Where are all the UK startups?

Excellent discussion over at Plasticbag on Where are all the UK startups?.

Networking events. There are quite a few networking events out there, but they aren’t easy to find. I spent a solid year looking for different events. Now, through work, I always receive invitations and find out about new events for entrepreneurs because we fund start-ups… so there’s a pull factor involved which obviously makes my life easier. One event that I just attended this week was the European Tech Wire event in London. Another frequent blogger get-together is Geek Dinner. Most, but not all, of them *are* London-based.

There’s a lot of moaning about everything being in London and not in the remote parts of the UK. The post is about moving to Silicon Valley because that’s where it all happens… Funny, there’s no discussion of Boise, Idaho or Jackson, Mississippi… I can assure you, there are entrepreneurs in Jackson, but they all leave- just like I left. Either you’re in a hub of activity or your not. What you can’t have is the most happening scene in your back yard (unless you’re from San Francisco, London or NY). If you want it, you have to go to it. Sorry, but that’s the case in the US or the UK.

Funding for start-ups. I definitely agree that getting a start-up business funded is extremely difficult. There are 1001 reasons for the market failure. As pointed out, most VCs won’t touch anything under £1million because it’s not worth their effort. At the London Business Angels Network I personally review about 800 business plans per year. Of those only the best 40 present to our network. Of those 40, approximately 15 get funded (£100k-£750k). That works out to 1.8% of companies that initially approach us getting funded. It is *very* competitive. London Seed Capital funds approximately half of those 15…

The LSC requires that the product is finished and there is market validation (through initial sales). The real challenge is getting the business sufficiently developed to raise external funding. The only sources of funds, really, for seed stage development are friends and family. NESTA offers seed and prototype funding, but it is very competitive as well. Setsquared is also mentioned, they are a good resource for very early stage businesses too.

Here are a few considerations when looking for funding that I pulled from the discussion.

Also, if you think VCs fund start-ups, you might want to read this classic article over at RedHerring “Ten myths and realities of VC“:

Myth No. 9: Venture capitalists fund startups.

The reality: Venture capitalists fund established companies. Angel investors fund startups.

OK, this one’s self-serving. Garage.com, which Mr. Reichert dubs a “venture gapitalist,” hooks up seed- and early-stage startups with angel investors. Still, I must agree that early-stage companies are much more likely to find backing from angels than even those VCs who say they focus on early-stage deals.

“There is a whole bunch of mythology that has evolved that says, ‘You find a couple of grad students, have a clever idea, go to Benchmark Capital, and get $15 million,'” Mr. Reichert says. “If you’re serious about starting a company, you’ve got to be realistic. You scrape together a little money from friends, fools, and family and then when you’re ready to go for outside money, there’s a one-in-a-thousand shot that you’re going to get name-brand VC even at that stage.”

Mr. Reichert’s main point, which I think is dead on, is that too many startups have unrealistic expectations, setting them up for discouragement. “Don’t limit your vision to getting your series A funding from a Sand Hill Road venture capital fund,” he says. “There’s this assumption that if, gee, I don’t get Sequoia Capital in my first round, then I’ll never make it with the big boys. There’s a chance, but it’s really unlikely that you’ll get that funding. So, you need to expand your horizons and understand what you’re looking for. Don’t compromise on quality, but be realistic in terms of who is the right investor for you at this point in time.”

Mr. Reichert speaks from experience. In his last company, Academic Systems, he didn’t seek VC initially. It made more sense to get corporate cash. Academic raised $400,000 in smart money from Jostens, which later brought in brand-name Accel Partners. It wasn’t long before Kleiner Perkins Caufield & Byers was on board, bringing along two little companies named Microsoft (Nasdaq: MSFT) and TCI. “There was a very nice food chain effect that happened,” he says.

Risk Tolerance. My opinion on the risk debate is that the US is somewhat better than the UK (although its not a case of showing up and they give you a check) and the UK is 1000x better than continental Europe. If you think it’s tough here, go try it in Spain. I spent six years there and it’s much more difficult to start a company and get funding. One of the main benefits in the UK is the UK government- they have done an excellent job of offering tax credits to business angels through their EIS program. The main issue is there are very few sources for “risk capital”- the UK government has taken steps to address those isses- much more so the any other country.

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