Guest post: An Open Letter to Alistair Darling and Lord Drayson: Put £100,000 into 10,000 startups

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This is a Guest Post by Robin Klein, Partner in The Accelerator Group (TAG), an early stage seed funder of tech startups in the UK and across the rest of Europe. If there is anyone who knows about early stage tech startup funding in Europe, it’s Klein. It chimes in with my post last year that the UK government should make sure any stimulus funds are channeled to into many more startups than proposed, instead of into a lucky few.

Alistair Darling, Lord Drayson – an Open Letter

Dear Lord Drayson,

Put £100,000 into 10,000 startups – not £10m into 100!

There has been a lot of chatter about the Government’s apparent initiative to make £1bn available for innovative early-stage companies.

Apparently, Lord Drayson, the Minister of Science and Innovation in the Department for Universities and Skills is driving this. The BVCA is keen to promote the idea through its influential contacts that this money should be channeled via the large established VC funds.

From where we sit, putting lots more money into the large funds achieves the exact opposite of what I understand the desired the objectives to be.

What is urgently needed in the UK – in order to promote entrepreneurship and encourage innovation – is funding at the very earliest stages.

One of the major drivers for Silicon Valley’s success has been the readily available, quickly raised seed capital. Its not uncommon, even in today’s funding climate to find start-ups funded with $500K in a matter of weeks by angel syndicates led by an agile tech VC.

There is more than enough capital available once companies have proven their technologies, validated the market need and have real momentum. This capital is NOT venture, it is development or growth capital.

The so-called funding gap has never been adequately filled and the growth in size of the leading funds has forced them to move up the food chain and to back relatively fewer pure start-ups.

We have all been wringing our hands at this gap for many years and in the current environment the gap is noticeably widening.

Seed funds are extremely difficult to make work effectively on the classic 2/20 model since it is important that seed funds invest in a large and diverse portfolio (in order to find the winners) while at the same time need to provide a lot of hand-holding to these companies (implying a larger organisation – more partners).

The BVCA’s position is interesting in that it looks at the whole issue from the ‘industry’s perspective’ – you can’t blame them for that – its their job. It’s certainly not being looked at from the entrepreneurs perspective!

We at TAG have had terrific support from some of the large tech VCs but their ability to do many seed fundings is very limited. We need healthy and growing seed capital partners to join us in our quest to find and nurture the next world beaters.

One of the most important and effective vehicles for promoting entrepreneurship in the tech arena in recent years has been Seedcamp [Interest declared: TAG has been an investor in companies promoted by Seedcamp – Editor] – the flood of applicants and the rising quality of these applicants attest to the strength of innovation emanating from Europe.

They are deserving of far greater financial backing.

Robin Klein

Partner, The Accelerator Group (TAG)

PS: TAG is an early stage technology investor with 43 investments currently in its portfolio. We invest actively mainly in the UK but also across Europe and in the US.

[Photo credit]

  • Richard Rothwell

    Excellent thought – “Put £100,000 into 10,000 startups – not £10m into 100!”

    Did you read my article?

    I was proposing £50,000 limits, but £100,000 is small enough – as long as the developers are required to publish their results for the good of all.

    • Mat


      Just wonder if you could clarify why developers should publish their results for the good of all?

  • Chuck Smith

    This suggestion actually reminds me of what the German government routinely does in giving out entrepreneurial grants (Gründerzuschuss). They basically pay you what you would get on unemployment (around 700€/mo depending on your situation) plus health insurance (around 300€/mo) for 9 months. In that time, you can keep the money you make from your startup as well without paying taxes. If you’re still not self-sustaining after 9 months, you can go back and seek another 6 months of funding. This way you can start your own business or freelance career without worrying that you won’t make enough in any given month to be able to eat and pay the rent. If it doesn’t work out, you’re no longer eligible for unemployment money until you’ve been employed again, but you will get social money to keep you alive.

  • Mike Butcher

    Chuck – but isn’t there some German law that prevents company directors of bankrupt companies from being directors of a new company? That would be an obstacle to innovation if true.

    • Chuck Smith

      I haven’t heard of any such law and my German girlfriend hasn’t either, but then again, we’re not lawyers. :)

    • Michael Stephanblome


      To my best of knowledge there is no such law in Germany. You will only be barred if your company goes bankrupt and there is a criminal insolvency associated with it – i.e. you did not declare the insolvency early enough or hide it.



      • Jens

        The same law exists in the UK, by the way

      • FourJack

        yes is true!!!

  • David Whitewood

    Good call. But no doubt the Government would waste £10m in trying to administer it. A less administrative intensive route would be to do it via the tax system.
    Investors in small holdings and farmers can still offset up to 4 years of losses against personal income tax. City boys (and girls)have been buying up and improving the countryside for years on this basis with money that would otherwise have gone to No. 11.
    Let me have access to the up to 2 years of income tax that I have paid to invest in a qualifying business.

  • RickWaghorn

    Go to Mr Shirky’s thoughts on where next for media and you’d find a fan… for now is the time for 000s and 000s of ‘little experiments’.. cos right now ‘nothing works, but everything might…’

    It is a thought that stays close to my heart as three boys in Norfolk, their lap-tops and their kitchen tables look to crack this hyper-local news nut… £10,000 can fund a very little experiment for more than a little while…

    Something that the Usual Suspects – banks, HM Gov’t, NESTA, EEDA, et al – all fail to grasp, IMHO.

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  • Simon Cast

    Direct investment is an interesting idea. I would combine it with income-contingent loans to spread the risk between the entrepreneur and the government. It would work with up to 3 employees being able to take out a loan that would cover 1 years worth of salary (up to a max of say £50k-60k). The loan is repaid through the tax system based on the person’s income.

    The biggest problem (apart from administration but given the gov owns 3 banks now I’m not sure that would be such a problem) is EU rules on state aid. My conversation’s with someone who deals with gov based venture funding is that the gov money would need to be matched by an equal amount of private funding. Which starts to create problems of its own. In effect the rules don’t allow the gov to address the funding gap.

    • Chris Padfield

      I am not sure the matched funding element is a problem, and is actually more likely a positive. We ran a £5m fund which required matched funding, however we actually matched the government money on an approx 6:1 ratio.

      There is a lot of private money out there from angel investors, however they often want the comfort of a small seed fund investing at the same time – doing the leg work, professional DD, legals etc.

      Our fund is/was one of the early growth funds setup by the DTI (now BERR). BERR abandonded doing any more of these funds (replaced by bigger ECFs), letting the regions do them instead (which some have, e.g. Finance South East’s fund). However there has not been a real replacement setup in London.

      I’ll add that while £100k is good for a web company, venture capital is not used to solely fund web startups! A typical technology company requires quite a bit more to hit suitable milestones for a 2nd round. That is not necessarily a problem when that £100k is a base for co-investment; however I would suggest an investment range between £50k and £250k is better for general policy.

      • Simon Cast

        My conversation was with London Technology Fund.

        The funding gap that I am looking at is in the sub-£100k. It is the funding point where people use their credit card, mortgage, friends and family etc. SeedCamp, Y-Combinator et al. are attempts to address this funding gap.

        It is the stage where an idea is being turned into a prototype ready for further funding in an angel and/or seed round. Non-web tech companies still go through this stage and even then the amount of money needed is low. Trying to organise investors at that stage is probably overkill which is why I think income-contingent loans is a better way of doing it. The income-contingent loans also work for a wider variety of small business.

      • Chris Padfield

        Sub £100k is quite hard for the public sector to manage. Who would you have handle giving out this money? How would they be incentivized to put the effort into selecting the best opportunities? What would the selection criteria be? I am not saying it can’t be done, but it’s certainly not trivial to setup the processes to handle it and prevent significant waste otherwise.

        >> Trying to organise investors at that stage is probably overkill which is why I think income-contingent loans is a better way of doing it.

        Remember that the government is investing here. Someone is going to have to put a lot of effort into it either way or you will end up with a lot of wastage. If there where £50k “loans” out there, anybody could write a business plan to claim one and just pay themself that £50k (significantly more than the average wage). It’s not easy managing a system like this.

      • Simon Cast


        It is a loan not an investment. Income contingent loans are used to fund university tuition in Australia and I think the UK. The loan would be contingent on having not had a similar loan in the last 3 or 5 years and be set your previous income to a max of £50k-60k. The loan can be originated through the current banking system or online application.

        The government isn’t trying to pick winners, but rather let 1000 flowers bloom and see which survive. The loan is repaid through the tax system based on the individuals income and is not tied to the company.

      • Martin Owen

        I agree Chris – below I describe how I can get the !00K I need in early phases. I suspect getting the £2million I need to get a marketable product will be a bit more difficult.

      • Chris Padfield


        If it is compelling enough of an opportunity; there are plenty of funds out there funding between £1m and £2m.

      • Angel

        Lolz u mean 100k i totaly agree with u

  • Mat Atkinson

    Any funding program needs to be simple to access with quick decision making. The biggest challenge for entrepreneurs raising funds is the distraction from actually shipping product and winning early customers.

    There have been government backed funds available for years offering smaller investments in the “funding gap”. The problem is that they require just as much time and energy to secure an investment as a full VC round, but with much less capital available at the end of the process.

    Simplify the application process and this could revolutionise the start-up environment in the UK.

    • Jen

      Absolutely, there is really a lot of effort needed to prepare things like a SMART application, or even apply to the Prince’s Trust for a startup loan. Compare that with the various American $10-20k seed schemes like Y Combinator and it’s night and day. Not everyone is a genius at making up imaginary figures for a business plan, and not everyone can wait 8-12 weeks for a decision.

      • Chris Padfield

        Do you think taxpayer money should be given out in the same way Y-Combinator does? There is a big difference in the level of justification needed for a private investment (where the loss/gain is also private) as there is for spending taxpayer’s money.

  • Martin Owen

    As a bootstrapper in Wales, if I can demonstrate the innovation, risk and potential this level of funding is already available through the Single Investment Fund (SIF).

    The funding is at 70% – ie you need to raise 30% from other sources – and that needs to be real cash through the books.

    I have been held up a little – not by the Welsh Assembly Govt or raising the 30% – however I have been held up by my bank. The money is paid in arrears (quarterly – but with 15% retention until a final report). I need to be able to manage cash flow. Trying to get an overdraft from the bank has been problematic. I understand that they have problems -but they never phoned back to say “Martin, we have a bit of bother – we can’t give you the overdraft” – they left me in mid-air.

    In the Technical Feasibility Phase you get a response in 28 days – and that phase lets you write the next stage in application.

  • Mike Butcher

    If any one here has a rebuttal arguement to put that would make a good post the pitch me the idea on email, thanks, Mike Butcher, editor

    • Lou Natick

      Here’s a thought:

      It’s difficult enough for seasoned professionals to pick winning startups. What makes anyone think government would be able to do it at all? Surely, giving the money out to 10,000 startups is better than 100. But what you really need is a greater confluence of angel investors and/or VCs. Instead of throwing away money by letting bureaucrats choose the startups, incentize investors by lowering the capital gains tax.

  • Robin Klein

    My open letter was meant to offer a completely different approach to that being advocated by the BVCA. Clearly there are areas such as fundamental technology research, clean tech where large, targeted and focused amounts of funds are needed.
    As most commentators have pointed out, the devil is in the detail and the implementation. Small sums go a long way but decisions to fund need to be made really quickly, painlessly and by people who work with entrepreneurs day and night.
    The best ways to achieve this IMHO is for Govt/Nesta to match funds from approved angels, seed funds, VCTs, angel networks – either by direct investment or by being LPs in the relevant fund themselves.
    In other words, choose a number of proven players and put money alongside them on the same terms (less 10% ? to recognise the effort/expertise).

    • Chris Padfield


      I completly agree; we run an angel network in London that used to have a BERR backed seed fund associated with it. The loss of the seed fund when it became fully invested has had a demonstrabable effect on the both the ability to close these types of deals and the speed at doing so. It would be very easy to re-fund that fund; and there are numerous other fund managers with the processes to manage £100k style investments on a co-investment basis.

      Increasing the number of co-investment funds is also a key policy of the BBAA (British Business Angels Association) who have been campaigning on this topic for a while.

  • Sam

    Just a thought – i think in the long term £100,000 into 10,000 is def a better bet, but in the short term doesn’t result in that many jobs – i suspect that part of the thinking is to create enought money to employ a bunch of people as well, but £100,000 chunks spreads it too thin to do that (but is good for the landlords of small offices etc.) That and the administration which gov is always useless at.

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  • Steven Dotsch

    Whilst a great idea in principle, it sounds like a major logistical nightmare in the make. Some initial thoughts:

    1. Where are the 50,000+ start-up ventures going to come from from which say one out of five will be of sufficient potential to secure the £100,000 funding?
    2. Where is the apparatus to consider those 50,000 business plans?
    3. Where are the 10,000 relevant early-stage NED’s going to come from supporting and monitoring these ventures?



    • Chris Padfield

      You are right; although it may be that any money allocated will be spent over the usual 10 year VC fund timespan.

      In all llikelihood a lot of this money, if allocated, would go to later stage VCs than being discussed here. By addressing the point; I imagine Robin is hoping that at least some of it will be used for seed funding.

  • George Bevis

    Robin’s vision is obviously correct, and matching finance solves most/all of the logistical problems. I’d be impressed/surprised if Govt actually needed to shell out 10k times to create a leading innovation economy: 10k is an awful lot of startups.

    NB Match funding might also lead to a market-wide standardisation of early-stage investment terms, which would surely be a good thing.

    We mustn’t kid ourselves that this has anything to do with pulling the country out of recession. Such a scheme would only be running at full speed after the recession is already over, and the jobs created would primarily be going to people who are highly employable anyway. Rather, it can be part of a long-term strategy to encourage an innovation ecosystem, justified by long term positive externalities, but *not* by short term job creation.

    • David Whitewood

      Matched funding is fine in principle but smallholders can offset the full losses against personal income tax. Why shouldn’t businesses starting out not get the same break? Any investor in any company could offset their losses against personal income tax liability. At higher rate tax this is effectively a 60:40 match.
      Admininstration wise this would be done through the tax return, although this does not provide boot strap cash, I sure that many a business angel would provide the bootstrap cash!

      • Chris Padfield

        Angels can get 52% downside protection through the tax system (EIS tax relief), and this is an important motivator for angel investment.

        Matched funding is not just about increasing the amount of money avaliable for investment (although that is certainly part of it). Part of it is about funding the infastructure around investment. Without professionally managed (which has a cost) seed funds / angel networks / incubators etc, it is harder for angels to do investments.

        Setup properly, each £100m in governement seed funding can leveage £200-£500m in private investment and help create a self sustaning seed investment industry – which is surely what it’s all about.

      • Martin Owen

        EIS is not much help to the bootstrapper I am afraid. I am not supported by the tax system to takes risks on myself.

        However I agree that money should be put in a supportive infrastructure- and not just around the finance. I need more than cash, I need intelligence about those parts of business that are new to me.

  • Andy Young

    Essential reading: “Can you buy a Silicon Valley? Maybe.” by Paul Graham (Y Combinator), from February

    • Lou Natick


      Paul Graham knows his shit.

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