Fact or Fiction - Venture Capital funding in the UK tech sector is dead

Dispelling the myths

"They’re all sitting on cash. The big business is sitting on cash, the banks are all sitting on cash, the VCs are all sitting on cash, the Private Equity firms are all sitting on cash – and they don’t know what to do with it because they don’t know what the next wave is."

Entrepreneur’s view

"We’ve seen this drastic change in what it takes to launch a business… the barriers to entry are so small, which means there is very little appetite for something that doesn’t have an inherent barrier to entry to receive any venture funding."

Entrepreneur’s view

In the tech sector we often hear from entrepreneurs that funding is more freely available in the US, they are less risk adverse and more in tune with the industry.

On the other hand UK investors say there is funding available for the right opportunities but as custodians of other people’s money they have set the bar justifiably high. We have interviewed over 100 UK companies, together with VC houses, banks and other intermediaries with an interest in the sector to understand both sides of this debate and provide entrepreneurs and investors with an insight into the attitudes of their counterparts in 2012.

In the video below, our global software leader, based in California, met with our UK technology specialists to discuss our findings and the differences between perceptions and reality when it comes to Venture Capital Funding for technology companies in the UK and US.

 

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Transcript content

Jass: The tech sector in the UK continues to do well particularly at the early stage, growth phase and the start up phase. There are many myths and perceptions and we wanted to dispel some of those myths. Whether VC funding was available and how easy it would be and what some of the issues are involved. So we have undertaken a piece of research to dispel some of those myths and with me here today are Mark McCaffrey who is a partner from our US firm and Brian Henderson who is a director from our technology group, just to talk a little bit more about the results of our findings. There was one big perception in there which was that there was a difference in the entrepreneurship between those in the UK and those in the US, what do you make of that?

Brian: I think we’d heard this a lot from our clients and some of the companies that we work with, that failure in the UK is viewed very different to failure in the US. And I think one of the perceptions that we tested through our research was whether actually that was something that was holding back entrepreneurial activity in the UK. I think the perception was that in the UK, failure is held against you, so if you tried and you’re not successful, then actually that would be held against you if you tried to do a follow up opportunity. In the US, I think there is more of a culture that if you’ve tried and failed, it seems the necessary thing on your CV and actually it’s almost required by some funders as to making sure that someone has managed to learn from their mistakes and moved on.

Mark: It’s an interesting comment. I’ve never heard it, you know, trying to fail or that theory. One thing that’s been, I think unique about Silicon Valley and some of the things that are done there around entrepreneurs is the ability to take a chance, to take a risk. Many of these companies don’t succeed at first. They require many rounds of financing before they can get to the market. And many ultimately get acquired or the technology gets acquired. Very few go actually into an IPO. But I think there is a different sense sometimes that you only see the successful ones so therefore you think it’s 100% all the time.

Jass: It’s a bit like the perception that, somehow, UK investors are more risk adverse and it’s easier to get funding in the US, but that isn’t the case is it?

Mark: I can’t say whether it’s a case or not but I would say the VC community is looking for good ideas, and they’re willing to hear good ideas and I think those VCs could be in Silicon Valley, I think they could be in New York City, I think they could be in London and they could be in Toronto, they could be in Israel. It’s a good idea, generally will get funded. Keep in mind, a lot of companies that ultimately with the technology, with the idea that they come out with, probably isn’t the original idea they started with. A lot of them change over a period of time. The one thing I would say Silicon Valley does have to its advantage is a mass of people who have been through the failures, who can coach the new technology of people who can work through the process. Something probably that is a little different with US.

Brian: And I think that was definitely borne out in our research, because I think the view of, certainly the VCs who we interviewed as part of our research, said that the perceptions arisen because actually there are a lot more funders in the US. So actually if you are a UK company trying to go to what is actually a relatively small community of VC funds, you could have that perception that actually there is not as much money available, when actually there is a critical mass over in the US.

Mark: And I would also add to that, the one thing I think a lot of companies need to do or entrepreneurs need to realise is, what is the definition of a success?

Jass: Because you’re not all going to be a Facebook.

Mark: We’re not all going to be a Facebook. We won’t comment on Facebook today, given the date of this. A lot of these companies aren’t designed to actually go public. A lot of them are really designed with the idea that maybe 80%/90% of them get acquired before they ever hit the public market. A good idea isn’t going to stay out there very long before someone picks up on it and acquire it.

Jass: The other thing we did Brian, in the research, was just look at talent, because there was a perception maybe there was an issue around the funding because of the quality that we had, and what did the research tell us?

Brian: I mean there are a couple of themes that came out with respect to talent. I think for some of the companies that we interviewed, the ability to recruit and retain technical talents, was actually still quite strong, but where they struggled was more in the recruitment of senior managers and business people who could actually take what was a relatively small start up business to the next level and have it compete with some of those larger technology companies. I think there was still an underlying theme that technological talent in the UK is patchy, but I think it’s very much around universities such as Oxford and Cambridge, hubs in London, Scotland and elsewhere in the UK, there are good clusters of very strong and talented people.

Jass: Mark, in the US, is there a shortage of talent or is there too much? Can we have some?

Mark: Is there ever too much talent? I think talent like everything else, and you made an interesting comment there about, it’s hard to compete with the bigger companies. And again sometimes I wonder if that’s less about the location and more about just the general nature of the economy. We are coming out of recession, economies have been struggling all over the world, the Euro is having its difficulties, US is showing some growth. People have a tendency to want to stay with the more secure, mature companies. A few IPOs and all of a sudden everybody is saying “hey, let’s get into the game again, let’s go to the small companies, let’s take a chance, let’s take a risk”. So sometimes, to me, these conversations always seem to come up.

Jass: In waves and cycles?

Mark: In waves and then people are wondering whether we are going into a small mini bubble right now, where those debates are coming up again, I can’t get the talent. Wait a couple of months and you probably get a few people wanting the equity play.

Jass: But just to wrap up then, Brian, from your perspective, one of the headlines was “Is VC fundingdead? I guess your argument would be?

Brian: I would argue not, and I think my view would be backed up by the VCs who we spoke to. I think there is still a perception gap over what entrepreneurs think VCs are looking for and what they actually are looking for. I think what we’ve encouraged the people who we’ve spoken to, who asked if we are running early stage of growth companies, is to make sure they have got good communication lines open to those investors and actually be confident that they can go out and look for the funding, because it is out there.

Jass: Brilliant. Thank you very much. So, from what we’ve heard, clearly don’t let perceptions fuel reality for you. VC funding definitely is not dead and if you’ve got a great business, go and get the VC funding.

We hope our report stimulates debate and creates a dialogue between investors and entrepreneurs. We have tested 4 common perceptions in this industry. To find out more, click on the following links:

4 common perceptions