The number of tech startups being founded in the UK has seen its first “significant decline” since 2022, according to accountancy firm RSM UK. Just 12,318 new tech companies were founded in the second quarter of 2024, down from 13,802 in the first quarter – a drop of 11%.
The number of tech corporations is seen as a good indicator of industry growth, and so far the number has suggested prosperity. The first quarter of 2024 saw the highest number of tech corporations in five years, while the total number of startups created in 2023 increased by 22% compared to 2022, the largest percentage increase on record.
Ben Bilsland, partner and head of technology at RSM UK, said in a press release that the latest data suggests the “wave of technology growth may be turning”.
“On the one hand, the new government is struggling with a budget deficit of £22 billion, but on the other hand it cannot afford to neglect a strong technology sector which contributes around £150 billion to the UK economy each year,” he said.
“With this in mind, and with high interest rates and stiff inflation continuing to challenge the economy, we would encourage the government to do everything it can to sustain growth in this sector.”
Last week, it was revealed that the new Labour government had scrapped £1.3 billion earmarked by the Conservatives for AI infrastructure. The July royal speech also made little mention of the tech sector and no new legislation for the sector, including the expected AI Bill, was formally announced.
Bilsland said: “We need a renewed focus from the government on the bigger picture, supporting the sector to develop the technology that will enable the UK to compete internationally. In the US, tech giants like Google and Amazon are generating huge economic growth. The question is, can the UK government afford not to invest in the technology sector?
“The King’s Speech seemed like a missed opportunity to address the technical skills gap through further training and the AI landscape. Despite limited resources, we urge the new Labour government to consider helping the sector in the next budget, through improved tax relief and access to deep computing to support AI development.”
London saw the most companies created in Q2, with 6,170. However, this figure was down 16% on Q1. In fact, all regions of the UK saw a drop in the number of technology companies created compared to the previous quarter, with the biggest drop being in Northern Ireland, where it fell 22%.
Despite a decline in new tech startups over the past six months, most regions saw more tech startups in Q2 2024 than in Q2 2023. This was particularly true in the North East and Scotland, where year-on-year increases of 38% and 22% respectively were recorded. The number of tech startups across the UK in Q2 2024 was 0.2% higher than the same number in Q2 2023.
It’s not just the UK tech sector that’s suffering
Shares of the “Magnificent Seven” of U.S. tech companies — NVIDIA, Meta, Alphabet, Microsoft, Amazon, Tesla and Apple — fell dramatically on Monday, losing a combined $1.3 trillion in five days. The sell-off is attributed to several factors, but the most significant is that investors are starting to worry about the returns on AI investments.
Alphabet spent $13.2 billion in the second quarter on AI infrastructure investments, up 91% from the second quarter of 2023, putting pressure on profit margins. Meta CEO Mark Zuckerberg also noted on the earnings conference call that he expects it will be “years” before the company starts monetizing its AI products.
Goldman Sachs analyst Jim Covello wrote in a recent report, “Despite its high price tag, the technology is still far from where it needs to be to be useful… Over-creating things the world has no use for or is not ready for usually ends badly.”
Sequoia Capital partner David Cahn argued in a blog post that the AI industry would need to generate $600 billion per year to cover hardware costs.
Semiconductor companies are also struggling. Shares of Intel, Samsung, TSMC and SoftBank Group (parent company of Arm Holdings) are set to fall on August 1.
Intel shares fell 26%, their worst day in 50 years, after suspending their dividend and laying off 15% of their employees. The moves are an attempt by the company to regain its dominant position in the industry after being overtaken by a number of competitors in the S&P 500, but they have also dragged down global semiconductor stocks. Rumors that NVIDIA would delay the release of a new chip due to design flaws also contributed to the stock’s 6.3% drop.
Investors are also bracing for upcoming U.S. interest rate cuts, which means they are prioritizing small-cap stocks that generally benefit more from lower interest rates.
