try on’ virtual clothing and further innovation.
The long-term impact of less people being together – whether that’s in a large office building or travelling to a trade event – will need a creative alternative from technology companies that gives a rich user experience. There will also need to be continued investment and agility to transform ideas into applications and devices quickly.
At the front and centre of what we do are people, trust, mitigating risk and providing value, whilst caring for others as our lives return to a near-normal.
MDC: Crises like these and especially the projections that many economists have made about a longer recession that will follow aren’t good for any industry to be honest, and that includes the tech sector. But having said this I would still see the tech sector being one of the winners (as far as there really are any) as this crisis will accelerate the digitalisation within companies of all sizes and across industries, which is positive for b2b tech companies as they are in the heart of this transformation. On the b2c side, the accelerated shift from bricks and mortar to online also benefits the tech sector.
What government help is needed for the sector to survive this crisis?
SH: Initiatives that help businesses in need, like the Future Fund, are good although they do not cover all cases. I do not believe the government needs to help tech start-ups as a priority – their investors should. It might sound counter intuitive as I am a tech founder myself, but you cannot embrace only the ‘positive’ side of capitalism (raising money and growing a private company) and not the downside (the market declines).
If your tech start-up cannot survive three months without cash infusion it probably wouldn’t have been a success anyway. Moreover, successful entrepreneurs always find a way to survive without being bailed out. I believe the government should better invest in healthcare and infrastructure, supporting the carers and putting programs in place to help people who have lost their jobs, rather than bailing out VC money.
SW: I think that certainly more support needs to be given to early-stage start-ups who may be facing difficulty, these are some of the biggest innovators and progressives in the field. Oftentimes these start-ups take years of work, research and dedication until they turn a profit and the backdrop of COVID-19 has certainly created challenging waters many of them might struggle to cope with. Support should come on a case by case basis; turnover, whilst certainly a key factor, shouldn’t be the only criteria as it would seem to be at the moment.
Without the support they need, some of the start-ups that make the UK a player in the global market place will simply be forced to shut up shop and that could have a long-lasting effect on getting us back on an even keel post-COVID. I may be biased but there’s an argument that long-established businesses that find themselves struggling when shocks to the system occur, shouldn’t be bailed out every time.
The smaller, more innovative businesses that are the real drivers of growth, employment and prosperity find themselves in difficult situations through no fault of their own. I’d much rather see support being delivered direct to individuals and small businesses as opposed to increasing the balance sheets of big banks and corporations. Unfortunately, ordinary people on the ground don’t hold too much sway over politicians’ decisions.
MB: The key is in encouraging private sector investors to take on some of the risk. The government cannot (and should not) continue bailing out businesses. The Future Fund is positive in that it has encouraged VCs and non-UK angels to take on some of the risk in funding larger start-ups, albeit with the government also taking a direct stake. Now, angels need to be encouraged back into the market.
The key incentive for angels to make high risk investments in UK start-ups is the Enterprise Investment Scheme which gives investors an upfront tax rebate equal to 30% of the amount of their investment, as well as a capital gains tax free sale of their shares after three years. There are numerous restrictions on eligibility for EIS including that the business cannot be more than seven years from when it started trading (unless it is a highly innovative business).
We propose a temporary 12-month new scheme along the lines of EIS but with an increased 50% rate of up-front relief that will allow angels to invest in struggling SMEs regardless of age to help them pay off creditors and re-launch their businesses. Other than the tax relief, the government assumes no risk and does not need to borrow further sums to fund the scheme.
DB: As an 11-year-old business, we’re fortunate to be fairly mature and also set-up at the end of the last recession. For younger organisations and start-ups, it can be potentially more difficult. The government has announced various funding, but the support I feel that’s needed will be ensuring the next generation that are coming into jobs will not be impacted by the crisis.
Younger people, those who have had their educations interrupted and others coming into job market, must be supported in their careers.
The digital divide is a societal issue too – how can the government support businesses to help counterbalance that? With 1.9 million households in the UK having no internet access or unable to buy mobile data, there must be more done to help vulnerable residents. For example, those leading by example included Vodafone, with the firm offering six months of unlimited mobile data to all NHS staff.
MO: Many small businesses are struggling financially and emotionally as a result of this crisis. While we are starting to see growing confidence and optimism, over half of small businesses now expect their profits to reduce by half.
Over and above financial support already announced, government support in skills, management, digital and leadership is going to still be needed to protect this vast sector, particularly across the areas hardest hit. Support is more than just cash – it is how to spend that cash wisely, how to restructure, how to make the most of new behaviours and trends, and how to build a more resilient business for the future. This will need to be driven by both Government and the private sector.
A critical part of that will be getting small businesses to take up the support on offer. There is a lot out there, but many small businesses don’t ask for it. We’ve curated a whole host of ‘Back to Business’ resources that can be found on the Small Business Britain website.
Has the virus impacted on funding for businesses in the sector?
SH: With the uncertainty, many investors are playing a waiting game, seeing who survives and resuming investment later on. I believe that specific sectors, like gaming, should now have enough ‘lockdown data’ to make a case to investors and try to turn the situation into an advantage for their business and raise money. Overall, I believe the crisis will contribute to lower valuations for the next 12 or 18 months.
SW: As a business that is changing the way investments are made, and empowering ordinary people to have a say in which businesses get funded, this is of huge interest to Pynk. A lot of investors are hurting, that’s for sure.
A lot of people have lost money and that’s left investors cautious about how and where they spend their money. The balance of power has shifted somewhat. At one time, to some extent, start-ups could be slightly more selective about who and where they raised their capital from but when VCs are more timid it makes the sell that much harder and that takes time away from building the core product, which isn’t ideally how we would have it. From a personal perspective we’ve been fundraising through the crisis – doing a mix of angel and VC and about to go live with Crowdfunding – and have had to spend more time than planned as a result of the world being turned upside down.
But I think in the main those with money see this as an opportunity. They’re getting better deals right now and can see which companies can deal appropriately with a shock to the system like this, which is a good early test and reduces their risk. My feeling is that this will blow over quickly.
Start-ups have proven themselves to be incredibly lucrative value propositions for investors; think of companies like the new breed of challenger banks who have made their investors very happy indeed! And some of the biggest tech start-ups came out of previous recessions. So, the atmosphere remains cautiously positive.
MB: In the early weeks of lockdown, many VCs were completing bridging rounds to fund their portfolio companies. However, those deals aside, there was a notable drop off in the volume and size of investment rounds. Most angels withdrew from the market and so earlier stage rounds essentially ground to a halt.
In recent weeks, we have seen a number of clients begin to sign term sheets with VCs, and the interest in the Future Fund has been huge.
A key issue for earlier stage tech start-ups is that they are reliant on angel funding and are ineligible for most of the COVID-19 funding schemes. They are excluded from the Future Fund unless they have raised £250,000 previously from investors; they cannot borrow from the CBILS as they likely have accumulated losses greater than 50% of their paid share of capital making them ineligible. Even if they were eligible for the Future Fund, angels providing matched funding cannot claim EIS and so are heavily disincentivised from investing.
Whilst angels and VCs will return to the market eventually, a lack of funding and support risks the failure of large numbers of early-stage tech start-ups.
DB: Lenders are likely to be more cautious in a global recession, although the technology industry has adapted well to the crisis and fared better than many industries.
There may be increases in taxes for businesses – as the government looks to balance the books following the substantial raft of measures that have been introduced. This could have an impact on company profit margins which will, in turn, impact investment on infrastructure and staffing.
As a business owner, there is an even greater need to be agile and have the ability to work through new ways of delivering value for customers. And from COVID-19, there are many valuable lessons to be learnt in everything – from running remote teams to developing true partnerships. The key to all this is to move forward and not forget what we’ve learnt.
CC: There’s a rising importance of people staying connected safely, alongside the need for businesses to be better connected. As a society we must continue to use and trust technologies that help to keep us secure and protected, and why we as a cybersecurity company are taking several steps to help our customers. We’ve been working hard to make the world a safer place for everyone, including making our full list of B2B solutions free for six months for healthcare organisations, enabling medical professionals to cope with unprecedented pressures and to help protect against cybersecurity risks. We are also providing support to keep remote workers safe, with training on working from home security basics; and keeping consumers safe, by releasing advice and top tips to help prevent cyberattacks and the steps people can take to protect themselves from these risks.
MDC: What it comes to venture capital investments and the overall feeling I’ve got when talking with industry experts is that many VCs are concentrating on their current investments and not that actively seeking new investments. But yet again I don’t see this having a negative impact for the medium to long term funding of growth tech companies that have solid numbers to prove their case.
BS: Our clients have encountered significant challenges accessing funding in recent months, with investors pulling out of signed term sheets coupled with the difficulties in attracting new investors and the emergence of more investor-friendly terms.
The £250m Future Fund for high-growth companies set out by the Government goes some way to supporting businesses but with the current restrictions in place, only a relatively small pool of companies can take advantage of the fund.
There is hope, however, with some economic commentators expecting to see a V or U-shaped recovery. This does come with the warning that funding may be subdued in the medium term, picking up towards Q4. It remains to be seen what the longer-term effects will be but our experience does offer insight into the now.”