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Seed Investing in the UK Is Losing Momentum

Hey everyone! Here you have (finally) my article take on what I presented as a keynote speech at the Birmingham Tech Week 2020:

TL;DR Summary

Are UK VCs loosing courage? Data from Beauhurst and our experience running the Silicon Roundabout tech community show us a decline in Seed stage investing in the UK. This is now taking place after a decade of accelerating growth at that stage and in spite of the current continuing of growth of the overall venture capital and the startup ecosystem in the UK. Here is what we know, and the observation we can draw from it:

  • In the last decade the UK tech ecosystem ballooned
  • Crowdfunding and Angel investing are not the cause
  • This decline has been going on for a couple of year, so covid can’t be blamed
  • Early VCs, on the other hand, have showed a tendency to move “up the ladder” towards later stages
  • As valuations grow across Europe and the typical angel ticket remains small, a larger and larger hole is appearing in the Seed stage investing in the UK: the valley of death
  • Outside of London it’s even worse to make deals happen
  • Implications of these trends – i.e.”why should you care”:
    • Startups should be careful about not getting ‘stuck’ in between rounds: raising a pre-seed is not too hard and at Series A there is a strong competition amongst VCs -the issue is if you don’t “know your investors” and can’t find the right match in between:
      • It’s easy to become ‘too big’ for pre-seed investors, and ‘without the required traction’ for Series A investors
    • Investors who are willing to specialise in Seed stage investing in the UK have a golden opportunity to capitalise on the reduced competition
    • Everyone else needs to be concerned about this trend and should (in their own ways) encourage a reversal:
      • Invest! -from angel investing to crowdfunding and from direct investments to investing in a VC- there are plenty of ways to inject capital into startups
      • Startups who pass the seed stage are the fastest-growing job-creation engine for the UK: their success is everyone’s success
      • Help startups or even join one to propel the ecosystem!
      • Found your own startup – communities like Silicon Roundabout and funds like SR Ventures are here to help you make it!
    • We’ve come a long way since 2011, when we started our meetup and the startup scene was almost non-existent: we’re now on a trajectory to catch up with titans like the US and China. Now is the time to double-down, not slow-down!

Are UK VCs losing courage?

I ask this question because I have been analysing some data that point toward a little problem with Seed stage investing in the UK.

I will walk you through it because I want you to see what’s happening out there and what this potentially means for you, whether you’re an investor, a startup founder, or whether you’re just part of the ecosystem.

Let Me Tell You a Story…

Back in 2011, when the Silicon Roundabout meetup started, the London tech scene consisted of a bunch of engineers and founders getting together in a pub. You could even argue that this was pretty much the UK tech scene because there wasn’t much going on anywhere else.

There were two startups that became unicorn from 2000 until 2010. In 2011, the number had not changed. Let’s fast forward to 2018.

By this time, Silicon Roundabout had become the largest tech meetup community in Europe. This was mostly by chance, as we continued to organise meetups and connect people. And while the tech scene was growing, we witnessed a parallel explosion in the number of unicorns created during this decade in the UK. There were now 31 new unicorns and the decade had not even ended yet.

Then from 2019 until 2020 things went even more berserk! Silicon Roundabout alone has seen its community startups balloon to more than 5,000. Meanwhile, the UK got 8 new unicorns in just over year.

It was then when we decided to drop everything we were doing and launch a venture fund.

We saw a lot of potential from this ecosystem and we wanted to help along the way those startups whose growth we know to be forthcoming, if they just got that extra push and financial support.

Fuel for Growth

So, we ask the question, what fueled the growth of the UK tech ecosystem?

How did the UK get from where it was in 2010 to where it is today?

Of course, the entire European tech market grew, in general, but the UK, by itself, is about twice as big as any other market in Europe. How was this possible?

The answer is simple: there was cash available.

To build a startup you need cash. If there is no cash available to fund your growth, you’re probably going to struggle a lot to become a unicorn. If there is money available and you can get funding, then it’s much easier for the startup to survive. So, cash is the key.

But there has been a little trend happening lately. Take a look at the graph below.

Even while there has been this massive growth in the amount of money invested, we see a dip in the last couple of years in seed and venture investment deals: Seed investing in the UK is actually losing momentum!

This is quite interesting because the data tells us that capital going into venture is growing, overall. There is more money available and there are more deals being done.

But! It is the seed stage which has taken a hit.

And this data is all pre-Covid, so we can’t blame it on the pandemic.

The simple fact is that people have been investing less in seed startups for the last two years. There’s more money available. More money is going into ventures. More venture funds are being started. Everything should be great, right?

And yet, startups, or at least certain type of startups, are receiving less money. So, what seems to be the problem?

Getting to the Root of the Problem

Let’s start with some educated guesses to pin-point the most likely culprits.

  1. Crowdfunding: Perhaps people are investing less.

No, they’re not! There is actually more money being deployed.

  1. Angel Investing has decreased.

Nope: it turns out that angel investing has pretty much remained stable in the last five years. Around £2 Billion more or less per annum.

We know this from the tax schemes records for EIS and SEIS rounds in the UK. Not all investments go into the category but it’s a good matrix of the angel appetite for Seed investing in the UK. And so, that can’t be the reason, as well.

If people continue to invest, what can be causing the dip in seed investments?

A Very Valuable Insight

My industry colleague, Martin Zaba, who was head of marketing at SyndicateRoom (I believe he has since moved on), said something very insightful. He noted that institutional investors, the VCs, are tending more and more to favour larger and bigger deals, usually at later stages of the startup life-cycle.

Crowdfunding and angel investing can get early money for startups. There is also ground funding, so it’s not necessarily a problem getting growth stage money, especially if you have the right metrics because there is more and more money going into the ecosystem.

But there is this gap in there that is starting to appear. In the industry, we refer to this as the “Valley of Death”!

The Valley of Death

Why does this matter, in the first place? It matters because in the UK and throughout Europe, in general, valuations are growing and continue to grow irrespective of Covid.

This is data that we pulled out ourselves from PitchBook when we sent out our report to venture fund investors just last August. And, you know, PitchBook doesn’t lie! Valuations have been going up since 2010, and 2020 is not even done. And yet, even if we include the second quarter, valuation still went up.

This is how the Valley of Death pops up and grows. Seed investing in the UK is now showing an equity gap between bootstrapping or pre-seed and late-seed or series A. And this gap is getting increasingly bigger and it’s becomes harder and harder to jump across it.

You can think of VCs climbing up the ladder toward bigger deals. And you look at angels and, yes, there is angel money. But looking back at the data that we pulled from the British Business Bank, the median ticket for an angel is GBP 45,000.

Pooling together a one to three million GBP round, which is what the new valuations are starting to indicate, is much harder to do. Therefore, there is a problem and that’s where a lot of startups are now getting stuck.

If they don’t get out, they fail.

Out of London… it’s worse

Seed investing in the UK only gets worse if you’re outside of London. Irrespective of the great initiatives done in Bristol, Manchester, Edinburgh and Birmingham, for example, the number of deals done in London still dwarf the ones done in rest of the country.

Most investors are in London, and from experience I can tell you that a lot of people don’t even look outside the city.

They wouldn’t turn away a deal that comes to them, but their reach is not as strong outside of their bubble and so it’s less likely that a deal is done, in the first place.

What Can We Do About It?

The answers, of course, depend on who you are within this arena.

  • If you’re a startup, you probably want to know, “How do I survive the valley of death?”
  • If you’re an investor, you’re probably asking yourself, “Why should I go to the valley of death if all others are getting out of it?”
  • For everyone else, why should they even care?

Tips to Help Startups Survive the Valley of Death

As someone who is currently reviewing many pitch decks for our fund for 2021, and having seen lots of funding rounds happening in the community for the last five years, here are some useful tips for startups.

  1. Know your investors. There are significant differences among investors. Knowing these differences can really help you get through this phase. For example, if you have an MVP or a good pitch, and you can show that you have a problem that is worth solving, you will probably be able to secure a pre-seed cheque.

But it’s a pre-seed cheque, so don’t shoot for £5 million or £20 million valuations.

  1. Build customer validation. They call it “traction,” but it really is customer validation. You need prove to the investors that you’re doing it right (If you can get people to invest a lot of money on the idea and the business principle the way Adam Neumann was able to do for WeWork, then you can probably skip this part! :D )

Keep this in mind: a lot of investors out there are looking for at least £1m in revenue. These people fall into the late-seed / Series A bracket. This is most VCs today, so if you’re trying to get money from them, everything you do should be geared towards showing that you either have it or that you are on the path to get it, and this funding is just what you need to get there.

If you do this, many more doors will open for you. You won’t get this advice from VC websites, so I believe it’s worth knowing this reality.

  1. Find the exception. Even though there has been a dip, and even though we’re seeing a shift in what ventures investors are comfortable investing in, not everyone is the same. That there are exceptions. In the UK, as of 2019, only 8% of VCs come from a startup background, and only 4% have had a technical job. But this is changing, so look out for the exceptions.

    There are VCs that have an open-minded, maybe more American, approach to venture. They will still fund deals that are not necessarily appealing to more conservative managers. You need to find them.

    Here’s something you can do. Use Crunchbase to look for a startup that aligns with what yours does; someone that has received funding at your stage. Find someone with a similar pedigree, a competitor, or just someone that is doing something similar, or someone that falls into a similar group with your company. Then work your way back to find who invested in them.

Valley of Death Tips for Investors

If you’re an investor the message is simple: there is money on the table.

If there is an equity gap, it means that it’s an under-invested sector.

Opportunities have not gone down, and startups are still starting up. There is more deal flow, potentially, and if everyone else is moving up to the larger deals and the angels are staying there, the opportunity exists right there in the middle of the seed territory. You can find a good way to enter and transform the “valley of death” of Seed investing in the UK into an opportunity, while everyone else is climbing up or staying stuck.

For Everyone Else…

If you are neither a startup nor an investor, why should you care? What’s in it for everyone else?

We should all care. Let’s look at this statistic from a report by the Octopus Group.

84% of the net employment growth in 2016-17 were provided by what they call High Growth Small Businesses – startups, in other words.

The same report goes on to analyse that the gross value add to the economy by these high growth small businesses during that period was £113 Billion. That does have an impact on everyone’s life, wouldn’t you agree?

Today, most of the startups are in tech. Tech Nation tells us that the tech sector has given us a 6X growth in the market.

This is basically its gross impact on the market compared to everyone else. So, while the economy might be growing at a certain speed, tech is 6X faster. Because it goes six times faster, it has significant impact on everyone’s life.

Reversing the Trend

Startups are not created equal. In fact, startups are not small businesses.

Startups are really large operations at a fledgling (but rapidly growing) stage, which can solve large problems at scale (as they develop).

That’s an important point because there is a difference that we can quantify. Octopus did it for us in their report, showing how startups are a fourth more productive than other businesses. They have a bigger impact on the economy overall. That startup’s impact is evident in job creation and in terms of value produced for the economy versus, say, a small shop.

And so, knowing all the good things we now know about startups, what can we do to counteract the disturbing trend that we just described in the VC industry?

Launch a startup

If you do have an opportunity to launch a tech startup, and you have the right mindset and the right team, and you’re solving a real problem, then try. Investments are taking a dip but remember, pre-seed or early stage investing is going up. There are also many funding opportunities backed by the government as a lot of projects may qualify for grant funding.

And there is a massive tech startup ecosystem all around you.

There currently is an “in-between rounds” problem. But that problem is solvable and there are investors that are actively interested in that Seed investing in the UK.

So, if you do want to start a company, just do it. And if you are already doing a startup or working at one, you can adapt. It’s not impossible to get money, even at that seed stage, even if you don’t quite fill every single criteria box in the mindset of an investor.

You can still take a few of them and try to pitch your opportunity the right way.

You can even consider going abroad if you have connections to US VCs. It’s not that common and it takes a little bit of work, but it can happen. Once you pass that bridge after Series A, the mortality rate goes down. So, your chances of making it are much higher.

Join a startup

If you’re not in a startup yet, you might consider joining one.

Why? Because we know what’s happening out there. The impact on the economy is the way it is because startups are today one of the biggest engines of job creation. There were a few casualties during the peak of the pandemic. But that’s improving as startups are hiring once again. My personal bet, based on what I’ve been seeing in the ecosystem, is that this uptrend is going to continue. Therefore, if you are not already involved in the ecosystem, you might want to try and potentially give advice, or even join a startup.

Retail investing

One last thing that we all could potentially do is to consider investing in seed startups. Investing in seed startups can take a lot of forms and that’s why I say it’s something we should potentially all consider. We’re quite fortunate there are plenty of opportunities today in the UK.

You could invest time by advising status. You don’t even need to be in tech to do this. A lot of startups need help with so many other aspects of their business.

If you’ve got a few hundred pounds, or thousands, to spare, you can probably join Seedrs or CrowdCube. They’re merging, so soon you won’t even need to pick. Or try other opportunities to crowdfund. It’s as easy as clicking your mouse.

Then there are some listed funds and VCTs you can buy shares for (if you don’t know what they are, your financial advisor might help you).

LP Investing

Then there are emerging managers.

I mean, we ourselves are starting a fund, for example, but there are hundreds of other people doing the same thing all over Europe.

Direct Investing

Finally, there is direct investing. If you have the capacity to  be an angel, why not consider it? And if you don’t want to put in any money, you can probably spend some time in the ecosystem.

It’s up to us all

The fact that Seed investing in the UK is taking a dip is probably everyone’s fault because in Europe, we have this mentality of saving up some money.

Then what do we do? We buy a house think that it’s an investment.

Then we save some more and buy another house and rent it out.

With the income, those who make it bigger buy a bar, or a restaurant.

That’s OK, of course. Investing is always positive.

But tech startups are having such a massive impact!

If we are to become a digital economy, which Covid is forcing us to be, then we must also consider venture.

This is where potentially we could be:

China and the US are way ahead of us. Even though the UK have got an advantage compared to the rest of Europe, there is still a lot of potential that we should harvest.

By being entrepreneurial, by supporting entrepreneurs, not just with money, but by encouraging people to take this path and not to go down the old same route, it’s what we need in the UK and Europe

Seed investing in the UK is losing momentum and we can be all part of bringing it back up.

Our mindset as Europeans affects the ecosystem.

The startups are there. If you are doing a startup or if you’re joining the ecosystem, I think you should consider what you can do in your own small way to really improve the situation and help the economy continue to grow. And to even overtake the US and China.

Well, why not?

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