Welsh startups 'increasingly isolated' over lack of diverse funding routes

The Welsh technology sector has the potential to become a leading regional UK ecosystem but is being held back by several institutional hurdles, according to a new report.

The regional ecosystem is said to be suffering from a lack of “diverse investment routes”, which is acutely affecting startups in the sector.

The study, run by startup policy non-profit Coadec, said that startup founders in Wales report feeling increasingly isolated in the broader UK tech scene, while many feel the government lacks a concise long-term outlook for the future of the ecosystem.

“Startups wanted access to more diverse investment routes,” the report noted. “Most founders and ecosystem members we talked to highlighted the difficulty raising funding from angel investors and VCs in the Welsh startup ecosystem and identified this as the ecosystem’s most serious and pressing weakness.”

“Multiple founders who moved to Wales from London, either to attend an accelerator or for personal reasons, noted the investment scene in Wales was quite a ‘shocking’ contrast,” it added.

Wales does boast notable “early success stories”, Coadec found, specifically in the fintech and cyber security spaces. Fintech was identified as one of Wales’ “most prolific and well-known areas of startup growth”.

Statistics from FinTech Wales, the non-profit organisation that represents the sector, estimate that Welsh fintech startups generate more than £3.6 billion in value to the economy.

The Welsh cyber security sector is also growing rapidly, and is now home to more than 400 companies, including global firms such as Airbus, Thales, Oracle, and General Dynamics.

Long-term, the report said that these high-growth industries could provide strong foundations to support the regional ecosystem, but warned that funding gaps were still a critical issue limiting growth.

“This shows a tech ecosystem with serious potential,” the report said. “But that potential needs investment. Wales is seeing record levels of investment year after year, but it is still too low.”

In response to these challenges, Coadec outlined a series of recommendations to help bolster support and diversify funding routes for startups operating in the sector.

This included a concerted effort to “actively flag the network at home and abroad” and broadening entry requirements to Angels Invest Wales – the country’s largest angel investment syndicate run by the Development Bank of Wales.

Coadec also called for the establishment of a programme that backs the creation of more venture builders in the region, as well as a commitment from the government to support and expand regional co-investment funds.

Finally, it called for a review into how government funding can be “leveraged to provide better engagement with startups”.

Regional disparities

Startup support on a regional basis in Wales also poses serious challenges for the broader sector, Coadec found. Founders raised concerns that a concerted focus on “equitable” support could inhibit the high-growth potential of specific sectors and areas within the country.

“Founders felt that, in some cases, a laudable attempt to be equitable across Wales’ regions and sectors has meant that resources are diverted from the areas where Wales has genuine opportunities to become global leaders,” the report warned.

“As Wales’ urban centre, South Wales is home to its biggest cities and universities and the six most populated unitary authorities. It is here that we can see the tech sector’s most striking growth, with Cardiff home to 426 Welsh high-growth companies, a quarter of the total.”

Despite concerns over the future of the Welsh technology sector, there are positive signs looking ahead, Coadec noted. A 2021 study from the Department of Culture, Media and Sport (DCMS), for example, revealed that the country had a faster overall tech growth than the UK average.

Wales also had a higher proportion of high-growth companies compared to the UK average, suggesting that the sector was still capable of producing dynamic new companies.

This growth rate continued throughout 2022, Coadec added. A December 2022 study from R3 recorded a 143% increase in the number of startups founded in Wales compared to the same period in the year prior.