The UK boasts one of the world’s best ecosystems for funding early-stage tech companies. But for the scores of startups securing pre-seed and seed investments, the majority seem to struggle to extend beyond that.
Much has been said about the UK’s supposed scaleup funding gap, wherein UK-headquartered startups struggle to secure the funding needed to move beyond that startup stage into a larger, profitable business.
This topic has dominated much of the discourse surrounding business funding and the growth potential of the tech industry, but while many strides are being made to shore up the UK’s late-stage funding ecosystem, the fact remains that even going from the earliest stages to a Series A round is an enormous struggle for so many.
In an attempt to understand both the extent of the situation and why it might be happening, investment group Antler VC has compiled the Path to Series A report, an extensive analysis of the climate of early-stage investments.
How many startups reach Series A
The UK is by most metrics considered to be the third largest tech ecosystem in the world. It boasts more funding and more unicorns than all of Europe and produces some of the most successful and innovative businesses currently operating.
But for every Wayve, Synthesia and Wise that blasts past funding stages into multi-billion-pound valuations, there are many thousands of businesses left behind.
Based on an analysis of more than 40,000 UK funding rounds, Antler’s report has found that only about 12% of companies progress from the seed stage to Series A.
The SEIS/EIS trap
Perhaps the most surprising finding from Antler’s report is the potentially damning impact for firms that have received forms of investment backed by tax incentive programmes.
The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) are government programme that encourage investors to back young startups with tax breaks.
These programmes are considered vitally important for the UK’s startup ecosystem, and the tech and investment communities overwhelmingly support their existence.
However, while they have allowed so many startups to secure funding, Antler’s research has found a worrying trend.
Companies that have a SEIS or EIS fund as their only seed investor have drastically lower rates of progressing to Series A at just 3.7%.
It is important to note that the issue is not with the schemes themselves, and the mere presence of SEIS and EIS backers is not itself a barrier for growth, in fact firms that have an EIS/SEIS backer as well as at least one additional institutional co-investor or angel have a conversion rate of 25.7%.
But in cases where a startup has solely relied on them, progress is much harder.
“We have spent fifteen years building a world-class tax incentive landscape, but the SEIS/EIS system is increasingly creating a single investor trap,” said Antler partner Adam French.
“To maintain the UK’s lead, we must evolve from a factory for startups into a factory for global giants. This data is a wake-up call: we need to ensure our tax incentives promote growth and institutional rigor over volume.
“We are using a tax incentive system that is 15 years old and is no longer fit for purpose for the very best founders and startups in the UK.”
Does size matter?
Looking at the size of investment rounds, a perhaps less surprising discovery revealed that the quality of the investor was far more important than the literal size of the check.
Investor quality, as determined by Antler’s scoring system looking at conversion rates and track records, is far more predictive of success than the size of the round.
A seed investment of $1m (£740,000) from an investor that scored 70 or higher in Antler’s methodology converts to Series A at a rate of 43.8%. Whereas the report noted many examples of seed rounds worth $5m (£3.7m) or more from low scoring backers that never stretch to the next stage.
The $1m mark is important as a minimum, however. Startups that crossed this threshold doubled their odds of reaching Series A.
The ideal path
Antler was able to identify a number of traits that increased a company’s likeliness of reaching the Series A mark.
Interestingly, the report found that raising a seed round too soon after a pre-seed round could lower a company’s chances. It identified the sweet spot between those early-stage rounds to be 12-18 months, resulting in a conversation rate of 31.2%.
The ideal path determined by Antler is to raise around $500,000 (£370,000) at pre-seed, build traction for 15 months then raise at least $1m at the seed stage that includes a named lead investor and a syndicated base.
“For founders, the journey to Series A is getting harder, but the rewards for those who build properly have never been higher,” said French.
“We no longer have to guess what Series A investors want; the architecture of success is now data-backed. We have the talent, we have the ambition, and we now have the data. It’s time to stop just starting and begin scaling.”
