Top Ten UK Startup Finance Myths (IMHO)

Next Story

Brazilian Startup DeskMetrics Raises Seed Round For Desktop Software Analytics

This is a guest post by Nick Pelling, Fonder of Nanodome a startup which designs, manufacturers and sells a new kind of PTZ (Pan Tilt Zoom) security cameras developed from its patent-pending IP. Nanodome says these are “tiny, light, low-profile, low-power, strong, quiet, precise and fast and can be mounted anywhere. However, Pelling has met with 120 UK-based Angels so far, drawing a blank on financing. Here’s his personal view on raising capital as a startup.

Here, for all you lovely TechCrunchers, is my Top Ten list of the startup funding myths currently doing the rounds in the UK. It’s based on my “Funding Startups & Other Impossibilities” blog, a place where I try to purge my psyche of the toxic claptrap that generally passes for entrepreneurial wisdom out there. Feel free to disagree and comment all you like!

Myth #1: “Banks support startups”

For any passing bank lawyer, I agree with you that UK banks do support startups. However, because banks broadly define ‘startups’ as “businesses that have been making decent, regular money for 12+ months”, and ‘support’ as “lending them money they probably don’t need to borrow”, this means almost nothing at all.

However now, for once, the new UK government isn’t fooled: it knows that UK banks don’t want to lend money to anybody, let alone startups [as defined by everyone else]. However, until it can find a way to coerce the high street banks (particularly the two it owns) to do so, they might as well be huge chains of dinosaur soup kitchens for all the use they are.

Myth #2: “Venture capitalists support startups”

As with the banks in Myth #1, VCs also do technically support startups. But once again, they define ‘startups’ as “2+ year-old companies that are already strongly profitable” and ‘support’ as “put £2m+ in under unbelievably one-sided contractual and control terms, while dismissing ~50% of CEOs within a year”. Sorry, but if you’re a startup talking with a traditional VC, there’s literally a 99% chance (from their own conversion rate figures) that you’re wasting your time.

Though there’s a lot of talk about low-end VCs (such as Octopus Ventures, which makes seed investments alongside its own group of business angels), the jury is out on whether or not this is a new ‘third way’ for seed. Nobody yet knows…

Myth #3: “UK angels support startups”

Weaving all the strands of evidence together, there seems to have been a big dip during early 2010, with the BBAA’s Dec 2010 newsletter noting that activity picked up in the second half of the year. Yet from talking with over 120 UK angels since late 2009, my impression is that many remain in ‘TK Maxx’ mode, only tempted by out-and-out bargains: for these, the ideal seems to be small companies where the owner / manager doesn’t realise that he/she could get bank funding instead of equity funding.

Analytically, angels know that this is opportunism rather than investment, and that the bottom of a macroeconomic cycle is instead the right time to put money into small high-growth companies with the capacity to go super-big. But many have been badly burnt (one Surrey angel told me how he lost £235K in a single hit), while few angels’ portfolios have even one clear exit in sight. Hence, the best-case UK angel-startup scenario right now is typically a pledge to come in second with £20K (my startup now has about ten such soft pledges): but without an angel to lead a round, this means nothing. It’s the end of an era, but there you go. Or, to be precise, there it went.

Myth #4: “The Enterprise Finance Guarantee supports startups”

The way this is supposed to work is that if an EFG-backed bank loan to a startup goes bad, the government underwrites 75% – a pretty sweet setup for the lender. Although, according to my (Lloyds TSB) bank manager, entrepreneurs only now qualify if they’ve first mortgaged every available penny out of any property they own or part-own and put it into their startup.

The problem is that the bulk of serious entrepreneurs (according to the stats) are in their 40s and have a partner who thoroughly objects to putting their primary residence on the line – A.K.A. “blow our savings on your stupid dream, sure, but not the damn house, OK?” – all of which sharply reduces the usefulness of the EFG.

Incidentally, the government is about to finesse this so that 20% of any one bank’s total EFG defaults are covered (rather than 13% as at present). Again, this probably won’t change anything; banks still have no desire to lend anything to anybody (see Myth #1). Still, I’m hopeful enough to think that changing the rules back to prevent banks from requiring entrepreneurs to put their primary residence at risk would enable several thousand startups to get going, particularly around London where entrepreneurship and home-ownership are both very strong. (But see Myth #6).

Myth #5: “There are plenty of startup grants out there”

Hilarious! Unless your company is located in an utterly deprived area and plans to employ a small army of semi-skilled people (when it may possibly qualify for a European regeneration grant), or you are a female entrepreneur (a few positive discrimination cash-pots still remain out there), or the laughably narrow timing and focus of a Technology Strategy Board call just happen to precisely fit your R&D timetable… you’re way out of luck, sorry. Basically, you’re a decade too late.

Myth #6: “London startups don’t need state support”

London is full of entrepreneurs: it always has been, and always will be. In fact, I’d guess at least 50% of UK startup activity comes directly from the London area. Yet Silicon Roundabout notwithstanding, it seems to me that government policy is to actively discriminate against London startups, by promoting funding elsewhere in the UK. Sorry to point out the obvious, but London is the economy’s engine, and right now it’s stalling not for lack of office space (which is why, for me, the whole Tech City agenda misses the point) but for lack of fuel. In fact, I’d argue that London should get special finance treatment to help kickstart the entire startup sector: if any initiative won’t work here (and fast), it probably won’t work anywhere in the UK.

Myth #7: “UK startups get sensible valuations”

Anyone who tells you that valuations are in any way related to balance sheets or projections or assets is a liar. In reality, valuation only works competitively (i.e. when there’s a non-collusive market, even two will do), while UK startups are lucky if they get even a single offer – which by definition implies an uncompetitive valuation. Why else do US startups appear to get valuations at a 3x multiple relative to UK startups?

Myth #8: “Startups can help turn the national finances round”

Sadly, this is where comedy yield to tragedy. Even though the UK has actually produced plenty of decent-sized companies in the past, research shows that a startup’s growth curve is largely defined by the amount of money it initially raises, probably by defining where the founders will come under sharpest pressure to exit. Which is why none of the current generation of bootstrapped, low-raise UK startups seems to me to be on a big enough curve to even blip on any macroeconomic radar. “Aim low & exit fast” is a lousy way to build companies… but right now, that’s where things are at.

Myth #9: “Things can only get better, this startup pain is just cyclic”

Most of the UK angels I have met (including some of the richest) are cashed-out entrepreneurs, looking to use their money and experience to somehow kickstart new, high-growth businesses: this matches the 73% figure given by BBAA & NESTA [PDF]. For them, the (build – exit – invest) ‘angel loop’ typically sits at the core of their whole angel ‘mission’.

Yet with the retreat of many UK VCs from even early stage investment, pay-to-play mid-cycle rounds from troubled portfolio companies, the death of IPOs, lengthening times to trade sale (7+ years is now routinely quoted), and with new rounds taking longer both to open and to close (typically 12 months and up), the whole angel loop has found itself stretched to the point that it barely resembles a cycle any more.

According to a recent US study, 65% of angel group members in 2010 are “latent angels” (2009 / 2008 saw 54% / 36% respectively), which are angels who haven’t yet made an investment, for all the kind of reasons given above: while UK groups seem very similar. From an entrepreneur’s point of view, this is one bad-looking trend.

Myth #10: “With no effective finance available, startups should just give up”

I’m not Santa Claus, so I can’t make all your startup finance wishes come true: but despite bringing so much bad news in one go, I’m not Scrooge McDuck either. Yes, things are bad – OK, they’re terrible – but the bad old days of “if you build it they will come” tech startups (one industry grandee once told me “but my dear boy, they will”) are long gone. Instead, modern professional startups are more tightly run and more consciously customer-oriented than ever before, and I believe now offer a terrific potential return on investment, probably the best for a generation. If much of that return will have to be via dividends rather than exits for a while, then so be it, I guess.

Hence I’m confident that new ways of connecting investors to startups will emerge. To many entrepreneurs, the UK may currently feel like Narnia enduring a hundred years of the White Witch’s snow, but my sunny forecast is that (for example) AngelList investors and Bay Area ex-pats will invest more in UK startups in 2011 than all UK angels combined. The future of startup finance is bright, just not in the way you might be expecting it. Merry Christmas and a Well Funded New Year!

  • Tim Joslyn

    Nick, I wholeheartedly agree with one exception, in the past I have been successful at getting an EFG backed loan without mortgaging my own property. The key was to make sure that there was a joint tenancy in place (e.g. wife/partner) and they were unwilling to have a charge placed on the property. Bank accepted this and proceeded with the EFG backed loan.

    • Nick Pelling

      Tim: how long ago was your EFG funding? As I mentioned, EFG rules *used* to prevent banks’ requiring entrepreneurs to put their primary residence on the line, but this got changed (for the worse) somewhere along the line. I think the current guidelines are inequitable and should be changed back to how they were. :-(

      • Tim Joslyn

        You are right, this was back in 2007 when it was in the previous incarnation as SFLG. I wasn’t aware that they had now changed the criteria…

  • MG

    Excellent article. Having just raised a low-ish amount myself, I have experienced/heard/seen each of those myths while out fundraising in the last year.

    There is a heavy reliance on a small group of active angels to kick start the economy… and that’s your only realistic option as an start up.

    Thanks for posting.

    • Nick Pelling

      MG: I’ve heard it claimed that of the ~2500 non-latent angels in the UK, only a handful will generally consider leading a round, perhaps even under a hundred. Tricky business, eh? :-)

      • MG

        Nick – I was very fortunate that a leader emerged from an early meeting and herded others together subsequently. My experience overall was very positive with the angels I met.

        The Banks and VC’s however, were generally dismissive toward me and the government help schemes/ enterprise initiatives were often helpful but rarely led to anything substantial.

        If angels are the only realistic option for start-ups, then it would be good for both businesses and the economy to pitch (good) concepts to a more diverse range of people. Both in terms of sector & interests and gender and race. There are plenty of wealthy people out there, I’d like to see further tax incentives for them to be encouraged to ‘get’ active in investing.

        Still, the article is a very accurate description of what I suspect, is a common set of experiences.

      • Martine Parry

        I read somewhere that there are only around 30 active angels in the tech space – I wonder if this is for London only. Sometimes Londoners write as if for the whole nation:-) It was an article that included reference to Permjot Valia. BTW I don’t think this number is accurate. The more informal network of wealthy individuals injecting capital is relatively ‘under the radar’ .. these communities are what needs to be tapped and are usually contacts of contacts etc…

      • Nick Pelling

        Hi Martine,

        It’s generally believed that the number of (allegedly) ‘active’ and ‘visible’ UK angels is in the 5000-6000 range. However, once you filter out latent (yet-to-write-a-cheque) angels, tapped-out angels, burnt-out angels, angels who are on too many boards already, angels with no spare time/attention, angels with insufficient due diligence skills (etc) to find out a potential lead angel… the figure inevitably drops dramatically.

        The comment about “20-30 high profile angels” was from Chris Padfield on Permjot’s TechCrunch post, in response to a comment I’d made there:-
        …and which I followed up a bit further down…
        As you pointed out, Chris’ figure seemed more like a SE England figure rather than a UK figure, so I did some rough scaling up to get ~90-100 or so. But writing off the possibility that his figure is correct for the whole UK could well be a big mistake too. :-(

        Best regards, ….Nick….

      • Permjot Valia

        Sorry to join this so late. great article. The reality is that a lot of angels just aren’t able to invest. I have publicly stated that I will not be investing in 2011 – for the simple reason that I have no money left.

        So I guess I am an ex-angel.

        The problem is that with banks not lending, most angels will need to hold on to cash to support existing companies rather than invest in new ones.

        As such I actually think the number of active serious angels (those who will do more than 4 deals this year at £25k a pop) is going to be less than 100 – and I hope I don’t come across as too London-centric

  • Nigel Eccles

    I agree with all of these apart from point 3.

    If you have pitched 120 angels with no one willing to step up to invest then you probably have a problem with either your product or your pitch. Without knowing your product the fact that 10 people have said that they would follow suggests to me they think it is interesting but need some further validation. Work on those 10 leads to find out what would give them confidence to lead.

    It is extremely tough raising early money in the UK but other people have done it so don’t give up hope.

    • Nick Pelling

      Nigel: ah, there’s a bit of a trap there. As far as I can tell, angels only rarely convert from passengers to leads, no matter how many milestone-shaped hoops they ask you to jump through. So you still need to get lucky in order to find a suitable lead.

      • Thai

        I agree with Nigel’s comment that if you’ve talked to 120 angels, then there’s probably something wrong with the product or the pitch, or you’ve been talking to the wrong people.

        As for Myth #2, events like Seedcamp are a great platform for first-time entrepreneurs to reach institutional investors. I’ve seen the best companies out of Seedcamp raise money at good valuations from European VCs.

        As for Myth #3, take a look at for serious angel investors in Europe.

      • Nick Pelling

        Hi Thai,

        Thanks for your comments – you’re right that Seedcamp (and are things that many startups should be aware of. However, because my hardware startup doesn’t really have anything like a Web 2.0 angle, it doesn’t really fit the whole Seedcamp ethos.

        But as for the 120 angels thing: unless you happen to be out there at the moment pitching to much the same angels (and getting dramatically different results), I really wouldn’t advise jumping to quick conclusions. UK angel behaviour is clearly changing: finding a lead is harder, time to terms is increasing, time to close a round is increasing, IPOs are history, trade exits are rare…

        Basically, all I’m pointing out is that all the unerlying angel trends are going in the wrong direction, and that I suspect that nobody has really yet grasped the scale of the problem.

        Cheers, ….Nick….

      • Philip

        Hi Nick,

        I think you make some very good points here and, in relation to Nigel’s and Thai’s comments, you might find this article from David Hornik interesting

        I think your point about your business not having a Web 2.0 angle is pertinent, too. It seems to me that “technology” is all too often assumed to mean web / mobile and particularly consumer focused businesses – but that is only a fraction of the innovation story out there, whether software or hardware.

        As to taking in small amounts of capital, it may well be the case that the cost of the technology that many early stage business needed to develop their products is much less now than 5-10 years ago – but the cost of scaling the business up when it comes to people and marketing is not cheaper.


      • Nick Pelling

        Hi Philip (H?),

        It’s true that many angels and funds seem to read “technology” as meaning solely “web software”. Really, even though the UK is still the 6th largest manufacturing country in the world, you wouldn’t know it from looking at investors’ portfolios. :-(

        As you point out, managing scaling challenges pragmatically remains a huge issue, and one not really faced up to (particularly the problems of marketing scale) by many of the web-centric pitches I’ve seen. But you knew that already! :-)

        Cheers, ….Nick….

  • One Nice Guy

    Just bootstrap it until you need more servers

  • Drummond

    Interesting article Nick.

    I’m still optimistic about things but I haven’t pitched to 120 angels. We’ll see what 2011 has in-store!

    • Nick Pelling

      Hi Drummond, hope you’re doing OK!

      I suspect the core problem is that angel investing [as currently practised] is built on a set of overlapping financial assumptions, which are unfortunately trending away from each other, as per this page:-

      Sadly, I’m only sufficiently clever to perceive the problem’s knottedness, but not to untie it. :-(

      Cheers, ….Nick Pelling….

  • Antti Hannula

    How would you comment Equity Crowdfunding like our helping this situation? We’re planning to enter the UK market in the spring… Any UK accredited investor willing to invest minimum of 10K would qualify (outside UK ie. continental Europe there are less requirements).

    • Nick Pelling

      Hi Antti,

      I’ve been tracking the crowdfunding sector for a while now: I suspect it will turn out to be a great fit for lower (say, 30K euro?) raises – such as for short-term social or entertainment projects that excite an external community – than for startups. That is, it seems more for sub-500-euro speculative hits individuals don’t really mind losing rather than for 20K euro hits they really do.

      Of course, this is a fast-changing sector, so who really knows? But that’s how I see it, anyway. :-)

      Cheers, ….Nick….

  • Jose-Rodrigo

    Great post, really debunked myths about funding, I have a question Mike, how about funding coming from other countries through ex-pat communities other than UK? (India, Pakistan, China for example)?

    happy Christmas and 2011 !

    • Nick Pelling

      Hi Jose-Rodrigo,

      Entrepreneurs need to grasp that their personal finance world may well be joined up in non-obvious ways. For example, in my own industry (security cameras), I would arguably stand a greater chance of attracting Taiwanese business angels (in fact, I have one already) than English business angels, because the former typically have a deeper understanding of contemporary manufacturing than the latter.

      Hence, if you have personal connections with an individual country, a few emails, Skype calls, and carefully chosen LinkedIn connections may yield a far more enthusiastic reception than you would get from UK business angel networks.

      So: yes, China, India, Pakistan, Mexico, why not? As we say in London, the world is your Oyster Card. :-)

      Cheers, ….Nick….

  • Iqbal Gandham

    Hi Nick

    Good post, and nice summary. I think we need to re-define, or define what angel/seed funding actually is, since I think there is a gap in understanding between what entrepreneurs think it is (should be) and what investors in the UK think it is.

    1. Is angel funding pre-revenue/pre- traction
    2. Is angel funding pre prototype
    3. Is angel funding idea on paper stage

    [Replace Angel with Seed above]


  • Iqbal Gandham

    Hi Nick

    Good post, and nice summary. I think we need to re-define, or define what angel/seed funding actually is, since I think there is a gap in understanding between what entrepreneurs think it is (should be) and what investors in the UK think it is.

    1. Is angel funding pre-revenue/pre- traction
    2. Is angel funding pre prototype
    3. Is angel funding idea on paper stage
    4. Is angel funding post-revenue
    5. Is angle funding post-traction (if so what is traction 1-100, 100-1000, 1000-10K, ???)

    [Replace Angel with Seed above]


    • Nick Pelling

      Hi Iqbal,

      Thanks! To me, angel investing is a high level process that requires a lot of lower-level stuff to be true in order to work at all: and I think that the tectonic plates beneath the angel sector have been moving away from each other for a while. To me, the overall move from (seed risk) to (post-traction & post-revenue) is therefore no more than a high-level symptom of all the other low-level changes that continue to happen beneath the surface.

      I suspect that the whole arrangement is broken, and no amount of nostalgic deckchair moving will raise this ship. Stripping it all down, I think UK entrepreneurs are talking to the wrong kind of people (UK angels) in the wrong kind of way (pay-to-pitch meetings) with the wrong kind of tools (business plans) for the wrong kind of raise (£100K) on the wrong kind of valuation (£400K post-money). No wonder it’s all not working!

      For all the talk about Minimum Viable Product, I think the big issue should be the “Minimum Viable Raise”. Once people begin to see that the minimum viable angel raise should be ~£250K on a ~£1m post-money valuation, based on 2 or 3 competing bids from international angel groups (whether AngelList, Bay Area ex-pats, or whoever), brokered by one or more disintermediated web portals (1% success fee), the whole sector will start to move forward again.

      There are lots of people now trying stuff around the edges of all this, but I guess the really big issues now are more to do with FSMA issues, cross-border promotions, cross-border contracts, etc. Tricky stuff that basically splays across all the legal and financial borderlines.

      Incidentally, the BBAA are currently preparing a submission to government about possibly reform to the FSMA re the status of angel intermediaries, so this may be a topic that needs addressing soon in order to fit with any legislative change calendar.

      Cheers, ….Nick….

  • Sean Walsh

    Hi Nick,

    Interesting article, quite clearly the current setup simply isn’t working, even in London as you mention, start-ups are being forced to move across the pond in order to properly expand.

    We need to replicate the successes of the likes of YCombinator or TechStars in the States, nimble seed funded programmes with access to proper mentors (not Vince Cable’s any Joe who wants to join type), access to real funding and ultimately a competitive environment for teams of start-ups to grow in.

    We’ve tried to replicate this here in the North (Leeds). Our founder, Justin Whitston, has funded our investment programme entirely out of his own pocket, after all the last thing we should be doing is just carrying making the same mistakes we did with the RDA’s and publicly funded cash. Plus, this allows our start-ups more flexibility and less red tape.

    We need to see more start-up hubs that do more than just offer office space, but mentoring, funding and the whole package. Equally though, we need to see start-ups get out there and do as much as they can before they come looking for funding. Too many start-ups think they have a god-given right to demand funding when they have tested their market, tried to build a prototype of their own back or even done the most basic stress testing. Then again, how are they to know what’s expected of them.


    • Tim Joslyn

      Hi Sean,

      Good post and I completely agree, in fact I had literally just published the same sentiments myself:


      • Sean Walsh


        Absolute breath of fresh air. An excellent article from start to finish.

        Independent review of plan, pitch & idea BEFORE investor pitch is so massively ignored it seems a little ridiculous. I guess, that maybe we’re a nation that doesn’t really accept criticism constructively and then move forward to re-address.

        You’re equally right – you only have one shot, and if that is executed flawlessly then why would an investor take the risk?

        Similarily, you’re spot on re. funding. Small chunks of £10 or £20k on a monthly basis is a concept we utilise on our programme. Huge amounts of money can add unnecessary pressure to the start-up to succeed quickly, as well as the fact more than not, they simply don’t need £150k! It’s an absolute joke when you see a pitch where they want that kind of money but plan to spend 75% on it their wages or “advertising”.

        I cannot stress to any start-ups looking at this article, that they read Tim’s blog post. Investors want to see that you believe in your idea enough that you’ve tried to take it further before seeking investment. As Tim nicely finished in his article, “make sure that your business deserves investment in the first place”.


      • Nick Pelling

        Hi Tim (& Sean),

        I can see the logic of smaller raises (people have done milestone-based tranched rounds for years) as well as the need to reach out to new classes of investors, for whom these smaller raises might be a more natural fit.

        But there’s a lot of financial machinery missing: currently, the only simple mechanism for continuously raising money without a lead is convertible notes (which is both EIS-unfriendly and reliant on a follow-on Series A VC round happening) so you’d need to open paperwork for each mini-round; tranched rounds can be wrecked by milestone acceptance disputes; and where does the core valuation come from? Do early investors get better rates?

        But perhaps even bigger than all these is the issue of how much attention any startup can afford to put into continuously raising money. As with European grants (where the time cost of the paperwork and legal conformance can rapidly escalate past the grant amount itself), I can easily see situations with continuous funding where the money raised is only enough to manage the fund raising process itself.

        How do the companies you have advised to raise funds in this way manage these key issues? Could they perhaps post comments here?

        Cheers, ….Nick Pelling….

      • Tim Joslyn

        In response to Nick’s question, I sit on your side of the fence, I have just been through the funding mill with different companies of mine in the past.

        You may have a slight difference with your situation in that you require manufacturing so I guess you are trying to fund an initial manufacturing run which can lead to a chicken and egg situation with regards to revenues?

        I guess it comes down to expectation around funding. I have never tried to get funding for a company that cannot demonstrate revenues or significant activity (however that is demonstrated, intent to buy, # of users, # of hits). Personally I would not try and do not expect to raise any significant funds in this state (personal opinion) so maybe that is where our experience differs?

        In my opinion a funding decision for an investor is all about the NPV calculation for your business. If the level of risk is too high (i.e. not a proven proposition, risk of competition, lack of market) then the NPV calculation does not work. Equally if they can obtain similar returns elsewhere the NPV calculation does not balance and you will not get investment.

        There is no easy answer and every case is different, I guess I still believe (and have seen in recent times) that if a company can offer a cast iron proven business case then funding options are ultimately still available, but it is a lengthy process.

      • Nick Pelling

        Hi Tim,

        You’re spot on with the differences (yes, products have different rules from services). All I’d say is that a high-growth startup with demonstratable revenues and significant customer interest probably shouldn’t be wasting its valuable attention on looking for angel funding!

        Cheers, ….Nick….

      • Martine Parry

        Not only do you have one shot .. but if you don’t work the funding contacts on a regular basis, networking before you need the funding, it’ll take longer and you could appear desperate. You have to build relationships the old-fashioned way.

    • Nick Pelling

      Hi Sean,

      If I’d have been asked for my opinion a couple of years ago, I’d have agreed with everything you said. But the kind of excellent training and support people such as Paul Grant run at the British Library for entrepreneurs has created a kind of continuous “virtual seed camp”, which rather undermines the value-add of the kind of external mentoring programme you describe.

      This is why, as I mentioned in the post, I believe entrepreneurs (in particular London-based ones) have become much more professional. The whole “BLAM” (bootstrapping, lean startup, agile, MVP) mindset has really helped focus their minds on doing more for less, and doing it for their customers.

      And I have to note that – much as I applaud the buzz surrounding TechHub and similar hubs – there is no obvious shortage of office space out there. Garages, bedrooms, GumTree small ads… there are plenty of ultra-low-cost options out there. Managing burn rate is the #1 practical challenge!

      Even so, arguably the biggest issue is that many of the startups I’ve seen pitch recently have lowered their finance expectations so much that it seems they cannot even conceive of constructing a world-class company. It could be that we’ve collectively professionalized ambition out of the system, something we all ought to bear in mind. :-(

      Cheers, ….Nick….

    • Debbie Todd

      Interesting points there Sean about needing to replicate YCombinator and Techstars style incubators in the UK. I thoroughly agree with you and it will be interesting to have a look at what’s been happening in the North.

      At Innovation Investment Journal we took a good look at YCombinator as we were wondering what it was that they were doing that seemed to practically guarantee the success of the startups that they took on. It seems that not only do they offer a really intense programme to the startups that they take on, but that they’re also use very stringent criteria when choosing which startups to get involved with:

      We came to the conclusion that YCombinator are quite different to the majority of startup incubators and it would be great if a UK organisation could replicate their success.

      As for Nick’s comments in the article about state-funding of startups, it would certainly make economic sense if the startups would subsequently provide employment and local revenue once they were up and running. At iij, we took this a stage further by suggesting that contrary to the current system of long-term unemployed having to work for benefits, what if unemployed people were to be paid to create startups. Obviously there would have to be some pretty strict rules on this and some of these have been suggested in the article:

      This would be a pretty imaginative and innovative way of addressing the problems of unemployment, what do you think?

      • Nick Pelling

        Hi Debbie,

        You don’t need to see many startup pitches to realise that at least 90% of them as presented stand precisely zero chance in the real world. So who exactly would get funded? This is why I think using public money to pay people to be entrepreneurial is almost always a bad idea.

        I also think that while you’re right to highlight YCombinator (because of its relative success), you’re wrong to glorify it because it is embedded in such a diametrically opposite funding culture to ours.

        Instead, a far more challenging journalistic angle for you would be to put SeedCamp under the microscope, and ask why Brainient (which, after all, was at *three* SeedCamps in a row) ended up relying on US angels for funding in its latest round. Now that’s a proper question…

        Cheers, ….Nick….

  • Colin Hayhurst

    This is an excellent post, Nick. I would concur with most of your myths. I could take you up on some over generalizations but that would be nit picking.

    I’ve spent the last 3 years helping numerous startup companies raise investment finance. It’s been very tough for every single one of them and the situation has been getting harder.

    However, I have to say that all the companies that I have closely supported, who had a credible proposition, have raised some investment. The only exceptions are ones that have only recently started. Now, of course, I’ve been approached by those with propositions lacking credibility and not willing to listen or learn. Plus the inevitable basket cases. No point in supporting those companies.

    So my take on this is that you can raise the investment finance. The real issue is how long it takes: It might take longer than you can survive for.

    The biggest factor that can contribute to getting funding success is working your network of contacts, but you know that.

    I’ve written a bit about this topic and my despair at some angel investor thinking in this blog post:

    Best wishes,


    • Nick Pelling

      Hi Colin,

      Three years ago, six months to get funded was the norm in the UK: but (as I’m sure you’re only too aware) this has now lurched up to twelve months and continues to rise. At what point does angel latency go beyond the point where you can sensibly build a business roadmap around the idea of angel funding? Sadly, many (if not most?) UK startups may already have silently crossed that particular Rubicon without even realising it.

      And that’s really the tragedy of UK angel funding right now – that because they have been squeezed on so many sides all at the same time, angels have collectively reacted by slowing their investment speed down to the point where their money is of use to hardly anybody.

      Right now, I think any unfunded startup with a burn rate is anything stronger than a mere smoulder is probably out of luck vis-a-vis angel funding. Would you agree?

      Cheers, ….Nick….

  • Top Ten UK Startup Finance Myths (IMHO) « Margowege's Tech & Gadget Blog
  • moncler

    like it very much

  • Jason Velody

    Nick. Great article and I have sympathy with a lot of your position. We have an experienced management team, all with a strong track record in raising money through for early stage to mezzanine. We started the VC rounds back in March, looking to raise £3M for our next project. It’s easy to get meetings – which in and of itself is a bit of a give away – people have time on their hands.

    We knew it would be tough but after 6 months we’ve completely refocused our efforts. In our case we’re leveraging our management credentials to roll up a selection of small but useful companies into something with the breadth and revenues to attract funding (all a bit counterintuitive I know).

    We’re also persevering with things like the TSB and EU Framework 7 – I agree they’re a pain but I don’t think the problems are as black and white as you present. We’re also working with what’s left of the RDA’s to put together an investment plan that they can sign up to. It pays to make contacts and take the time to understand their underlying drivers.

    Once we’ve completed our M&A work we will be hitting the road in the US. In my humble experience there is far more “venture” in the VC world across the Atlantic. Having said that, turning up with a few slides and a great idea isn’t likely to cut it these days (sigh). Bear in mind that if you’re going to go down the US route you’ll almost definitely need to have US based management in the plan.

    Yes things are terrible. But there’s still investment cash sloshing around out there in need of a home. To maximise your chances of accessing some of it you’ll need to be flexible in your approach and broad in your focus. I’ll let you know how things pan out in the new year.

    • Nick Pelling

      Hi Jason,

      You’ve definitely got ambition in spades, and for that I salute you. However, the other two legs of the funding stool are timing and proof, so to make up for bad timing you’d need extraordinary proof. Just something to think about… but good luck anyway!

      Cheers, …Nick…

  • Martine Parry

    An excellent post Nick. What I would add is that 1. at least the UK has become better at investment generally. In my early days in tech (86- 99) the UK was mostly value-added resellers for US products and services. 2. There must be an opportunity for manufacturing-based opportunities. Others in hardware I’ve dealt with (an example in music hardware for instance) have had real challenges in attracting investment and I think part of the problem is a lack of ‘knowledgeable’ angels out there willing to invest (and maybe the cost of manufacture) – and I would suggest a lack of ‘reach’ to them. Anyone know if there are specialised groups for visual, audio etc investment?
    3. In the last 10 years of dealing with the investment and entrepreneur communities (in various industries) obviously I have come across a number of failures – and these are often used by the investment community to walk away fast. They failed for a reason, not necessarily due to the entire market! Some of the time the failures have been due to very high risk industries/ ventures or very poor advisors. This is exacerbated by either a poor level of education/understanding by VCs/ angels about an industry segment or a complete lack of wanting to be educated about it. Believe me, I have tried a number of means to educate these people .. Generally, my advice is to make sure that the revenue model is explained using KISS (keep it simple, stupid!) and that means that the closer you can get to a unit-based profit model the better .. investors understand the FMCG model more than any other. 4. My experience in market due diligence for a number of start-ups has opened my eyes to the way VCs and angel groups work – often they want to add to other portfolio organisations’ markets or exploit an existing successful portfolio company focus. These will twist and turn your plan into something you never anticipated before. For example: a 3d model compression algorithm spin-out company I was working with were lead by the VC outfit towards a business model that exploited the possibility of silicon chip manufacture. However, the first markets to exploit were clearly games and other graphic-intense media accessed over the internet and through streaming. Luckily money was put aside as a first tranche of funding to conduct the marketing research so we could twist and turn looking in depth at all potential markets with some funding in place. Success with the business plan would draw down the main funding of over £1m. This is usually not the case of course, although the demands will still be made on the start-up to report back the detail to make the case for funding.
    So guys, let’s get together and debate this more. I’m running the 3rd annual Funding & Investment Summit in London on 25 Jan and you can all come for the start-up delegate fee less 20% discount (by this Friday 24 Dec) – attend for only around £80. Use gen20 at the reg page (choose the start-up ticket option).
    Hope to see you there. Martine

    • Nick Pelling

      Hi Martine,

      Responding to your points in turn:-

      (1) Sadly, what can come can also go. Many of the things that helped support angel investment in the UK may well have dissipated since 2008.

      (2) I know of no specialised groups for any kind of hardware investment, sorry.

      (3) Though I do generally advise hardware entrepreneurs to fix their pitch on the “We Buy Any Car Dot Com” level, this isn’t because of FMCG, it’s because 95% of angels they’ll meet got rich off some variant of financial services rather than hardware sales. :-(

      (4) Every investor will tend to suggest ways of massaging your business plan towards their personal model of how to make money. You just have to make them aware how your market has changed (because it almost certainly has).

      (5) Though I’m sure your upcoming Funding & Investment Summit will do just fine, please humour me and remove the word “transmedia” from the write-up, it really doesn’t help anyone. :-(

      Cheers, ….Nick….

  • Martine Parry

    Just to add re the comment about international-accessed funding, I have been building relationships with both angels and VC outfits in the US and will be building them in other international geographical territories, together with the new companies being created out of the RDA/ media sector agency closures and angels and VCs in the UK. I’d be keen to build an informal network of everyone in this space (hi-tech in internet, software etc and including manufacturing and silicon) so we can flex it when it is needed. This should provide access to people and funds across the world. (I get the impression that official angel networks in the UK / Europe are not working for some reason). Let me know if you’re interested in being a part of this.

    The regional approach to funding by government / EU etc is deeply flawed. We are of course in a *global* economy for hi-tech start-ups whether they are in manufacturing, FMCG, software, internet …. Martine

    • Colin Hayhurst


      1) Count me in
      2) I agree that the regional approach is deeply flawed


  • The Ghost of Startups Future… « Funding startups & other impossibilities…

    […] been an interesting few days here following my Top Ten UK Startup Finance Myths (IMHO) post on TechCrunch, in which I boiled several months of grouchy blog posts here down into a meaty […]

  • Nick Pelling

    Hi everyone,

    Thank you all for your comments to my post here, I really appreciate every one of them: and please accept my best wishes and my highest hopes for your funding / investing activity in 2011 and beyond.

    And to stop you from getting unseasonably miserable about the startup funding mess we’re in, I’ve posted some follow-up tips from the Ghost of Startups Future on how to invest/build startups properly, advice you probably won’t find anywhere else. Here’s the link:-


    Cheers, ….Nick Pelling….

  • Twitter Weekly Updates for 2011-02-13 : chromewalker
  • Death to startup theatre! « Funding startups & other impossibilities…

    […] – no less true online. Despite occasionally hosting dissenting guest columnists (such as me here), TechCrunch Europe as a rule rarely reaches the level of what anyone else would term […]

blog comments powered by Disqus