Early Stage investing in the UK: Doom and Gloom?

I attended the CityZone event Thursday night to hear Jon
Moulton’s Christmas message of doom and gloom for the early stage venture
capital community. Jon’s view is that there is too much money in early stage investments
in the UK- hence the poor historical returns seen by early stage investors.

Mark White from NESTA added his comments that the UK early
stage venture market is too stratified and there needs to be vertical
integration- allowing companies to receive funds from seed through to Series D
from the same Fund. Many early stage investors have caps on their investment
amounts (London Seed Capital included) to keep us investing in the sub-£1m
range.

I agree with parts of both of what they said. I’m a firm believer that in order
to make money in VC you have to invest early and then really back the
winners that begin to emerge. Unfortunately, that’s not the prevailing approach in the UK.

The “stratification” Mark refers to strips early stage
investors of the ability to follow an investment with large sums of money in
later rounds. This means spinout funds and early growth funds, like LSC, are
taking large risks initially without the ability to put “good money after good
money” for successful investments. In most cases, other funds are investing
large subsequent sums into these companies – at a point of significantly
reduced risk with marginal price increases on the last round (if they don’t
make it a down round)- and are reaping the rewards.

Jon further qualified his comment by saying that the startup money is spread too thinly, i.e. too many startups are getting funding. The key here is that the funding is insufficient. Case in point: one of our portfolio companies is doing very well, but we can’t provide additional capital to them.

I  don’t share Jon’s prognosis of doom and gloom, but I do agree that there’s a lot of work to be done improving the venture capital market in the UK.

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