The UK tech scene has had a lot to celebrate of late: Third in the world for producing successful tech companies and home to 13 tech unicorns – 37 per cent of Europe’s total unicorn companies, making it officially the tech unicorn capital of Europe. At the opening of London Tech Week last month, prime minister Theresa May said more than £1.2 billion is expected to be invested in UK tech companies from around the world this year.
So then what is fuelling the UK technology market’s funding gap at Series B?
The UK tax system includes huge incentives to invest in early-stage start-ups, which is fuelling massive growth in the UK start-up scene. According to KPMG, more than £1.19 billion was invested in UK companies in the first quarter of 2019.
However, once companies get to the stage of requiring a series B round, they’ve usually used up the tax incentives available. Combine this with a lower number of UK and European based VC funds which are big enough to fund larger series B and beyond funding rounds, and you’ll start to see why such a funding gap exists in the UK.
The failure rate of businesses at series B is roughly the same as at series A or seed round. However, the amount of capital at risk is higher, especially as tax incentives will no longer apply at this stage.
Some investors deliberately avoid the slightly riskier series B rounds, preferring to wait until these companies have come through some of the scale-up problems, and returning as investors at series C.
There is also increasing pressure from across the pond with US investment firms leading 40% of series B rounds in Europe. They are also able to lead on bigger rounds as there is more capital available in the US markets than in Europe or the UK. And, of course, once companies have US funds, it becomes easier for them to raise further money or pursue a sale in the US.
According to the Guardian, “The value of deals involving US companies buying UK businesses more than doubled to £79bn in 2017-18 from £36.8bn in the previous year.”
On top of this, there can be a dip in enthusiasm on behalf of the tech entrepreneur who is, by nature, a creative, daring and innovative ideas person. The ‘fun part’ is the cool and exciting start-up phase and, by comparison, the scale-up stage isn’t nearly as ‘sexy’.
As the leader of a scale-up, you need to focus on the details that are going to help you progress to unicorn, which are not necessarily the skills that made you successful as a start-up. Scale-up is all about developing systems, processes and cultures, KPIS…
However, if the UK is serious about helping companies reach unicorn status, we need to look at how we, the investor, partner with founders from Seed all the way to Series B and beyond.
We need to up-skill our start-up leadership teams to ensure they are in the right position to take their company through to unicorn. And this does sometimes mean introducing a good CEO alongside the creative founder to ensure the journey continues.
Founders and investors also need to be on the same page with the plan of building the company to scale-up and beyond, not just creating a sales window for great technology. Founders need to be clear about their plans to stick with the company for long-term growth, and they’ll need to find investors to stick with them.
At Luminous Ventures, we work closely with our founders, supporting them every step on their journey. We are patient capital. We are in it for the long haul. And we believe that between strong investor relationships and the dedication of our founders to build businesses for growth in the UK, we can stop our best technology being sold off, instead building the unicorns of the future.