UK entrepreneurs are attracting investment for AI projects, but many are exiting early due to challenging economic conditions.
Wealth managers servicing the UK’s beleaguered entrepreneurial community are reporting challenging conditions, as both the private and public sectors struggle to identify good news to attract investment.
Staffing remains a key issue. “There’s a real battle for talent – and not just with competitors, but for experienced individuals who are wanting a work-life balance or choosing to retire early,” says Jeremy Franks, head of wealth planning advisory, UK and Emea, at HSBC Global Private Banking.
There are also key cultural factors at play, which are stronger in the UK than in the US. “Lots of businesses fail, but there is often a stigma attached to it,” he says. “However, a serial entrepreneur is not necessarily going to back every winner of every race. A lot of the successful entrepreneurs will say how they learned from the mistakes they made and have become better business owners with the benefit of experience.”
Some sectors are clearly performing better than others among the bank’s entrepreneurial client base. “We are seeing more optimism in sectors that rely on highly skilled workers, such as the technology sector where there are exciting developments in AI, as well as in pharmaceuticals and construction,” he says.
Falling profits
Rising costs are placing significant pressure on businesses, particularly in the hospitality sector, as firms contend with the end of Covid-related business rate relief, higher energy and input costs, and increased employer national insurance contributions.
“People-heavy businesses are being hit the hardest, forcing them to either raise prices, cut staff, or absorb the costs, making them far less profitable,” says Miles Kean, director of private banking at Arbuthnot Latham, a London-based boutique firm.
Larger firms are seeing cost increases of £75m ($94m) or more annually, while mid-sized businesses are also under strain. Mr Kean reports that one client firm of his, with £25m in annual revenues, faces a £400,000 rise in costs, erasing 40 per cent of its profits. Another, with £8m in revenues generated by eight employees, saw only a £25,000 cost increase.
Shifts in workplace dynamics are compounding recruitment challenges, as younger employees who missed in-person training during Covid face knowledge gaps, while many older workers, now financially secure, are reluctant to return to the office.
“Expectations around pay and flexibility have risen, making hiring more competitive, especially in London, where high employment levels give candidates more leverage,” confirms Mr Kean. Employers are also concerned that school leavers are entering the workforce without essential skills, further tightening the labour market.
More than 40 per cent of UK entrepreneurs are currently exiting, “to prioritise well-being and family”, rather than continuing to invest in their business, according to a report by Arbuthnot Latham.
Market conditions are a key factor, with 65 per cent selling earlier than planned amid concerns over potential tax increases. Meanwhile, one in five entrepreneurs cited receiving offers they "couldn’t refuse", often leading to swift decisions amid increased uncertainty.
Education sensation
A much-needed impetus to boost start-ups has come from the government, which is starting to acknowledge the importance of the country’s world-class universities, in its bid to boost its entrepreneurial ecosystem.
In February, the UK prime minister, Sir Kier Starmer, unveiled the AI Opportunities Action Plan, setting out his ambition for the UK to establish itself as a global leader in artificial intelligence.
The government aims to boost productivity by fostering collaboration between humans and machines. Mr Starmer emphasised AI’s transformative potential, stating that it will drive significant change and could reshape the lives of working people. UK universities are set to play a major role in this.
“The UK is very lucky to have so many world-class universities — they are huge assets that can create a lot of commercial value,” says Mr Franks at HSBC.
“The government can see this potential, which is why they recently promised to invest in the Oxford-Cambridge Arc to tap into the scientific and technology expertise in the area.”
In addition, he believes, many universities — often including the Russell Group of top institutions — each have the ability to make a hugely positive impact on local businesses and communities.
Despite the currently challenging economic backdrop, entrepreneurs are showing signs of resilience, says Mr Franks.
“We are seeing significant flows of capital into the UK, helped by a strong dollar but also because the UK remains to be seen as very stable when compared with a lot of other jurisdictions, despite some of the uncertainty we have seen over the past few years.”
“There are always challenges, but successful entrepreneurs often have the mindset where they are able to move with the changing times, embrace a new situation and find new opportunities when others cannot.”
Trouble ahead
Further challenges are however looming on the horizon. Recent changes to business asset relief could also have far-reaching consequences for intergenerational firms. Family-owned companies such as Wates and JCB, both involved in the construction sector, have warned of “significant tax liabilities” when ownership transitions. These could force some businesses to sell assets or take on debt to cover costs, potentially reducing investment and leaving them more vulnerable to overseas takeovers.
Trade talks between the UK and US, focusing on technology collaboration, particularly in AI, still have some way to go. Analysts at Capital Economics note that the UK’s pledge to increase defence spending may have helped secure US goodwill, but broader economic growth remains weak due to domestic tax and wage pressures.
Trade uncertainty complicates planning for UK entrepreneurs. While avoiding tariffs would help exporters, ongoing global tensions and domestic challenges may curb investment. The focus on AI could benefit start-ups in key sectors, but analysts warn that shifting government priorities and economic uncertainty will make conditions tougher for many businesses.
