Seeds of unrest

18 January 2007

After looking for early-stage funding last year on both sides of the Atlantic, one entrepreneur has come to a stark conclusion about the UK. We hate start-ups.

Indeed, of several hundred seed deals completed last year, only a handful were done by venture capital funds, with the rest predominantly being financed by either angel investors or friends and family. As Laurence John, head of the newly-created Amadeus and Angels Seed Fund (AASF), acknowledges, that's created a problem - one that Amadeus' £10m fund aims to fix.

It's no secret that there's a funding gap for start-ups between the £250,000 mark and series A funding of several million. Angel investors typically invest hundreds of thousands in a start-up, but according to Amadeus' research, a start-up needs an average of £1.1m to get it to the point where it's properly 'cooked' - in other words, ready for series A funding. This figure is based on extrapolating back from companies that made it to a series A round - many more will have secured seed funding but never got any further, but that's another story.

A further problem, John points out, is that angels who come in with hundreds of thousands of pounds in the early days end up getting horribly diluted if the company makes it to be a tech giant, which can require anything from £20m to £60m of funding. That's why the AASF, which is made up of money from the Government's Enterprise Capital Fund and 50 angel investors, will keep some funds aside in order to 'manage' their equity stake beyond seed stage. John says Amadeus learnt these lessons well from setting up a Mobile Seed Fund, which he's headed since 2001.

So what does all this mean for the wider investment market? For a start, John argues that VCs are definitely looking for early-stage deals but aren't necessarily able or willing to seed fund them. (At least not in this country; on the other side of the Atlantic, things are managed rather differently.) But he - and many others including the UK government - thinks that will change.

For start-ups, anything that increases access to seed funding has got to be good news. But it doesn't alter the fundamentals. Even if there's more money sloshing around for early-stage ventures, you've still got another big hurdle to cross - convincing them that you're a blockbuster opportunity.

By David Longworth, Webster Buchanan Research