UK Entrepreneurs: Get Your Funding While You Still Can

by on July 20, 2009 at 6:06 pm

[Cross-posted from TechCrunch]

You think you have it bad,
Mr.-Silicon-Valley-entrepreneur-trolling-Sand-Hilll-Road-for-cash? Try
life on the other side of the pond.

Out of 39 firms that were active investors in British start-ups over
the last five years, only thirteen venture firms have £5 million or
more left in their coffers to invest, according to NESTA, the UK agency that advocates for start-ups and also sponsored the recent Traveling Geeks blogger tour.

That’s right: All but thirteen firms in the United Kingdom are
either completely tapped out or have committed the rest of their funds
for follow-on investments in existing portfolio companies. In total,
NESTA estimates there’s about £400 million left that’s uncommitted
among the thirteen, with only half of that available for brand-new
series A deals. To put that into perspective, there’s roughly the same
amount of money in the fund Marc Andreessen just closed than there is for new companies in the entire United Kingdom right now.

This is coinciding with a precipitous drop in UK firms closing on
new funds thanks to the global credit crunch. In 2008, only seven firms
closed new funds, and NESTA expects fundraising to be even weaker in
2009.

As most people know, I’m a pretty big advocate of the idea that many
of the next great high-growth companies will be founded outside of the
U.S., but these stats starkly demonstrate a undeniable advantage of
being Valley-based. Even when fundraising slows and VCs save bigger
reserves than usual for current investments, there are still billions
sloshing around to fund new deals. Sure, it’s hard during times like
these even in the Valley, but raising venture capital should be hard.

As with most research reports on the venture business, it’s the
trend line that’s important to note here. It’s probable that NESTA
isn’t counting a firm here or there. But it can’t be too far off.
Indeed, the stat explains a lot of the anecdotal evidence that hit me
in the face as soon as I arrived in London two weeks ago. Many of the
entrepreneurs who’d pitched me on my last visit to London in November
have already shuttered their companies and were unsure of what to do
next. I have exactly one friend in Silicon Valley who has been forced
to that point.

Even the good UK early stage names are struggling to close deals. It took AlertMe—a hot energy home monitoring company that won The TechCrunch Europa
for best clean tech company last week—a whopping nine months to raise
money almost landing the company in bankruptcy. (Index Ventures and
others finally snapped up the deal a few months ago.) “I don’t want to go through that again,” the very polite and British CEO Pilgrim Beart demurred.

It’s that kind of bleak desperation that lead the infamous Paul Carr to pronounce the UK Internet scene dead….just before his own column in the Guardian became its own victim of the economy a few days later. (See Mr. Butcher's TechCrunchEurope rebuttal here.)

Indeed “the scene” may be dead, but there’s an upside here. The
companies that are still around have a much greater emphasis than
Valley companies on making money. The Traveling Geek contingent went to
Accel’s London office to meet with a handful of start-ups, and each one
emphasized revenue and profits in their five-minute elevator pitches.

One that caught me by surprise was Michael Smith’s Moshi Monsters,
a social network/ virtual game for kids. Cute idea, but sounds like it
should be road kill in this environment, right? Nope. Its revenues are
growing 35% month-over-month, it has 85% gross margins, and just five
months after launching the site is cash flow positive. Nicely done,
gents. (BTW, Smith isn’t all business. His house was the setting of those famous Scoble pictures…)

Indeed, there’s always something healthy about startups having to
work within constraints. There will be fewer of them, but it’s possible
that the companies that make it in this environment could well make up
one of the most promising crops of UK companies we’ve ever seen. After
all, Skype was laughed out of VCs’ offices when it started in the wake
of the dot com bust.

In the coming days, I’ll be writing several more posts about the London companies that impressed me the most. Stay tuned.