Author Trevor Clawson
Britain’s fledgeling tech startups raise less money, through fewer funding rounds than similar companies in the US, and their founders tend to sell out earlier – a tendency that reduces the chances of a UK company completing the journey from startup to £1bn unicorn.
That’s the view of the Treasury, which in August of this year noted in its Patient Capital Review that Britain trails well behind the US when it comes to commercialising what is often world-class R&D. As the government sees it, a lack of finance is “dampening” the ambition of UK entrepreneurs.
Lack of Finance Part of the Problem
And according to a poll of 100 tech entrepreneurs carried out by equity investment research company, Beauhurst, investment platform operator, VentureFounders and private bank Coutts, a majority of founders expect to sell out in the near future rather than steering their businesses through a scaling up process and perhaps on to a possible stock market flotation. However, the researchers argue that lack of ambition is not the problem.
Focusing on businesses that have raised investment capital – all those taking part had secured at least £10m over the past two years – the Scale Up report found that 79% were already preparing for an exit and the majority were looking at a timeline of two to five years.
Echoing the concerns of the Treasury, well over half (56%) were projecting a sale value of less than £50m while only 1% could see themselves achieving the £1bn price tag that would designate unicorn status.
Questions About Tech
The research – coupled with the Treasury review – raises real questions about the true potential of Britain’s tech startups sector. When policymakers visit accelerators or announce plans for new tech hubs, there is often much talk of supporting the companies that could become the next Google or Amazon. But as things stand, Britain produces just 4% of the world’s unicorn businesses, compared with the 54% attributed to the US.
According to James Codling, CEO of VentureFounders, the report highlights the challenges facing scale-up entrepreneurs. “It is critical for the UK to nurture the scale up infrastructure,” he said.
To date, the UK has proved successful in nurturing a flourishing startup and tech startups economy, supported by seed and early-stage funding from multiple sources, such as angels, VCs, accelerators and government grants. Many investors have been encouraged by the generous tax breaks available through the Enterprise Investment Scheme and its Seed Enterprise Investment Scheme sister.
A Lack of Growth Capital for Tech Startups
Problems begin to arise when capital-hungry businesses seek growth capital at the Series A and Series B stages where more substantial sums are required, but the risks to investors remain high. This is the so-called valley of death. “The big challenge for businesses seeking to scale up is lack of capital,” says Andreas Thorsten, a tech partner at EQT Ventures, a VC Fund, with offices in Stockholm and London, set up to provide European companies with funding of up to 75 million euros from Series A onwards. “It is the main reason why companies struggle to grow.” It may also be the reason why many founders opt to sell out relatively early.
Commenting on the findings, James Codling agreed with the Treasury’s analysis that there is an acute need to direct more investment capital to scale up businesses. But he rejected suggestions that UK entrepreneurs lack ambition – or that they were simply seeking short-term gains. “While UK founders do tend to exit early, 80% of them want to back into the ecosystem and support it. After they’ve exited their own businesses,” he said.
Meanwhile, Beauhurst CEO Toby Austin sees signs that the growth funding climate in the UK is, slowly but surely, becoming more scale up-friendly.
“I suspect that we are at the beginnings of a shift in the funding landscape,” he said.”Late-stage companies have been able to find the support they need within the UK.”
Acknowledging that much of that capital currently comes from overseas sources, Austin said he expected that situation to change.
“The UK is brimming with exciting ambitious businesses. The ecosystem simply needs to catch up.”
Compared to the decades-old financial infrastructure in, say, the US Bay area, Britain’s scale-up environment is still a work in progress and there is certainly a need – as identified by the Treasury – for more patient capital, provided by investors who are prepared to wait more than a few years to see a return. But it’s also worth remembering that for an entrepreneur, building a company that can be sold for around £50m is also a success.