The evolution of early stage investing in the UK

I wrote the post below for Crowdcube, one of the UK’s leading equity crowdfuding sites. It went up on their blog yesterday.

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Two developments have changed the face of startup investing in the UK in recent years.

The first development is increased capital efficiency. Entrepreneurs can now achieve an awful lot with very little money. We see this all the time at Forward Partners where we invest right from the idea stage and most of the companies get a first version of their product live for less than £30k (that generally includes founder salaries and time spent doing customer research). When startups can do more with less money the returns from investing small amounts of money go up, and that can be seen in rising Series A valuations and declines in the average amount of money raised before exit.

The second development is SEIS and EIS. Along with many other governments around the world ours believes that a healthy startup ecosystem is critical to the future long term economic health of the country. That has resulted in a number of policies designed to stimulate startup activity of which the most important is the Enterprise Investment Scheme (EIS) and it’s younger brother the Seed Enterprise Investment Scheme (SEIS). Both of these schemes use the tax code to make it more attractive for high-net-worth individuals to invest in startups.

These two developments combine to make startup investing much more exciting than it ever used to be and we have seen a massive increase in the number of individuals who want to be angel investors.

However, finding and assessing investment opportunities is still a difficult and time consuming business. I’ve been a venture capitalist since the first internet bubble and what I’ve learned is that it’s hard to assess investment opportunities unless you have a thorough understanding of the company’s product and market and unless you’ve spent some serious time doing due diligence on the business. Similarly, from the other side of the table fundraising is still a tough thing for entrepreneurs to pull off and building a company remains as hard as ever.

Forward Partners and Crowdcube are both attacking elements of these problems.

The great thing about Crowdcube is that it makes it easier for people to invest in startups. For me the most important things they do are select start-ups they think are likely to succeed and give investors a standardised investment process that’s almost as easy as buying a movie on iTunes. That makes it possible for investors to cost-effectively invest small amounts and make lots of small bets on different startups.

Rather than help individuals to make investments Forward Partners focuses on making it easier for entrepreneurs to build great companies (it’s still hard though…). I could give lots of examples but perhaps the best is the way we work with solo-founders. Rather than pitching their powerpoint idea to potential technical co-founders, solo-founders who take investment from us pair with our developers and customer development team to quickly validate their idea and launch a site. Then, after a couple of months they can work with our Head of Talent to find a co-founder from a position of strength. We recently published a case study of how that played out for our portfolio company Snaptrip.

Whilst we have different models both Crowdcube and Forward Partners work to make investments in startups, and whilst we haven’t done a deal together yet I hope that we might do in the future. We add value in different areas and should compliment each other nicely.

  • http://freyfogle.tumblr.com/ Ed Freyfogle

    HI Nic,

    agree with what you say, but I think you overlook a third factor driving increased angel investing activity: that the alternative investments have looked very unattractive the last few years. If my choice is between putting the money in a savings account where in real terms it loses value, or put it in a start-up where I get tax benefits and hopefully can help influence a positive outcome, frankly putting it in the start up doesn’t seem like such a terrible idea.

    Obviously anyone doing angel investing should assume the money will be lost and limit their exposure to only a reasonable percentage of total net worth, but I think at least some percentage of angel investing is being driven by lack of compelling alternatives. At least that’s the case for me.

  • http://www.theequitykicker.com brisbourne

    Hi Ed – yes, you are right. There are precious few exciting investment opportunities these days. Angel investing and Bitcoin are about all I can think of 🙂

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