Free lunch? – What does UK government funding mean to startups?

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This is a guest post by Nick Halstead, CEO and founder of

As I am in the midst of raising another round of funding for I wanted to cover some of my thoughts on the government’s recent announcement of further funding for business that is meant to help SME’s survive through the credit crunch. The question is: is there real substance to any of this, or is it just a lot of hot air?


This is just a fancy new name for what you probably know as the SFLG (Small Firm Loan Guarantee) – this is a scheme in which the government guarantees 75% of a loan with the rest covered by the banks.

A year ago this allowed loans of up to £100,000 – which was then increased to £250,000. It was something you fell back on if the bank turned you down for a normal loan (in fact it was a requirement that you first applied for a normal loan). I have previously raised a SFLG (over 2 years ago) and found the process reasonably painless except for the fact they take a debenture against your Intellectual Property.

The problem though is that since the beginning of the credit crunch the Banks have not been lending. I inquired to a friendly senior figure in HBOS about 4 months ago and was told not to even bother. I also contacted a few other people in the know within SEEDA and the answer was the same, no lending.

So when I heard about the new initiatives I was curious to find why anything would have changed. Well the statement from the UK GOV declares ‘This scheme will support up to £1.3bn of new lending by banks.’ However, there is one BIG problem, the banks still do not want to lend. I heard today from someone who was at a senior meeting of the “Big Four” banks (that we as tax payers now own) that they declared that in no way was there any going be any lending via SFLG.

My Advice: Ask your bank manager, but when he laughs at you don’t be surprised.


This used to be a fund created by the government that was bid for by various private venture funds who would then invest it. The scheme was originally setup to fill ‘the equity gap’ that being investment between £250,000 and £2million – an area that traditionally is not covered by Angels or VC’s. The fund is re-invested by companies such as Seraphim Captial and Oxford Technology. Both of these in general only deal only with companies that are already generating good revenue.

The confusing part is that the new announcement seems to have converted this equity based funding model into a ‘debt to equity fund’ this may be due to the fact that not enough of the fund has been spent, and or they see it better used to convert bad debt.

My Advice: If you are already generating cash then talk to them, but if you are in that position then the VC’s (such as Balderton) are already in the prowl for good deals.


The last minor announcement was that a further £25m was going to be invested through the RDA’s. This in theory is the best news for startups as RDA’s such as SEEDA are slightly better at distributing money out via other agencies. One which I have dealt with at length is Finance South East – they have a range of funding models from equity based matching funds (up to £250,000), debt based accelerators (up to £100,000) and also a few other small funds for very early stage ventures.

My Advice: For startups at pre-revenue stage there are a number of good options, but be prepared for a 4-5 month process + a lot of paperwork.


Lastly let me just make a scathing attack on NESTA who in theory cover ‘Science, Technology and the Arts’ but in fact would rather not touch Technology with a 9 foot investment stick. I was clearly told that “We do not invest in anything web 2.0 at the moment.” – So feel free to go waste time talking to them, but I would warn against it.

My Advice: Tell them to stick it where the sun don’t shine.

Other Resources

If anyone wants contacts into SEEDA, FSE or advice on other government schemes then get in touch via Twitter.

  • What does UK government funding mean to startups? : Nick Halstead, What is this Tech?

    […] rest of the article is on TechCrunch UK as a guest […]

  • Evan Rudowski

    Good article, Nick.

    Don’t forget Wales, which has been very aggressive in recruiting new business via Trade & Invest Wales (formerly the Welsh Development Agency).

    We located our start-up in Cardiff specifically because of the grants, loans and other incentives offered to us. We have received several hundred thousand pounds in grants for job creation, professional services, marketing and other activities. We have also been resident in the @Wales Digital Media Centre, a top-quality facility at heavily subsidised rates.

    Average salaries here are much lower than London although there is a smaller pool of talent for some specialised roles. There is a great university here, providing a lot of clever young talent seeking work experience.

    Cardiff has the advantage of being only two hours by train from London Paddington. Of course it’s still not close enough for us to be in London for all the great industry networking and social events, so we miss out on some of that.

    Thanks to this approach we have built a large paying customer base and brought ourselves nearly to breakeven without taking any external funding (other than from the founders). Had we opted to remain in London this would not have been possible. We would have needed to take external funding sooner, or we might have hit the rocks due to higher costs which would have given us less breathing room to figure out our optimal model.

    Best wishes,
    Evan Rudowski

    • Loopy


      Great stuff. I wish a lot more entrepreneurs who do business via web/mobile would understand that physical location does not have to be in ‘the fashionable’ places but in a location that serves the business well strategically and financially (as you have found for your company).

      I get a feeling that some web companies still have a bricks and mortar attitude and want to be seen in the best position in the best high street.

      BTW, I am welsh, living in Europe at the moment, but I could certainly entertain upping sticks with my businesses to be nearer the millenium stadium for match days :0)

  • Danvers Baillieu

    Nick – good article. In a nutshell the message is that whilst government funds are available they are in short supply for tech start ups and cumbersome to win. In many way, I think this is quite right – these are commercial enterprises and the government has got better things to do with its – sorry, our – money.

  • Nic Brisbourne

    Nick – my helicopter view on all this is that everything which helps to make more money available for startups is a good thing – but there are obvious difficulties translating policy into action. Hence your frustration.

    I’m sure everyone could do a better job, but be aware that banks have got (much) bigger problems to work on right now and it is really hard for governments to deploy investment capital effectively.

    This isn’t an easy problem to solve. The great news is that people are trying and we need to be careful that our frustrations don’t end up with them giving up.

  • Kevin May

    By all accounts Nesta did a decent enough job of hosting the V-JAM Day recently for Virgin Atlantic, where all manner of so-called ‘web 2.0’ ideas were thrown into the pot.

  • Scott Jones

    re NESTA

    They clearly state on their site

    “Stimulating Venture Capital – the need for a new £1 billion fund

    In our recent ‘Shifting Sands’ report, we highlighted the retreat of private venture capital from the early stage venture sector. NESTA is calling for a £1billion fund of funds to be created after warning that the UK’s next generation of technologies are at crisis point, with early stage innovative firms suffering from the retreat of private venture capital from the sector.

    In our paper ‘Attacking the recession’, we suggest the fund is aimed at ultimately supporting high-potential, innovative, early-stage businesses suffering from the effects of the ‘equity gap’.

    We would further suggest that the fund operates on a strictly commercial basis. Discussions are now underway to build on the governments’ interest in supporting UK companies through the improvement of access to Venture Funding.”

    Which sounds fair enough to me.

  • Alx Klive

    Good article and any more insight into the practicality of dealing with these initiatives is warmly welcomed.

    On the subject of NESTA, we were, frankly, disappointed in our dealings with them. They didn’t seem to get our space at all.

  • Oli Barrett

    Interesting piece Nick.

    Your advice about NESTA is extremely to the point and might lead a reader to believe that they are not supportive of Web 2.0 in the UK.

    I wanted to point out that NESTA have in fact been cash supporters of the following three significant initiatives over the past year, which have in turn helped numerous Web 2.0 ventures.

    1) Seedcamp (

    2) Social Innovation Camp (

    3) The UK Catalyst Awards (

    The last of which, I was closely involved with. NESTA are also supporting Make Your Mark with a Tenner, another project I’m working on, so I must declare that interest.

    Rather than drawing conclusions from a phonecall, I would encourage you to recognise NESTA’s support for the above projects, which in their own way play an important role in fostering the growth of Web 2.0 in the UK.

    Good on you for promoting discussion in this area – and I look forward to catching up soon!

  • Mark Rock

    I’m with @mbites on the NESTA debate really. They are essentially a shop window for innovation in traditional ‘engineering’ fields and really don’t understand the concept of value in software or data. In many ways they are so inconsequential in the current climate that it’s hardly worth picking a fight with them. To their credit, they are pretty clear on their website that they are not particuarly interested in the belts & braces technology scene –

  • Ben Colclough

    Great article – should prove a tremendously helpful resource. Not sure I agree with Danvers. Yes they are a commercial enterprise but is all a question of risk appetite. Why have governemnt funding if it is only going to invest in lower risk businesses which by definition probably have funding options elsewhere. Having said that I can certainly see an argument that internet businesses are not massive job creation exercises.

  • Nick Halstead

    Nic, I am not frustrated for myself as I have already done the work, learnt the lessons etc, my time engaging with SEEDA / FSE has been rewarding long term, but I am very lucky that my office is in an enterprise hub, and that gives us links into the right people who are normally very hard to track down within these GOV agencies.

    I do see ‘green shoots’ ;) appearing amongst some of the agencies, but the burden of paperwork is WAY more than even going to a VC.

    Scott, hiding behind ‘strict commercial basis’ doesnt help anyone, we are talking about early stage startups for the most part who need investment for ‘innovation’ and innovation comes at a risk, you CANNOT create new ideas/technologies when you are spending your whole time trying to prove a commercial point. Agencies like FSE understand this and have created a range of policies that cover early stage through to revenue generating companies.

  • Will Pearson

    Despite a few brilliant and committed people there (Roland, Rohan, Vicki and some others) I agree with the views above that they are remarkably keen on new incarnations of traditional industries and don’t see new industries for what they actually are, ie, new. This is apart from social enterprise where thanks to those named herein, they are making a difference. They have to look at the role of art and design again at a fundamental level, it’s what they continue to seem to think is fuzzy. That’s a shame and the real loss from NESTA from the time before their current CEO.

  • Mitch Sava

    A few words in defense of NESTA: as a CEO of a web 2.0 start-up, I certainly sympathise with your frustration. However, it would be arrogant of us to assume that “Technology” only includes Web 2.0 developments. Indeed, Web 2.0 activity in the UK only comprises a fraction of technological development, and associated investment into this space. As a technology fund, NESTA Investments actively pursues and manages a portfolio of investments in ICT (particularly high-tech hardware), biotech, and cleantech.

    Additionally, as NESTA funding currently originates from the public purse (technically, from lottery proceeds) as taxpayers we should be pleased that they are investing their resources on areas in which they have solid expertise (an accordingly, can make more intelligent investments and provide meaningful support to their portfolio), rather than pouring money into whatever technology seems ‘hot’ at the moment.

    Furthermore, as can be seen by the popularity of they myriad web 2.0 networking events, there are a number of other investors, both angels and institutional players, now active in the Web 2.0 space. While there is certainly room for additional investment in this realm, it seems entirely appropriate to me that NESTA spend its limited resources on areas where there are fewer private sector players (and accordingly, a more significant equity gap). Don’t get me wrong – I’d be overjoyed if they launched a web 2.0 fund – but I do understand their rationale for not having done so yet.

    Finally, just because NESTA Investments is not active in Web 2.0 work, does not mean that NESTA is not involved in the social media space. Indeed, they have an entire programmatic stream, called Web Connect, devoted to investigation and support of highly innovative applications of web 2.0 concepts.

  • Nick Halstead

    Oli, I was talking strictly about them funding companies themselves, because frankly when it comes down to it, beyond the events what all startups want is cash.

    You have NESTA Ventures which is meant to direct investment into companies, and my (and others) experience is that they won’t invest in this area full stop. And this not just from a phone call, I have met NESTA representatives.

  • Alex Bellinger

    The fundamental question here is should tax payers money go into high risk, innovative ventures right now?

    If VCs are pulling out of early-stage start-up funding, why should we expect government agencies to.

    If the support funding goes to revenue generating businesses and helps secure jobs, then in the short term I think that’s a good call.

  • Roland Harwood

    Mike – Would like to meet up face to face and introduce you to our programmes and investments guys about NESTA’s investment approach and our support for Web 2.0 in general such as Seedcamp, Social Innovation and Webank. Cheers, Roland

  • Chris Osborne

    Good piece and discussion.

    If you’re in London then the GLE (Greater London Enterprise) is the economic development arm of the London RDA (London Development Agency) – so I guess they’re the London equivalent of Finance South East (an extension of SEEDA), which Nick mentions.

    Still getting to grips with what they can actually do for you (and us in the web space), but here are some links:

    *About GLE
    * GLE funding & financial support info

    They don’t seem to offer the ‘enterprise hubs’ that SEEDA do and which got mentioned (, which seems strange. Or maybe they’re well hidden.

    And if you’re not in London, then here’s the RDA map for the country so you can find yours (Nick linked to this site in his piece, but this map is handy)

    And if you’re a grant hunter then here’s the Business Link page on grants and other government support

    Any other useful links to share?

  • Matt Randall

    Great article, and some interesting points raised in the comments. I am also looking forward to hearing about NESTA’s investment approach for Web 2.0.

    I’m part of a start-up currently actively seeking funding, and the process is slow, but progress is slowly being made for us.

    If you want the money from government, VC or elsewhere, you really have to work hard for it.

    You have to keep arranging meetings, building connections, winning influential people over with your idea and get them to actively assist in the funding search.

    You don’t even have to stick to traditional outlets for funding such as Government, VC’s, loans and grants etc.

    If you can find the right angle and have a solid business plan to back it up, you can pitch for anyone to back your business: companies, wealthy individuals etc.

    The point is, leave no stone unturned when it comes to hunting for funding. Go for multiple lines of attack, don’t be afraid to try speculative applications to absolutely anyone for funding. If you can arrange a meeting, at the very least you have a foot in the door.

    Best of luck for anyone looking for funding, would love to see a real flourish of new and exciting UK web start-ups over the coming year.

  • Mike Butcher

    On an iPhone so a short comment – since seed capital is rapidly disappearing from the private sector doesn’t it behove the public sector to so more at seed AND with high risk Startups? Should NESTA be broken up into Science, tech parts to better target? Why does NESTA not back more organic market events with sponsor model instead of running it’s own? Lastly supporting social media stuff is fine – but it’s largely built on US tech and biz. What about some home grown businessesfor a change

  • Joel Hughes

    As a (pre) start up with a new Web App ( I don’t see any sensible way to raise funding outside competitions like SeedCamp.

    It looks like the amount of paperwork and legwork would require many hours a week, something that can’t be done whilst holding down a day job (vital in the current climate). I wouldn’t be surprised to see many start ups bootstrapping until money becomes easier to come by in a few years time.

  • Chris Padfield

    What we see a lack of in the market are early stage co-investment funds. There are angel investors out there ready to invest in companies; however they often want/need early stage VCs – with professional investment managers – to source deal flow, run the investment process and perform some of the DD. Angels are then prepared to add both capital and there extensive experience and expertise in growing the business – two things they are generally more interested in than the process of actually completing deals – which even for seed capital investments takes a lot of work.
    The early growth funds were examples of how this model works; making maximum investments of £100k and requiring matched funding. The one we run actually leveraged about 5 times the private money; one company raised £2.7m over 2 rounds with about £200k from the seed fund – the rest all private angel money. Without the seed fund; it is very unlikely this deal would have happened.
    There are certainly problems with the early growth funds, they are too small in size and lack the ability to support their companies adequately through subsequent funding rounds; however with some adjustments the model can work and for “bang for buck” for public money the private leverage is compelling.
    Unfortunately BERR do not seem to be re-funding these funds now and they have almost all reached the end of their investment window. They have been replaced by the ECFs mentioned in the article. The ECF is a good model (which in particular solves the problem of being able to support the companies through subsequent rounds), but the deal size is considerably larger and although they require 1/3 private money up front – this is considerably less than even the required matched funding (1/2) of the EGFs let alone the 5:1 we saw with our fund.
    Of course, if the government wanted to encourage more private investment – the simplest thing they could do would be to make the EIS tax relief scheme more generous; particularly increasing the income tax offset from 20% to 40%. The recent response by the government to the BBAA does not seem to suggest there is any appetite for this however. Given how much support us tax payers are paying to get the debt markets rolling; it is a shame there is less government support for equity – given debt is a non-starter for the vast majority of start-ups.

  • Ivo Jansch

    It may seem like a bad generalization on behalf of NESTA to not invest in “Any Web 2.0”, I can actually understand where that comes from. The Web 2.0 ecosystem at large is huge, and only a few initiatives are actually based on a solid business model. Many others are ‘bubble fodder’, trying to create ‘value’ out of thin air, and with a goal to exit by selling the service at some point.

    It would be neat though if NESTA were actually able to distinguish such bubblesque initiatives from real good ideas that have a chance to actually turn a profit.

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