Risk-averse venture capitalists are harming the UK’s startup scene

Caroline Preece Read more March 7, 2016

We already knew that startups were struggling to gain growth-stage funding, but new research has uncovered the scale of the problem, revealing how more and more VCs ignore the startup community opting instead to invest in bigger, more-established companies.

Risk-averse venture capitalists are harming the UK's startup scene

Hype around multibillion valuations of companies such as Facebook, Snapchat and Uber grab the attention of VCs, derailing attempts of early-stage startups looking to grow, TechMutiny Insights reports.

Joshua Davidson, founder and MD of learning-apps firm Night Zookeeper, said that he was forced to use his company’s own resources to launch the business, despite winning many tech pitch contests. He has now started a campaign for Series A round funding from VCs.

“We’re now used on five continents,” Davidson said. “We have 60 kids per school buying [Night Zookeeper], although we’re not experts in book publishing. We see a high level of enthusiasm for our brand. But I don’t think many senior media and entertainment executives that we’ve spoken to have necessarily understood the full potential.”

Henrik Eklund, founder of personalised video news service Newstag, told TechMutiny that investors need to re-evaluate how they measure the success of startups, with them currently focusing too heavily on user numbers. When these start to fall, he said, VCs tend to lose interest.

social_chain_and_nvc The team at Social Chain, a UK startup that may not be here today without VC funding.

“The market, including myself, gets swept away by high numbers even though they’re not relevant,” he said. “That leads to a situation where you can have amazing numbers in the billions, which in the old media model would correlate to billions [of] dollars, but in reality is just an output that will continuously fall in value as the supply in endless.

“It is more valuable to have 1,000 people having a personalised experience than exposing your brand, message [and] value to 18 million eyeballs.”

It should come as no surprise that governments around the world want to emulate the success of Silicon Valley, and TechMutiny’s report reflects that, stating that digital technologies are predicted to account for 25% ($24,600 billion) of global gross domestic product by 2020.

Ciprian Borodescu, CEO and co-founder of Webcrumbz, the venture behind mobile publishing firm Appticles, said: “The difficulty rises when you are ready to get to the next level. What happens afterwards? I have been told there is a lot of money there, but not many startups manage to find it.”

Investors are still in the transition phase, says UK tech entrepreneur Jonathan Chippindale, adapting to a fast-moving startup scene based on risky ventures.

“Technology, by nature, is innovative, and because it is new, brands don’t have the tools to assess its value. Innovation means higher risks, despite the greater rewards. It can take only seconds to move on from something new just because you find it difficult.

“As a tech startup, you need two to three years of R&D, and no-one is going to support that. What investors want is a working prototype that can be inserted immediately into the brands. That can take two to three years without bringing in any revenue.”