You think you have it bad, Mr.-Silicon-Valley-entrepreneur-trolling-Sand-Hilll-Road-for-cash? Try life on the other side of the pond.
Out of 39 firms that were active investors in British start-ups over the last five years, only thirteen venture firms have £5 million or more left in their coffers to invest, according to NESTA, the UK agency that advocates for start-ups and also sponsored the recent Traveling Geeks blogger tour.
That’s right: All but thirteen firms in the United Kingdom are either completely tapped out or have committed the rest of their funds for follow-on investments in existing portfolio companies. In total, NESTA estimates there’s about £400 million left that’s uncommitted among the thirteen, with only half of that available for brand-new series A deals. To put that into perspective, there’s roughly the same amount of money in the fund Marc Andreessen just closed than there is for new companies in the entire United Kingdom right now.
This is coinciding with a precipitous drop in UK firms closing on new funds thanks to the global credit crunch. In 2008, only seven firms closed new funds, and NESTA expects fundraising to be even weaker in 2009.
As most people know, I’m a pretty big advocate of the idea that many of the next great high-growth companies will be founded outside of the U.S., but these stats starkly demonstrate a undeniable advantage of being Valley-based. Even when fundraising slows and VCs save bigger reserves than usual for current investments, there are still billions sloshing around to fund new deals. Sure, it’s hard during times like these even in the Valley, but raising venture capital should be hard.
As with most research reports on the venture business, it’s the trend line that’s important to note here. It’s probable that NESTA isn’t counting a firm here or there. But it can’t be too far off. Indeed, the stat explains a lot of the anecdotal evidence that hit me in the face as soon as I arrived in London two weeks ago. Many of the entrepreneurs who’d pitched me on my last visit to London in November have already shuttered their companies and were unsure of what to do next. I have exactly one friend in Silicon Valley who has been forced to that point.
Even the good UK early stage names are struggling to close deals. It took AlertMe—a hot energy home monitoring company that won The TechCrunch Europa for best clean tech company last week—a whopping nine months to raise money almost landing the company in bankruptcy. (Index Ventures and others finally snapped up the deal a few months ago.) “I don’t want to go through that again,” the very polite and British CEO Pilgrim Beart demurred.
It’s that kind of bleak desperation that lead the infamous Paul Carr to pronounce the UK Internet scene dead….just before his own column in the Guardian became its own victim of the economy a few days later. (See Mr. Butcher’s TechCrunchEurope rebuttal here.)
Indeed “the scene” may be dead, but there’s an upside here. The companies that are still around have a much greater emphasis than Valley companies on making money. The Traveling Geek contingent went to Accel’s London office to meet with a handful of start-ups, and each one emphasized revenue and profits in their five-minute elevator pitches.
One that caught me by surprise was Michael Smith’s Moshi Monsters, a social network/ virtual game for kids. Cute idea, but sounds like it should be road kill in this environment, right? Nope. Its revenues are growing 35% month-over-month, it has 85% gross margins, and just five months after launching the site is cash flow positive. Nicely done, gents. (BTW, Smith isn’t all business. His house was the setting of those famous Scoble pictures…)
Indeed, there’s always something healthy about startups having to work within constraints. There will be fewer of them, but it’s possible that the companies that make it in this environment could well make up one of the most promising crops of UK companies we’ve ever seen. After all, Skype was laughed out of VCs’ offices when it started in the wake of the dot com bust.
In the coming days, I’ll be writing several more posts about the London companies that impressed me the most. Stay tuned.
Purely anecdotal evidence here, but I’m seeing plenty of UK entrepreneurs set up shop in Ireland because of it’s lower costs & favourable tax rate.
This gives me some consolation and re-assurance that US is not the only country hit hard by the Recession.
I liked the part about revenue generation…sounds like these companies are actually about making sustainable business, not just pump and dump.
“You think you have it bad, Mr.-Silicon-Valley-entrepreneur-trolling-Sand-Hilll-Road-for-cash? Try life on the other side of the pond.”
trolling, as in trolling? Trolling as in scaring little venture capitalists when they cross your bridge or trolling as in internet trolling?
Definition fail.
Trolling: fish by towing a baited line behind a boat.
Definition win.
Europe will always be behind in terms of VC. It’s a risk averse culture and people need much longer to mentally recover from losses or euphoria that didn’t deliver on the promise. And that is refelcted in the VC’s war chests.
Your twitter bio tells you’re from Canada.
I had to check, just to make sure whether it was an American who does not know anything about Europe, but still wants to convey an image that he does.
I am actually from Germany, currently living in Canada. I’ve worked and build businesses in European markets for about 16 years.
Hmm, I guess building businesses in European markets for 16 years might constitute knowing something about Europe. Possibly. I’ll think about it.
Your generalization about what Europe is, is ridiculous, that’s all I care about.
Niq: Your so blindsided by your love for Europe that you don’t realize how bad it is over there.
I must say you are spot on. Im a UK entrepreneur and rasing cash for equity out here is almost impossible, so much so that UK companies are actively seeking to gain US based investment and are even prepared to relocate if the deal so demands.
GT
Cheif Scientist
FilesWire.com
Evidently Scientists can’t spell, chief
Raising cash is definitely hard right now, in the same boat here, but angel networks are pretty active still, and so are PE funds with their “extra cashpile” leftover from the megadeals.
And apparently, some people, use commas, way too, excessively.
“I’m a pretty big advocate of the idea that many of the next great high-growth companies will be founded outside of the U.S., but these stats starkly demonstrate a undeniable advantage of being Valley-based”
that’s a bit of a leap…
there are lots of places where people are investing in startups, outside of the Valley and the UK – China and India come to mind…
also, VCs are the not the only funding sources out there, just the only ones you guys cover
This is very much why the chatter around London these days is about boostrapping – how to go longer without funding, how to build revenues earlier etc. A lot of the VCs I talk to are, as you outline, concentrated on growth funding or late stage. Hence why the PRO Founders announcement at The Europas was so interesting as it aims at the equity gap so common in the UK and across Europe.
I agree, the VC scene in the UK is a joke, but it does at least focus your mind on making money from the begining…
“Mr.-Silicon-Valley-entrepreneur-trolling-Sand-Hilll-Road-for-cash?” Yeah, funding would be nice. But the idea still works without money.
“To put that into perspective, there’s roughly the same amount of money in the fund Marc Andreessen just closed than there is for new companies in the entire United Kingdom right now.”
I’m not defending the UK venture funds, but journalists really need to learn the value of the money they write about.
The difference between $300MM and $400MM is gigantic, whether we’re talking about revenue, total funding or amount raised etc. The difference alone is more than likely 1000 times what you’ll earn in a year as a writer.
Lets keep things in perspective, eh.
He was making a point. I think we all got the point without over analyzing the authors comment.
Are we talking about big money?
The high taxes and other socialistic problems make it hard to start up there.
We’ll see what happens here as the tax rates increase, cap and trade kicks in, socialized healthcare takes out the existing healthcare and health insurance industries, etc.
Everyone can use a few extra bucks right about now
“I’m a pretty big advocate of the idea that many of the next great high-growth companies will be founded outside of the U.S”
I like your idea.Sarah!
We have never met Sarah, but have heard a lot about you.
I run http://www.edocr.com, which I have bootstrapped for well over 2 years and we are perhaps the first to come up with a commercial model in our market segment, if you ignore Scribd’s commercial entry to Amzon.com’s territory. We will continue to bootstrap until we are ready to raise funding on our terms. This is not a reflection of the market, but our own attitude regarding taking external finance.
Secondly, I run http://www.nwstartup20.co.uk – (NS2) my attempt at building an ecosystem for tech entrepreneurs primarily in the North of UK. The site is currently being improved with the idea of opening up the blog for tech entrepreneurs. We run monthly events in the North and invaded London on 8th June with Michael Birch spending over 8 hours with us. What Michael and Brent Hoberman attempting to do in London is very refreshing.
In terms of VC market, I can only talk about the North, and specifically NW. Two to three small VC funds closed over the last two years due to running out of cash. NWDA will make £13.5 million available over the next few months for investment up to mid 2010, when they will launch a £140m fund for the next 6 years. This is public sector funding. Other VCs continue to raise small funds in the range of £10 to £15 million from HNW individuals. Two of London based angels network are considering launching their franchises in the NW/North. We at NS20 may also stretch our model or team up with one the networks coming to the North.
Just to conclude, the market is not as bad as you say it is. Yes, selection process is more stringent than ever, and in this game, credibility and contacts are important as ever.
If you do return to UK, and want to wonder up north, we are happy to consider running an event to coincide with your office. Just give us couple of weeks notice.
All the best
Manoj
apologies about major typos. “office” should have been “visit” and “NS2″ should have been “NS20″
Meh.
Each minute you are complaining about UK economy/VCs/SV-envy/socialism/ecosystem in the techcrunch comments is a minute you could be spending getting more customers. Just get on with it!
Bugger… that’s nearly a 1 minutes I spent on that! Quick! Back to work! ^_^
We are still investing, and finding syndicate partners wanting to come into early-stage technology deals. It is worth remembering that the number of deals of this kind p.a., and the number of investors active are very similar- there is a very long tail of technology investors. We are finding that some of the super-angels, and corporate investors are actually more active. Overall it’s a tougher climate, but far from dead.
A solid article and some good comments. As reported on TechCrunch recently (http://uk.techc...m-dawn-capital/) Cognitive Match (http://www.cognitivematch.com/) recently closed significant investment.
Given we are UK based, early stage and raised money this month we are in a minority. I wanted to share our approach to investment and in particular how it changed as it became increasingly clear we were heading into a significant ‘down market’.
We started actively talking to potential UK investors in last year. Something quickly became clear, VC’s were unsure where the market was heading but they were still actively talking to companies that could tick the critical boxes:
1. Have you done it before
2. Have you invested your own money
3. Is the business in potential growth market
The same questions investors have been asking for years, what changed was the priority. In the recent ‘mini boom’ the 3rd point was the focus, increasingly now VC’s want to see experience and serious financial commitment. The assumption is an experienced team is more likely to be able to weather the storm and adapt their business model as needed.
Next up we spent two weeks in Silicon Valley. Six weeks before we left we called/emailed the great and good and managed to set up 14 meetings. I’d encourage UK companies to go to Silicon Valley as the lessons we learnt there were invaluable. I’ll temper that with the following:
1. Set a firm goal on the number of meetings you need as a minimum to make the trip viable. If you don’t line enough up don’t go.
2. Don’t expect to close funding. There is much more VC money in the US but the likelihood of getting funded by a US VC without being set up as a US company is very slim.
3. Listen hard. If several VC’s say the same thing then they’ve probably got a point. We changed our business plan as a result of our trip.
Back in the UK it became clear that the market was most definitely becoming less healthy. The steps we took to increase our chances of funding were:
1. Lowered the level of investment needed
2. Actively pursued Angels. I’m sceptical about Angel Networks but we did get some great traction with London Business School E100 Network of Angels. We combined this with tapping up contacts and contacts of contacts.
3. Significantly widened our search for VC’s.
The new ‘leaner’ plan and the widened search significantly increased our traction. We came close with a group of 8 Angels Investors but ended up securing funding with a great UK focussed VC – Dawn Capital (http://www.dawncapital.co.uk/).
So the final ‘lesson’ that I think applies to fund raising in a down market is persistence. Sounds obvious but I think one thing us Brits have a tendency to do is not be aggressive and driven enough in our approach. The point to remember is there is still money out there that VC’s want to invest.
Apologies for the length of this post, certainly I don’t claim to have all the answers but I hope sharing our experience helps UK entrepreneurs in some way.
Glad E100 was of help. As you know, we qualify all pitches by only accepting those introduced by our network rather than cold applicants.
http://www.lond...erprise100.html
Hmm well this is very interesting. Well is it better to look for investment now.. or wait another six months? Might have to shop around for http://routenote.com
That’s alot of $$$
:)
er don’t class us Brits and European we don’t want nothing to do with them i would rather be the 53rd state of America than part of Europe……
“We don’t want nothing to do with them”?
Perhaps before speaking for the people of Britain you could do us the courtesy of learning to use our language.
The benefits for British businesses of being at the heart of the European Union are manifold; by dismissing them all in such a lumbering way you sound like a commenter on The Sun newspaper’s forum at best, a UKIP voter at worst. For shame.
And 53rd state? Which, to your “mind”, are the 51st and 52nd?
Dolt.
I like you paul, not because of what you say but because you have your name in lowercase, good to see someone else can appreciate that lowercase letters look prettier then uppercase.
Yeah, I’m a regular e.e. cummings.
Sorry, am I missing something here?
£400m = about $655m
$300m = about £182m
£400m ‘roughly the same amount as’ £182m? It’s less than half.
How are these sums comparable?
I like very much the writings and pictures and explanations in your adress so I look forward to see your next writings.
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I’d read about the business funding drying up for about a year before the Lehmann Brothers collapse. I opted for a small £250 test trade grant from Croydon Business where my application was handled by Jason Ojukwu. Simple idea involving online books. Am I rolling in loads of cash? Not really but it felt good to have someone believe in my skill again.