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Funding for seed-stage UK startups drops over 80%

Startups looking for initial funding are struggling, with first-time investment plummeting since lockdown began.

By Isabel Woodford

Startups raising money for the first time have been the hardest hit by the drop in venture capital funding, raising fears that the coronavirus pandemic will hold back a whole generation of tech entrepreneurs.

Funding for UK startups raising for the first time fell by 83% between 23 March and 17 May compared to the same period in 2019, according to new research by Plexal and Beauhurst.

In comparison, UK tech startups in general saw a 50% drop in overall funding year-on-year — showing early-stage companies are being disproportionately affected.

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Speaking the week that the UK’s Future Fund is launched to help startups with over £250k in existing funding, Andrew Roughan, managing director of Plexal, called on the government to do more for first-time founders.

“We risk losing a generation of tech entrepreneurs at the earliest stages of their startup journey… By only backing companies that have already raised funds, investors are ignoring the very companies that will define the future success of the British economy,” said Roughan.

Since lockdown began in March, just 5% (£52m) of the £1bn raised by British tech startups has gone to companies raising funds for the first time. In contrast, this group made up over 9% of the VC funds raised in May 2019.

These figures speak to investors’ reduced risk-appetite, but they might also suggest VCs are more sceptical of founders they’ve only met virtually and don’t have a pre-existing relationship with. Entrepreneurs may also be holding off starting their ventures until after lockdown.

The biggest five deals for British tech startups that haven’t previously raised investment include:
  • Audiens (marketing data analytics) — £6.4m
  • Living Optics (imaging technology) — £3.3m
  • Primer (business-to-business payments) — £3.2m
  • Addionics (rechargeable batteries) — £2.8m
  • IRIS (audio tech) — £2.4m

A rationale?

The retreat of early-stage capital could prove a blow to Europe’s burgeoning startup ecosystem, which has attracted the attention of large international investors from the US and Asia in the last five years.

Nonetheless, Matthew Jones, a seed investor at London-based Anthemis, says cautious investors are at least giving existing startups a fighting chance by focusing their attention there.

“It‘s logical to expect that this challenging macroeconomic environment favours startups with proven quality. This means investors reconnecting with those companies and entrepreneurs they have spent time building relationships with prior to the point at which financing is needed. But, at Anthemis, we’re optimistic. When there has an opportunity to get to know founders, we have continued to invest; the pipeline is exciting right now,” he told Sifted.

Indeed, Beauhurst’s research showed there had been a big dip in funding across startups in May compared to April, hinting that “initial signs of resilience” seem to be waning.

That means startups who have already raised capital will be heavily competing for funding too, facing growing pressure to sustain their workforces and settling for down rounds.

This data is reinforced by Swoop — a platform that helps SMEs compare different funding options — which told Sifted it had seen a 700% increase in traffic, with founders looking more intensely at alternative funding mechanisms.

By way of example, ANNA money — a business banking solution for freelancers — just raised £17.5m from the venture arm of one of Russia’s largest bank. Although it wasn’t their first raise, they bypassed venture capitalists and opted for a less traditional source of funding.

With VCs slowing their deal-flow, founders will have to look for new methods to raise funds.

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