Are this years investment trends a worry or an opportunity?

Magic Sauce

There’s a rise in crowdfunding activity and venture debt based on what I’m seeing at the moment, so I thought I’d try and put a high level view of what’s going on into our blog. This is based on what I’m currently seeing through social media, early data and the various fora and social media platforms I devour daily.

Angels, SEIS and Crowdfunding

We’re already hearing that SEIS investments prior to the tax year end are likely to be lower this year by double digits than last year. The murmurings are that fewer Angels are parting with money at the sharp end of the tech startup landscape with SEIS as the major incentive. We should see that confirmed in the new tax year, but what worries me most is that it may give the UK Government an excuse to scrap the scheme saying that use is declining and thus there’s less interest in it.

Part of this can probably be explained by the rise in “retail” investing (crowdfunding) through the likes of Crowdcube and Seedrs. I’ve never seen so many companies successfully raise through crowdfunding and the trend seems set to continue. 

The attraction is that you can bet lower amounts across a greater range of companies and the user journey for this is simpler than scouting for startups, doing the due diligence yourself and getting yourself involved in the startup directly. My own bit of amateur psychology tells me that a proportion of investors will feel good investing in a number of startup at lower stakes too because it means they’re reaching more people (and at the end of the day, most Angels like to help startups and pay it forward).

The surprising downside to all of this is that the likes of Seedrs and Crowdcube are struggling as separate entities. That tells us that they haven’t quite worked out the right business model yet, or they’re just not profitable entities. Either way, the rise of crowdfunding seems set to continue unabated (and someone will no doubt hit the right business model with the number of crowdfunding platforms that are joining the ecosystem).

Another downside is that part of the excitement of Angel investing is linked to that involvement (no matter how small) that you could have a direct impact upon the early success of a startup.

The upside of crowdfunding to a startup is that if you have some early indications of interest from investors and you think there will be sufficient interest to complete the round using a multitude of smaller batch investors then you could be onto a winner. Could be super useful in attracting interest and customers too.

Downside is that you do have to have a budget for a decent video pitch and you need to get your proposition looking slick (with all of the other stuff like financials, go-to-market plan, etc., ready that you’d need for pitching rounds to Angels or syndicates).

VC’s and Debt Funding

VC’s seem to be experiencing a bit of a deal flow lull at the moment and as much as that seems odd, it’s not entirely unexpected.

More and more growth stage businesses seem to be more attracted to the non-dilutive and easier to obtain venture debt. We probably won’t see data on this for some time, but there are more and more stories appearing on those £/$2m+ raises that scale ups and later stage startups are turning to venture debt as a means of raising the money they need. 

The upside for a growing company is that it’s fairly easy to obtain, you spend less time “pitching” for money, and it’s based on your results & forecast metrics. You’ll probably get a lot longer to pay it off and that debt can grow with you if you’re on a mega-growth curve.

Downside is that you’re likely to miss out on some of the “smarts” that come with VC funding from the right people (and in the past, more favourable valuations). You also have to factor in the debt repayments as far as your forecasts go.

So..

It’s no bad thing, this variety of funding. 

There have been accusations that with a lot of VC’s working on referral only business and operating at arms length from the people they’re meant to engage with that just like any market, they’re ripe for disruption. For the last few months, the scouting networks of some of the more nimble VC’s and micro-VC’s has grown and they’re looking to dip into the shallower, early years end of the pool. I just hope they don’t bring the restrictive terms of higher investment levels down to pre-Seed levels.

The market has probably led the change to more retail investing so people can take less risk at Angel investment levels and operate in a large herd to enhance survival rates and chances of success.

What the Venture debt vs Venture Capital debate does do at scaleup levels is offer a broader range of options, and provides other options for growth capital that weren’t on offer in such abundance previously. It will be interesting to see if all of those venture debt lenders are able to offer the kind of board expertise or advice those scale ups may need to get to an IPO or substantial exit. 

What the rise in Crowdfunding offers is again another avenue for startups to gain investment at an early stage. What we are in danger of losing is direct involvement from successful ex-entrepreneurs who could add so much advice to early stage businesses. 

If we could see a little more of what the ex-Revolut guys have done in kicking off Expansion Capital it would give heart for the future that we could see SEIS funds being built and managed by ex-entrepreneurs that could give that advice and focus to the next generation of tech superstars.

In the UK, the Government’s Future Fund may have had an effect on early(ish) and growth stage tech startup funding needs too, but it’s too early to tell.

What is certain is that the first cheque is harder to get than ever for tech startups, so even if it is easier to shop through startups on a platform, look for something exciting you can help and play a part in rather than just being number 123 on the Shareholders Agreement. I’m not saying you shouldn’t have a punt, but do get your hands dirty too. Founders need you more than ever.

Beauhurst have put together some data based on last year’s figures for the UK with commentary on what to expect going forward here.

I’d love to hear your own thoughts, so please join the debate.

Finally

While you’re here, I’d also like to invite you to complete a survey by Beauhurst on potential changes to Capital Gains Tax/Disposals that would directly affect investors and entrepreneurs. You can find the survey here. There is talk that instead of paying around 30% tax on disposal of shares (or a company), that you’d lose up to 45%. Have your say in the survey. We don’t need to make investing or starting up a company any less attractive.

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