According to accounting firm RSM UK, the number of tech startups founded in the UK has suffered its first “significant decline” since 2022. In the second quarter of 2024, there were only 12,318 new tech startups, compared to 13,802 in the first quarter – a decline of 11%.

The number of tech startups is considered a good indicator of industry growth and has so far indicated prosperity. The first quarter of 2024 saw the highest number of tech startups in five years, while the total number of startups founded in 2023 increased by 22% compared to 2022, marking the largest percentage increase ever.

Ben Bilsland, partner and head of technology at RSM UK, said in a press release that the latest figures suggest that “there could be a turning point in growth in the technology sector”.

“On the one hand, the new government is struggling with a £22 billion budget deficit, but on the other hand it cannot afford to take for granted a strong technology sector that contributes around £150 billion to the UK economy every year,” he said.

“Against this backdrop, and given that high interest rates and stubborn inflation continue to pose economic challenges, we would like to encourage the government to do everything in its power to sustain growth in this sector.”

Last week, it was revealed that the new Labour government had cut £1.3 billion in funding that the Conservatives had earmarked for AI infrastructure. The technology sector was barely mentioned in the King’s Speech in July and no new legislation was officially announced, including the expected AI Bill.

Bilsland said: “We need a renewed focus from the government on the bigger picture and supporting the sector to develop technologies that will enable the UK to compete on the global stage. In the US, tech giants like Google and Amazon are driving huge economic growth. This raises the question, can the UK government afford not to invest in the tech sector?

“The King’s Speech seemed to me like a missed opportunity to close the technical skills gap through further training and to address the AI ​​landscape. Despite limited resources, we would urge the new Labour Government to consider supporting the sector with enhanced tax relief and access to deep computing in the next budget to support AI development.”

London recorded the highest number of new business launches in the second quarter, at 6,170. However, the number is down 16% compared to the first quarter. In fact, all regions of the UK saw a decline in the number of tech businesses compared to the previous quarter, with Northern Ireland seeing the largest decline, at a 22% drop.

Despite the decline in new tech startups over the past six months, most regions saw more tech startups in Q2 2024 than in Q2 2023. This is particularly true in the North East and Scotland, where there were year-on-year increases of 38% and 22% respectively. The number of tech startups across the UK was 0.2% higher in Q2 2024 than in Q2 2023.

It is not just the British technology industry that is suffering

On Monday, shares of the “Magnificent Seven” U.S. technology companies – NVIDIA, Meta, Alphabet, Microsoft, Amazon, Tesla and Apple – had all fallen dramatically, losing a total of $1.3 trillion in five days. The sell-off is due to several factors, but a key reason is that investors are increasingly concerned about AI’s return on investment.

Alphabet spent $13.2 billion on AI infrastructure investments in the second quarter, 91% more than in the second quarter of 2023, putting pressure on profit margins. Meta CEO Mark Zuckerberg also noted in a quarterly earnings call that he expects it will take “years” for the company to monetize its AI products.

Jim Covello, an equity analyst at Goldman Sachs, wrote in a recent report: “Despite the high price, the technology is still far from where it needs to be to be useful… Overbuilding things the world has no use for or is not ready for usually ends badly.”

David Cahn, partner at Sequoia Capital, argued in a blog post that the AI ​​industry needs to generate $600 billion a year to cover its hardware expenses.

Semiconductor manufacturers are also facing problems: Shares of Intel, Samsung, TSMC and SoftBank Group, the parent company of Arm Holdings, all plummeted on August 1.

Intel shares fell 26%, their worst day in 50 years, after the company suspended its dividend and laid off 15% of its workforce. The moves are part of the company’s attempt to regain its dominant position in the industry after being overtaken by numerous rivals in the S&P 500. At the same time, however, they dragged down global semiconductor stocks. Rumors that NVIDIA would delay the release of its new chip due to design flaws also helped send shares down 6.3%.

In addition, investors are preparing for upcoming interest rate cuts in the US and are therefore favoring small-cap stocks, which tend to benefit more from lower interest rates.