Startup in London? Here’s how the capital’s funding scene is changing

 

The funding landscape for startups in London is changing. It has expanded and diversified, making it easier for early stage companies to raise capital. Yet the benefits vary greatly, depending on the size and type of company.

 

London is fertile ground for startups looking to raise between £50,000 to £150,000. The Seed Enterprise Investment Scheme (SEIS) has been an advantage for early stage companies. But once they pass the £150,000 limit, activity drops off until you get to the big venture capital size investments of £1,000,000 plus.

 

For startups looking for their first taste of funding – around £50,000 and under – the results are also mixed. There has been a boom in London in the past few years in terms of accelerators, which traditionally occupy the £50,000 and less space. According to an O2 report on accelerators in London, from 2011 to the end of last year, the number of accelerators in the UK increased around 110 per cent. Roughly one third of those provide funding for participating startups – and almost all promise greater access to funding through introductions to investors.

 

This directly provided funding can range from a typical £10,000 to £20,000 for roughly 8 per cent equity, all the way up to £500,000 at EcoMachines, an incubator which focuses on hardware in the energy sector. The typical startup in London that has been through an accelerator programme raises £68,000 through outside investment.

 

But in spite of the proliferation of accelerators filling many different financial needs, they do not cover them all. From a purely financial perspective, early stage entrepreneurs are often reluctant to give up 8 to 10 percent of what they think will be worth billions for a small investment and a few months of free rent.

 

Many look west to the US. Chief executive of London’s Real Life Analytics Adam Carrigan said that he came to MassChallenge, an accelerator based in Boston, because he and his partners did not want to give up equity so early in their development.

 

“We were at a very early stage when we applied to MassChallenge in 2014. We were able to keep our equity when we were at idea and prototype phase, and go all the way to first customers because of the network we could access through MassChallenge,” he said.

 

Adam came back to London after the four-month programme in a stronger position, having gained traction, developed the prototype, and consulted legal resources. Once over the initial, very early stage hump, Real Life Analytics was able to raise its first full seed round back in the UK.

 

The most important aspect of accelerators in terms of their place in the ecosystem is not so much the funding, but investing in the teams themselves. Early stage companies are often not ready for investment when they start seeking it. Accelerators help fill the critical knowledge and sophistication gaps that make it possible for companies to survive post the £50,000 or £150,000 hurdles, and create a long-term, scalable business. Wayra and TechStars in London, and Entrepreneurial Spark, which is throughout the UK, are excellent examples of providing immeasurable value through their supportive programmes, rather than through investment.

 

Now, MassChallenge UK has come to London, and will be the largest in the capital, accepting around 80 startups for its summer 2015 cohort. It will be a bridge for some of the startups in London and the rest of the UK who have slipped through the cracks so far.

 

The incubator invests in teams by providing free office space, training and access to a global network to make sure startups have the best chance of winning. It accepts early stage companies, defined as having raised under £300,000, from any industry. At the end of the programme, there is a competition for a share of £500,000, the top award being £50,000 per startup, with no equity taken.

 

Although Adam and his team didn’t receive any funding from MassChallenge, he calls the experience invaluable. It’s vital that in the development of the London ecosystem and hype over the funding scene, we don’t lose sight of the fact that the startups themselves are what needs to be valued, and funding gaps, although major obstacles, are not the only ones to overcome.