What are the main trends affecting the UK Venture Capital (VC) market?
Kevin Monseratt is CEO of PK2M and Consilience Ventures. Here he unpicks the current state of the UK venture capital market.
The Venture Capital (VC) market in the UK is often hard to define and understand as it is very much a function of the global VC market and the performance of scale-up businesses heavily depends on their capacity to grab international investors as they scale.
It might be helpful to first classify the VC market in three categories, as they are all affected differently by trends.
Seed Capital: private or institutional investors typically investing the first check and trying to maximize their ownership as they will be diluted in the future.
Venture Capital: this is writing checks between approximately £250k to £5m with some exception.
Growth Capital: this is more about mega funds who are trying to capture more value pre-IPO.
So, what are the trends impacting these markets?
At macro level the whole VC market suffers from the same thing, which is that everybody is tweaking the odds, and this makes the market unfortunately misaligned.
What I mean by this is that start-up success is about speed and momentum and our society functions in seasons, incubators, accelerators, angels and VC funds, and everyone has a different agenda than the start-ups. Our industry manufactures start-ups the way schools manufactures students – by classes. I believe there is a need for more linear and constant growth mechanisms.
Too often, we believe that successful companies and their founders were the best in their market and in control of most of its dynamic. Our industry tends to forget that most of the success is driven by luck and good timing.
Instead, we need a more scientific and collaborative approach to entrepreneurship, as this would bring some significant efficiency to helping companies grow faster.
As stated by Shikhar Ghosh of the Harvard Business School Entrepreneurship Center: “75% of venture-backed start-ups fail, which suggest to me that the VC market isn’t operating as efficiently as it could be.”
Poor quality consultants
Professional Angels and venture funds are still very much the biggest pillars to drive start-up success. But they have been and will be investing in companies that waste some of that capital working with some poor-quality service providers and consultants. This is because not only is there no quality control, but they have no skin in the game; because sweat equity does not work for most people.
I would also say that another live trend is that raising capital is still too much of a distraction for start-ups, and on the flipside every investor knows that they are giving some cash to founders to finance the next funding round – which in turn will dilute them. In fact, I believe that start-ups are selling at least 50% of their shares at the wrong valuation. First, start-ups are spending between 6-12 months to raise capital, and a start-up will typically raise between 18-24 months of cash-flow before the next round.
Uber, Slack and Airbnb
Secondly high-growth companies make very good and visible progress every six months at least. For example, Uber, Slack and Airbnb have IPO’d in less than 10 years.
So, in reality, for start-up founders it is important for them not to be undervaluing their shares when raising; and they should be raising every six months at a new valuation.
It’s not the fault of VC funds, experts and start-ups that the market is skewed and difficult to navigate. It has simply evolved this way, and everyone has been doing their best. But the venture capital market is opaque, inefficient and mythical.
So despite multiple governments attempts to enhance the VC market like: Innovate UK, H2020 (European Investment Fund), the Enterprise Europe Network there is still a massive need for connecting, informing and inspiring the next generations – but we will have to be prepared to think differently.