After angels, before VCs: UK consumer startups are stranded in £1m-£5m no man’s land
Britain’s brilliant consumer startups are finding themselves stranded in a funding no man’s land – too mature for angel investors, too small for venture capitalists, writes Joe Benn in today’s Notebook
Why Britain’s consumer startups are falling into a funding trap
The UK is brimming with ambitious founders reshaping tired categories across fast-moving consumer goods (FMCGs). In recent months, brands like Deliciously Ella, Biotiful and Wild have shown how compelling storytelling, bold branding and a mission-driven ethos can disrupt the status quo – and attract major acquisitions. But for every headline-grabbing success, there are dozens of startups falling into a funding gap.
Early-stage investment can be straight-forward enough, with enterprise investment schemes (SEISs and EISs) providing great tools to attract angels and crowdfunding.
I’m not saying it feels easy out there if you’re a first-time entrepreneur, but realistically if you have a strong proposition and the right approach, you should be able to raise those all-important early funds.
This early-stage ecosystem is both a blessing and a curse. It breeds innovation, but also fierce competition and inflated valuations. These early valuations create a psychological trap. Founders believe they’re worth millions on paper, but unless they navigate an exit, that’s all it is – paper. Worse, these inflated figures must keep climbing. Raise at a £5m valuation today, and you’ll need to justify £10m tomorrow. Miss the mark or hit market turbulence, and it all crumbles.
So many UK FMCG business get stuck in this zone between £1m-£5m revenue: tapped out on angels and the crowd, but too early for VCs. This leaves them vulnerable to aggressive VCs who might come down stream for a deal, but can insist on terms like board control, liquidation preferences or anti-dilution. This leads to misaligned incentives which can kill the flexibility and creativity that is so important in early-stage businesses.
Not all VCs are bad, but most are chasing unicorn outcomes rather than looking to build sustainably. On top of that, most VCs aren’t operators and they don’t have direct experience of consumer brand dynamics. The reality is that 90 per cent of UK startups fail within the first three years of operation.
If you can guide your brand to £5m+ in revenue and hit profitability you’re one of the lucky/skillful few and you’ve earned options. You can look at VC funding from a position of strength or even PE, debt or strategic partners. But most brands never get to that point, or they arrive with broken cap tables that squeeze founders out long-term.
I believe it’s time for a new funding playbook. Patient capital over pressure capital. More operator-led funds who understand the grind and can empathise with founders.
This isn’t about lowering ambition. It’s about giving FMCG founders a fair shot at building something meaningful. Until then, too many brilliant brands will fall into the gap between early hype and sustainable scale.
Family offices could be part of the solution
Family offices are investment vehicles that manage the assets of wealthy families. They are often the LPs behind VC funds. But more and more we are starting to see them invest in consumer businesses directly rather than/as well as through VC’s. Family offices are not beholden to the same fund economics of VC firms, where every startup investment must have the theoretical possibility of “returning the fund” within a strict timeframe.
If you’ve not heard of something called fund economics, broadly it means that if a fund has raised £60m, then they apply a theoretical framework such that each investment should be able to return £60m. It’s a sniff test of sorts. It means that if they have a 10 per cent stake then they must believe the business can exit for £600m. It’s the forcing mechanism that drives the growth-at-all-costs mentality in VC. Family offices are investing their own money as opposed to other people’s and therefore can afford to be more patient. The catch? Access. Without the right introductions, getting in the room is almost impossible with most of these guys as they typically fly under the radar.
Access to startup investment still a man’s game
I state in the main article that ‘early-stage investment can be straight-forward enough’ – which is easy for me to say and I’m sure not how it feels for a lot of entrepreneurs. In FMCG as much as most industries, the vast majority of funding is going to white middle/upper class men. There are a few investment groups out there looking to change this by investing into different groups and a few retailer schemes looking to support but in general the industry needs to do so much more to level the playing field and encourage startups from different backgrounds.
Lessons from the US
The UK has no shortage of ambitious, creative founders building businesses that customers love. But when it comes to scaling those businesses, the investment eco-system and retailer landscape can be ill-equipped to support their rapid growth and ambition. Having spent a lot of time in the US, I have experienced first-hand how much more the market there is set up to allow entrepreneurs to flourish. There is easier access to capital, an entrepreneurial culture, a much more supporting legal and regulatory environment and of course a domestic market which offers much greater scale.
I’d love to see the UK produce more winners, especially on the global stage. I truly believe winners breed winners and if you see it you can believe it. I’d love to talk with any aspiring/early stage entrepreneurs and offer any guidance I can.
Joe Benn is director at MNC