100 UK Startups - Founding and Funding

Today the Daily Torygraphs process for winnowing down the Tech Startup scene to the Top 100 bore fruit, and here they are - we wish them luck (they're going to need it - anticipated success of startups is in the "less than 20%" area). But I was re interested in a parallel post on the Torygraph about the "Equity Gap" funding as that to me is one of the two main drivers of success. Quouth Kolvin Stone and Giles Hawins said Torygraph:

Whilst publicly VCs maintained a commitment to the early-stage market, this was not being borne out in practice - although recent signs suggest this is starting to change.

This gap in the funding market has been filled by business angels, or more formal angel funds, that, though having shallower pockets, have become a more frequent source of funding. A number of entrepreneurs who have made their money are now re-investing in start-ups, either through formal funds (such as Notion Capital, Passion Capital, Pro-Founders and Atomico) or personally. This is a relatively new phenomenon for Europe, but something that has fuelled Silicon Valley’s success for some time. This trend should continue as we see more European entrepreneurs achieve exits over the coming years.

We are now beginning to see the return of venture capitalists to early stage investing (although it has to be said that the definition of “early stage” differs in Europe to that in the US). From our own deal flow observations, it appears that many venture capitalists are using a “barbell strategy” – investing either at the very early/seed stage at one end or writing large cheques for growth opportunities at the other. Whilst many venture capitalists have rolled out a seed programme, this approach is still evolving and has not yet been standardised: some venture capitalists prefer using debt some equity and some will use either.

Our colleagues in the US are still seeing higher valuations than we are in Europe, and on better terms, with US companies more likely to get funding at an earlier stage. European investors are still demanding to see evidence of revenues, or traction, before they invest, even at an early stage.

This lower funding/more evidence of success required in the UK maps to what I heard at a BIS session on the New VC Paradigm last week at the BIS - in fact when I was impertinent enough to suggest the somewhat long and involved cycles in European funding may be simplified I was rapidly swatted away for my impertinence (Ditto another questioner who wanted to know how creative businesses could be more easily funded in the UK). But this is the literal Million dollar question for these startups - who shall fund them so they can grow quickly enough to win vs the early and well funded US rivals?

One of the issues driving the Input is the Exit - as the Torygraph article notes:

Unfortunately, we are still seeing few exits in Europe in either M&A or IPOs. Compared to the US and Asia, the IPO market for technology companies in Europe is challenging, but there does appear to be some promising news with the recent floats of Betfair and Ocado. Our client Sequans Communications SA, a company backed by Kennet, ADD Partners and Serena Capital, has recently announced its intention to float. While this is notable for being a rare example of a European tech IPO, it is even more notable for being the first listing of a French company on the New York Stock Exchange for more than ten years.

One development in respect of M&A is the rise of the management buy-outs. As technology companies become more mature, private equity will increasingly become a source of liquidity for venture capitalists.

Umair Haque would say that selling to yet another Equity Provider is a hallmark of a Ponziconomy. While I wouldn't go that far, it is clear that the funding cycle in Europe is not really optimum yet. I have great hopes of the StartupBritain campaign, but so far it seems to be more about money-off coupons for digital picks and shovels (and Snake Oil) than trying to change the basic economic structures to increase the probability of success.

Overall, all the glamour around startups is wonderful, but it is all still largely window dressing over the key issues in the UK as the Government withdraws a lot of the assistance that used to be available - it's more difficult to start and run a small business here than in the US, funding is less and comes later. UK entrepreneurs need and deserve a more integrated national strategy (after all, apparently these people are going to create all these extra jobs in the Coalition Plan) - so here's hoping a grander design emerges.