UK funding gap is killing start-ups and also creating a bubble28 July 2015
If you as an entrepreneur are running a service business or you belong to any of the categories mentioned in “Abundance of start-up funding in the UK but not necessarily for YOU”, you probably have not faced any serious issues with funding. For the rest of us, it remains one of the biggest challenges in the UK. Moreover, this is also one of the reasons you don’t see many “unicorns” from the UK and Europe.
For big and profitable companies starting a new project is comparatively easy. They can afford to spend time and allocate money necessary for comprehensive research to see if the product or service is viable and how well it might perform. They can then put together a team and spend millions bringing the product to market. Even then most new projects of big corporates fail.
Now, compare that with a start-up in the UK. Usually they can expect seed funding of around £150-300k. This paltry figure, especially if you are building product which requires significant amount of development, won't go very far when there are all kinds of enormous expenses, from renting high-priced property to hiring costly staff and buying office equipment and technology. It's all practically gone before you gain any “traction”, leaving the start-up in a perilous position just as they begin life. Most angels will ask for good revenue / user numbers after the very first round of seed funding, while the start-up still needs capital to improve the product based on user feedback, and position themselves in the market. As an entrepreneur in the UK, you have limited money to not only build a competitive product but also start marketing before the product is ready. We’ve faced similar challenges at CityFALCON .
This also creates the potential problem of a start-up valuation bubble, because with fewer new companies staying in business and being able to go from the seed to Series A stages, there will be more investor money around for a far smaller number of start-ups. So it's important for a vibrant UK start-up environment that they attract the right level of funding at the beginning, to carry them through to the next stage. It's good for the investors, too, as what they've put in will be far more secure.
In the US, start-ups start with a much higher seed capital, usually around $1m and can also expect VC community to support them early on the way. Thus, US start-ups have a better chance of getting to Series A round and further.