fact or fiction - venture capital funding in the uk tech sector is

Fact or fiction – Venture Capital funding in the UK tech sector is dead.Dispelling the myths

www.pwc.co.uk

May 2012

1Dispelling the myths

Setting the scene

Rightly or wrongly, a perception has emerged in recent years among entrepreneurs of growth companies in the UK tech sector that obtaining funding especially at early stages, is getting more difficult. Many are casting envious glances across the Atlantic, where they believe funding is more freely available from investors who are less risk-averse and more tuned-in to the industry.

Is this perception fair? In the UK venture capitalists say not. According to them, little has changed, apart from greater competition for funding as more opportunities open up. The right combination of a compelling idea, scalable and sustainable business model, and strong management team will still win investment, say VCs. But many entrepreneurs are not so sure. So, who’s right?

2 Dispelling the myths

What have we done?To help guide the debate, PwC1 has conducted a research study of the UK tech sector, eliciting views and perspectives from various stakeholders about the current environment for funding for growing companies. The study included a survey of over 100 UK companies, together with a programme of in-depth interviews with specific companies, VC houses, banks, and other intermediaries with an interest in the sector.

“ They’re all sitting on cash. The big business is sitting on cash, the banks are all sitting on cash, the VCs are all sitting on cash, the Private Equity firms are all sitting on cash – and they don’t know what to do with it because they don’t know what the next wave is.”

Entrepreneur’s view

40% Agree

46% Disagree

Proposition: “True VC funding of growth companies is now dead, you have to be an established company to attract capital nowadays.”

Is funding harder to get?On the question of whether funding is now harder to obtain than two years ago, opinions among the companies we interviewed were divided: 42% said yes, and 50% said no. Responses were similarly split on the overarching question of whether true VC funding for early-stage businesses in the sector is now dead with 40% agreeing, and 46% disagreeing.

Within these overall findings, there were some interesting – and in some cases surprising – correlations. The smallest businesses, those below £1million turnover, were the most optimistic about VC funding still being available. And over half of the businesses who agreed that VC funding is dead had never actually received any funding from VCs at all, suggesting they had either been bruised by rejection, or were voicing a pure perception, based opinion with no first-hand experience.

40%

46%

1. “PwC” refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom), which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.


Figure 1: Lending to UK small and medium-sized enterprises, June 2009-Feb 2011

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“ We’ve seen this drastic change in what it takes to launch a business… the barriers to entry are so small, which means there is very little appetite for something that doesn’t have an inherent barrier to entry to receive any venture funding.” Entrepreneur’s view

A mixed pictureOur in-depth interviews with companies, VCs and other stakeholders revealed similarly mixed views. There was some sense among entrepreneurs that VCs appear less willing to invest in the early stages of a business, and want to wait until ideas are proven winners before taking a risk on them. But others saw no change in VCs’ overall approach.

Also, while some of our respondents have been successful in securing funding at a relatively early stage, this was generally acknowledged to be tougher now than it used to be. Mostly the funders agreed this is true, partly due to the effective exit of the banks from the market, and partly because VCs now want to see more ‘skin in the game’ before investing.

The view that funding has become harder for UK SMEs to get is suggested by other research and official statistics on bank lending (see Figure 1). This view is also reflected in our survey findings: while 54% of the respondents said they had received loans from banks or other traditional institutions in the past, only 33% saw banks as their most easily-accessible funding source in the future. And many companies are looking to VCs to help fill the gap. 38% of companies surveyed had received VC funding in the past and 45% regarded this as the most accessible way of funding their businesses going forward.


How are companies reacting?Alongside the squeeze on the supply of bank funding, there are also some downward pressures on the demand side. Among SMEs generally, many are deleveraging by repaying existing bank debt, and delaying investment plans given ongoing economic uncertainty. And in the tech sector specifically, the costs of entry to setting up a business are now so low that companies can get a long way by “bootstrapping” or with seed or angel funding before even speaking to VCs. And rather than give away a big slug of equity early on, many entrepreneurs want to wait until they’re in a better bargaining position before seeking more significant capital to fund expansion.

To set some background, it’s interesting to compare trends in VC investment between key geographies and stages of investment. As Figure 2 shows, over the past two decades the value of VC investment in the US has consistently far exceeded that in the UK and Continental Europe.

Comparisons between the US and UK VC markets should however be viewed in context. The average amount invested per company is much lower in the UK and there are also some variations in definition.

Figure 2. Venture capital investment in the UK, US and Continental Europe, 1991-2010

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Source: Tax-advantaged venture capital schemes - NESTA, September 2011


Table 1: UK vs. US VC funding by stage of investment, 2010

UK (US$m)1 USA (US$m)2

Seed 16.4 913.2

Start-up 75.5 1,685.8

Early Stage/Expansion 275.8 1,117.0

Later stage 146.1 717.8

Total Venture Capital 513.8 4,433.8

Source: 1. BVCA Private Equity and Venture Capital Report on Investment Activity 2010 2. VC Investments Q1 ‘12 - MoneyTree – National Data

Testing four key perceptionsTo maximise the insights from the research and stimulate debate, we’ve focused our findings on four key perceptions that feature high on the agenda of entrepreneurial and VC-backed companies in the sector: first, talent and attitudes to entrepreneurship; second, attitudes to risk; third, the location of management, operations and investors; and fourth, government incentives and regulation.

We have covered these issues and the views of our respondents in the following sections under four arguably widely-held perceptions in the industry:

• Perception 1: Compared to the US, the UK has a less positive attitude to entrepreneurship – and a weaker talent pool.

• Perception 2: US investors are prepared to take greater risks than UK investors.

• Perception 3: Successful UK tech sector companies must be based in London and have a foothold in the US.

• Perception 4: Government incentives in the UK are sufficient to encourage UK tech businesses.


Perception 1Compared to the US, the UK has a less positive attitude to entrepreneurship – and a weaker talent pool.

Testing 4 key perceptions


As the results show, our interviewees were in broad agreement that entrepreneurial activity in the UK is discouraged by negative attitudes to failure. Significantly, agreement with this proposition was strongest among respondents closest to the entrepreneurial coal-face: those involved since start-up, turning over less than £1m, or trading for less than 10 years.

Many interviewees explained their view by contrasting the culture in the UK with that in the US, where they felt there is a much more relaxed attitude towards failure. Indeed, some highlighted a sense that having past failures on the CV is viewed positively by US investors, provided the entrepreneur can show that he or she has learnt and gained from the earlier, unsuccessful experience.

This readiness to embrace failure is regarded as being especially strong in Silicon Valley – helping to explain why Silicon Valley founders have on average started almost twice as many growth companies as founders in London, and also in New York City2. One interviewee quoted from their experience of dealing with a leading US VC: “The ideal investment is in entrepreneurs on their third company. One success so they know what works; one failure so they know what to avoid; and a strong desire to prove their success wasn’t a fluke.”

2. Startup Genome – Bjoern Herrmann, Max Marmer, and Ertan Dogrultan. www.startupgenome.com

“ In general, British people are risk averse. Also the tall poppy tends to get lopped off. I think those things work against a good entrepreneurial culture.” Entrepreneur’s view

“ Failure is almost encouraged in the US. Some VCs will say: ‘We won’t back you unless you’ve failed twice before’. Maybe it’s a cliché and doesn’t actually happen, but that is the perception.” Entrepreneur’s view

“ The US sees the tech industry as absolutely mainstream now. This reduces perceptions of associated risk, and draws more funding in.” Investor’s view

61% Agree

21% Disagree

Proposition: “Negative attitudes in the UK towards failure discourage entrepreneurship.” Do you agree?

61%

21%


While some felt that attitudes to failure may be relaxing in this direction in the UK, there was a general recognition that this will not happen overnight. And the view that the UK tech community is generally less successful than that in the US is reinforced by recent ‘rich lists’. BBC News’ 2010 list of the 26 richest internet entrepreneurs worldwide included 15 web billionaires from the US, five from China, three from Japan, one from Germany, and none from the UK. And of the 90 technology industry players who made the 2012 Forbes rich list , 51 were from the US, and the UK was again not represented. In the 2012 Sunday Times Rich list there were no UK entrepreneurs in a new top 10 social media millionaires category.

While the respondents to our study felt that the aversion to failure in the UK can result in a more conservative attitude to risk among potential entrepreneurs, they didn’t feel it degraded the underlying talent pool. Most took the view that technological talent within the UK is as strong as anywhere in the world – but that the UK’s ability to commercialise its technological breakthroughs lags behind that in markets such as the US.

Turning to the standard of education in the UK, some views echoed recent media criticisms of the UK education system with regard to technology and electronic engineering, saying there was too much emphasis on business software applications and not enough on creative programming.

And the worries over UK innovation are strengthened by the fact that only five of the top 100 computer science courses in the world are in the UK, whereas 19 of the top 25 are located in the US4. Also, while international patent filings under the WIPO-administered Patent Cooperation Treaty (PCT) set a new record in 2011, helped by rises of 33% in filings from China and 8% from the US, filings from the UK fell by 1%.

Despite negative indicators like these, the UK does have acknowledged strengths in technology talent and innovation. Cambridge University-supported by willing investors – has helped that region spawn the highest concentration of high-tech companies in Europe.

A further advantage highlighted by our interviewees is the UK’s ability to attract high-quality international technology talent to come and work here. In some sectors – notably digital downloads, mobile technology and finance – respondents said they believed the UK was leading the way globally.

“ In the UK, a failure is a failure. In the US, a failure is someone who has tried.” Entrepreneur’s view

29% Agree

54% Disagree

Proposition: “The UK’s talent skill level is weaker than that found in parts of the world like the US, China and India.” Do you agree?

29%

54%

3. Why is there no Facebook or Google in the UK ? Sarah Rigos, November 2011


While technical talent, is perceived as strong, many highlighted shortcomings on the managerial and commercial side. There was a widespread feeling that the US has a much stronger talent pool for senior managers who can take companies into their second and third phases of growth, and a richer seam of entrepreneurs with experience of both success and failure. This can sometimes lead to investors “parachuting in” executives from the US to the UK as part of follow-on funding deals.

Ten things to think about before start-upPeople start up their own businesses for a variety of reasons. Our respondents were typically looking for a new challenge, to be their own boss and have more control. They were also looking for excitement and were willing to take risks.

Amid the excitement of the start-up phase, it’s important to look ahead and think through the issues. There are many things that many companies don’t think about in the early days that can save them stress and expense later on. Here are ten things the entrepreneurs in our survey mentioned as important to think about before you set up your own business:

1. What’s the business model – how will you make money?

2. How much funding do you need?

3. Where and how will you get it?

4. What’s your long-term strategy?

5. Is your idea easy to copy – are there barriers to entry?

6. What people and skills do you need to launch and then grow the business?

7. How will protect your intellectual property?

8. How are you going to incentivise and reward key staff members?

9. What’s your support network like? Remember, it’s lonely at the top.

10. How will you exit?

“ The education system in computer science, the syllabus, is a disaster in this country.” Entrepreneur’s view

“ If the talent pool isn’t smaller (in the UK) it’s unharnessed” Investor’s view

“ We have great research in London. We have many, many universities, and we need to tap that talent and develop a lot of it.” Investor’s view

“ In the UK, we’ve found a tremendous amount of talent in the creative and technology space… The challenge that I’ve found in the UK has primarily been senior marketing talent.” Entrepreneur’s view


Perception 2US investors are prepared to take greater risks than UK investors.


Entrepreneurs’ strong agreement that US investors appear more ready and willing than their UK counterparts to embrace risk was one of the most striking findings of our study. The 60% who felt this perception was justified were countered by only 14% who disagreed. Again, the level of agreement was highest among respondents at the sharp end of entrepreneurialism – those involved since start-up and running businesses under £1m turnover.

That said, the investors we interviewed tended to dispute this hypothesis. They accepted that there are simply more funders in the US, and that the high-profile focus on Silicon Valley meant that US funding sources were better known overall. But they disputed that attitudes to risk differ significantly on either side of the Atlantic.

Interestingly, most respondents in our study have not tried to get funding in the US, meaning their opinions may be based on perception rather than first-hand experience. The point was also made that while there are more options for raising money in the US, the competition for funding is significantly higher as well. There was also a sense that in the US a company needs to go for a much larger investment to be taken seriously.

A key theme of many interviews was the structural differences between the US and UK funding industries. There was a view that the US has more ‘spray-and-pray’ investors who approach investments with the attitude that many may fail, and that these will be more than offset by a handful of successes.

“ I think a lot of VCs have moved away from seed, early stage, because it’s so risky. There’s still the angels, but the VC’s seem to have moved way beyond start-up phase.” Entrepreneur’s view

“ What is really missing in the UK is a part of the ecosystem that is very present in Silicon Valley, and is starting to become more present in the East Coast: angels willing to write quick cheques.” Entrepreneur’s view

60% Agree

14% Disagree

Proposition: “US investors are prepared to take greater risks than UK investors.” Do you agree?

60%

14%


Respondents also highlighted the emergence in the US of a significant community of ‘super-angels’, often former tech entrepreneurs willing to ‘buy into a vision’ and invest quick money in growing companies. These individuals seem to regard investing in the next generation as a form of social responsibility, and are also ready and willing to act as “mentors” helping businesses succeed and grow.

In contrast, there was a sense among our interviewees that Europe – where wealth is more often built up through other avenues, such as property – still lacks this stratum of investors. And this gap doesn’t put the UK technology companies at a disadvantage only to the US: in 2010 high-tech businesses in Israel raised nearly twice as much as those in the UK, whose economy is ten times as big 4.

Overall, the view expressed by the UK tech sector companies interviewed in our study was that the whole ecosystem and funding market for technology growth companies is more mature and sophisticated in the US than the UK. Yet many readily accepted that what can look like risk aversion on the part of UK-based investors is actually sensible risk assessment.

One US-based investor put these trends into context, pointing out that while some US funders may be quicker to invest, they also pull out faster, and are prepared to ‘kill’ failing companies much quicker than European funders. “There are no hard feelings – just move on quickly to the next thing.” He felt that, over time, the UK and Europe will migrate further towards this approach.

“ Most people that are going to be angels didn’t earn their money as a salary; they earned it taking some risks themselves. They’re looking for that opportunity to express some of their own entrepreneurship, almost by proxy.” Entrepreneur’s view

“ We need to set the bar high. I can tell you, if we see 20 great ideas, we would find a way to back those twenty companies.” Investor’s view

“ Capital is here to be put to work, and it is being put to work. I can tell you that, when there is a good company, the chances are that we’re competing against other VC firms.” Investor’s view

4. Where’s Britain’s Bill Gates? The Economist, August 2011


What’s on the mind of potential investors in my business?There is no formula to successfully securing funding. Investors look for a range of things when exploring investment opportunities and our research has identified five key areas which companies need to get right or focus on in order to be taken seriously:

1. Strength of the idea – can you articulate it well, has someone else already thought about it and is doing it better and how will you position yourself in the market as you grow?

2. Business model – have you challenged your own business model assumptions, do they stack up and is the data based on realistic estimates that can be externally benchmarked?

3. Scalability – can scale be achieved and can it be done quickly and on a cross-border basis? If you’re already growing your business, how will you maintain momentum?

4. Management team skill – have you got the right mix of expertise to grow the idea into a commercial operation and importantly, have you got a plan for how that will evolve as the business grows?

5. Exit strategy – Is this well defined from the outset and is it clear to investors how payback will be achieved?


Perception 3Successful UK tech companies must be based in London – and secure a foothold in the US.


A key focus of discussion among our research sample was the impact of geographic location, both on commercial success and funding opportunities. Within the UK, there was a debate over the relative benefits of being based in London or elsewhere. A parallel discussion was whether a US presence – either operationally and/or in terms of investors – was a prerequisite for a business to scale and succeed.

There can be no question that London has many strengths. In the recent policy summary paper ‘The UK equity gap: Why is there no Facebook or Google in the UK?’ published by the Greater London Authority, the conclusion states: “On many levels London is perceived to be the European hub for tech start-ups. The capital should refocus its radar away from the US and onto the growing digital European and non-European markets that sit at its back door.”

London is also Europe’s largest investment banking centre and the second largest hedge fund management centre globally. The recent Startup Genome5 ranking of the world’s top 25 startup ecosystems by average throughput rated London in third place after Silicon Valley and New York City, and ahead of Toronto and Tel Aviv (see figure 6, page 19).

Unsurprisingly, forecast growth rates in emerging economies such as China and India outstrip both the UK and the US. However, London is at the heart of the UK’s thriving and increasingly digitally-driven media industry, whose growth rates bear comparison with its counterparts in the US (see figure 3, page 19).

Figure 3. Forecast media segment growth rates for key territories, 2011-2015 (Values in $ US Dollars [Millions]) Compound Annual Growth Rates (CAGR)

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Video Games Internet Advertising Internet Access

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Source: PwC Global entertainment and media outlook 2011-2015

5. Startup Genome – Bjoern Herrmann, Max Marmer, and Ertan Dogrultan. www.startupgenome.com


TechMarketView 2011 UK SITS Market ForecastsOn the question of whether being in London improves the chances of success, our respondents were broadly in agreement that it does, especially among younger entrepreneurs running smaller businesses (overall 50% in agreement with only 24% disagreeing). However, some 71% of those businesses based in London agreed that this gave them an edge – with perhaps the surprise being that this proportion wasn’t higher.

However, beyond the question of being in London or elsewhere, what really mattered was being within a ‘cluster’ of companies, which can yield benefits around talent recruitment, growth and funding. As respondents pointed out, examples have sprung up all over the UK: not just in London, but also Cambridge, Oxford, the M4 corridor, Edinburgh and now in North Eastern England.

Figure 4. TechMarketView 2011 UK SITS Market Forecasts (£m)

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Source: TechMarketView

“ There’s a positive ‘viral’ effect that builds in the clusters. An ecosystem develops that fosters growth and focus and can help attract interest from funders.” Entrepreneur’s view


There is a clear view that, looking across the world, Silicon Valley has developed as the ultimate hub – situated at the eye of a ‘perfect storm’ of technology and management talent, funding sources, specialist professional advisers, and ready access to a flow of innovative ideas from, amongst others, Stanford and Berkeley universities. In this context, US tech companies’ close relationships with major academic institutions was seen as another key attribute of the US environment, and one that the UK still has further to go in emulating.

It is important to remember that Silicon Valley’s ‘perfect storm’ didn’t come about by accident. The rise of Silicon Valley was originally kick-started by the development of a complex of technology companies which served the US military. So the Valley’s success also underlines the potential role of government in promoting areas of high tech growth.

On the question of whether a US presence was a prerequisite for success, opinions were once again divided. While the majority agreed this was the case, some disagreed strongly, pointing to examples of tech companies that have achieved significant international scale without a US presence or funding.

“ We wouldn’t at this stage have a base in the US or any other country until we’ve proven that our model works in the UK. But I think the US will have to be a key target at some point.” Entrepreneur’s view

“ If we were to find a market outside the UK attractive to us, then it probably would be the US. Out there it’s not difficult to get funding either. If you’re a UK business with some traction, then to get financed in the US is relatively straightforward.” Entrepreneur’s view

58% Agree

31% Disagree

Proposition: “For growing tech businesses within the UK, being based in London improves your chance of success.” Do you agree?

51%

38%


Those advocating a US presence thought the main driver was the sheer size of the US’s single, unified market, offering quicker scalability for the right product or service than Europe’s more fragmented environment. This in turn creates the risk of US ‘copycat’ companies identifying underfunded ideas in the UK or Europe, spending money building up an identical model rapidly in the US, and then expanding them back over the Atlantic.

Sectoral and cultural factors also affected the importance of a US presence. In terms of sectors, it was felt that finance and digital download businesses could go global successfully from a UK base, whereas for gaming and enterprise software it was more important to be in the US. And some ambitious, high-growth UK tech companies now try to ‘look and seem’ American to gain credibility, such as using US-style job titles, or employing American senior management to ‘offset’ their European location.

Alongside the greater scalability in the US, some respondents pointed to access to funding as a reason for setting up there. However this advantage may diminish over time. As figure 5 shows, there was an expectation that the US’s role in funding tech sector businesses in the UK, while increasing during the coming years, will be outpaced by the growth in funding from markets such as China, Russia and Brazil.

Figure 5.

Questions: “Where in the world have the principal sources of investment in the UK tech sector come from in recent years? Where do you see as the principal sources in the future?”

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“ Obviously, we’re in China, India and Israel. Israel is a very developed and established technology ecosystem. China is developing very quickly, but there’s a little bit of a get-rich-quick atmosphere in China, whereas in the US, if you build a good company, good things will come.” Investor’s view


Figure 6. Top 10 Global tech hubs

Location, location, location What should you consider?As advances in technology mean that the world effectively gets smaller, many argue that it does not matter where a business chooses to physically locate. However, our research has reinforced some widely held views about the top 5 factors that might help you reach that decision about where to start.

1. Local tax system – what incentives are available and how difficult is it to do business in your chosen home territory from a regulatory standpoint?

2. Location of your customers – if you’re not able to service them quickly and efficiently from your chosen location, will you be able to grow your business effectively?

3. Access to talent – from where will you source your key team members now and into the future?

4. Access to funders – does it help to be on the doorstep of potential providers of finance now and into the future?

5. General ecosystem of peer companies – clusters of like companies generate more than just a buzz and media headlines. How can you take advantage of the infrastructure and local knowledge whilst also keeping one eye on what your competitors are doing?

1. Silicon Valley (San Francisco, Palo Alto, San Jose, Oakland)

2. New York City

3. London

5. Tel Aviv

7. Singapore

8. Sao Paulo

Source: Startup Genome – Bjoern Herrmann, Max Marmer, and Ertan Dogrultan. www.startupgenome.com

9. Bangalore

10. Moscow

6. Los Angeles

4. Toronto


Perception 4Government and tax incentives in the UK are sufficient to encourage UK tech businesses.


In his Budget speech on 21 March 2012, the Chancellor, George Osborne, stated the government’s ambition to “turn Britain into Europe’s technology centre”. The government’s role in encouraging technological innovation and entrepreneurship in the sector is a recurrent topic of debate in the industry.

For the purposes of testing the industry view on government incentives, we firstly asked our respondents for their views on one particular incentive, the Research and Development tax credit.

The prevailing view was that the UK’s R&D incentives are, on balance, sufficient to encourage tech businesses. However, those disagreeing with this view tended to hold their opinion more strongly, indicating that the companies feel that more could be done to help.

“ R&D tax credits saved us some money. But they’re not a practical step in helping businesses grow. That’s why if you can’t get into VC or seed capital, you would be limited.” Entrepreneur’s view

“ We have made the strategic decision to centralise our R&D efforts in London. We thought we were going to split the team and have half of them in New York. We have actively chosen not to, in order to maximise our R&D claim benefit.” Entrepreneur’s view

45% Agree

38% Disagree

Proposition: “R&D incentives in the UK are sufficient to encourage UK tech businesses.” Do you agree?

45%

38%


It was clear from the responses that UK R&D tax credits are deeply appreciated by many companies. Several respondents provided examples of R&D tax credits’ positive impact – even to the point of influencing decisions to locate the R&D capability in the UK. However, R&D credits were criticised by some for being difficult and expensive to process.

Broadening the discussion to other incentives, the consensus across all respondents was that the incentives are never enough on their own to fund a start-up, and that additional money is nearly always needed. Some added that it’s a case of ‘every little helps’, and that a relatively small incentive can have a big impact.

Early stage companies can enhance their attractiveness to potential investors by investigating whether they qualify to attract Enterprise Investment Scheme (EIS) investment, or the new Seed Enterprise Investment Scheme (SEIS) relief. In particular, SEIS relief offers, where qualifying conditions are met, income tax relief of 50% on subscriptions for shares of £100k per annum, exemption from capital gains tax on disposal of the shares and (for 2012/13 only) an exemption from capital gains tax on gains arising in 2012/13 which are invested under the SEIS.

Respondents made positive mention of the UK’s Technology Strategy Board’s funding for projects. However, the Guaranteed Debt Scheme was viewed less favourably. One described it as “just lip service and headlines”, adding: “Unless you didn’t need the money, you couldn’t get it.” There was also some general criticism of the UK Capital Gains Tax rules, which were felt to discourage entrepreneurialism.

In general, the entrepreneurs we interviewed did not have sufficient cross border insight to compare the incentives available in the UK and US. However, one respondent put forward the interesting idea of incentivising UK businesses to export more to America.

A wider topic of debate was the role of governments and regulation in encouraging the growth of tech/digital media clusters. Some respondents compared the ‘organic’ development of Silicon Roundabout favourably with the more government-led development of Tech City. The consensus of respondents was that governments should focus on creating a supportive environment for innovation and entrepreneurship, but should not intervene further.

“ The US is a very expensive market to enter. So maybe the UK government could do something to encourage UK businesses to go there. Maybe offer some incentives for more trade in the US.” Entrepreneur’s view

“ We were here before it was Silicon Roundabout but it has definitely helped attract a certain kind of person” Entrepreneur’s view


Where do I go for help?There are many incentives, funds and tax breaks to encourage entrepreneurship in the UK, and is it vital you have investigated all the possible avenues – your competitors may have overlooked them. We have set out some of the key tax incentives for UK companies to consider, but be aware – this is not an exhaustive list and they are changing all the time.

Table 4. Tax Incentives Early Stage Technology Companies should be aware of

R&D Tax Credits Qualifying R&D spend by SMEs is eligible for a corporate tax super deduction currently of up to 200% and, under certain circumstances a tax credit repayment.

Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS)

Offers income and capital gains tax reliefs for investors in certain small, higher-risk companies.

Enterprise Management Incentive (EMI) Allows small and medium sized businesses to reward employees through provision of share options in a very tax efficient manner

Entrepreneur’s Relief Reduces CGT on qualifying gains to an effective rate of 10% up to a lifetime limit of £10m of gains

Optimising capital allowances Alongside the standard capital allowances scheme there are enhanced allowances for investing in R&D, energy efficient equipment and investment in certain Enterprise Zones

Small Business Rate Relief Qualifying small businesses may be eligible for relief of up to 100% on business rates for 2012/13.


ConclusionAligning the agendas of entrepreneurs and funders


From our position as an adviser to the sector, our view is that VC funding for UK tech sector businesses is not dead, but a number of profound long-term changes are underway in the dynamic relationship between entrepreneurs and funders.

Perceptions drive reality...As we’ve highlighted, each of the areas in our research is subject to perceptions that may or may not be well-founded. The problem with perceptions – especially negative ones – is that they can feed into reality: companies that don’t expect to receive funding may well not even ask for it. This type of vicious circle is exactly what the whole sector needs to avoid.

When we asked companies what attributes they thought funders were looking for in a business, they highlighted strong management, a winning idea, a strong business model, and the business’s long-term scalability and sustainability (see figure 12, on page 26). For their part, the investors we spoke to said they focused on the strength of the idea, the scalability of the business model, and the team or entrepreneur behind it.

...but companies and funders can decide otherwise Given that scalability and sustainability are so closely related in a growing tech sector business, these two agendas are very well aligned. In our view, this a good basis for increasing mutual understanding and value creation between companies and VCs in the future, making the generalised perceptions we’ve tested in this research increasingly irrelevant.

“ We want to know scale can be achieved, and quickly… Aiming to be No 1 in France is not enough. By the time they’ve cracked France, someone else will have cracked Germany and the whole thing will be lost.” Investor’s view


“ Sometimes the idea is the most important thing, sometimes it’s the individual. It’s not a formulaic thing” Investor’s view

“ When entrepreneurs say VCs aren’t funding, what they are actually saying is: ‘No-one wants to fund me, and companies like me. Therefore I’m going to extrapolate from that individual experience to the whole market’.” Entrepreneur’s view

Figure 12.

Question: “How important do you feel each of the following are for investors when making decisions about funding?”

A track record of innovation

Financial/growth track record of the co.

Track record of lead individuals

The scalability of the business

Long term sustainability of the business

Having a strong business model

Winning/compelling product or idea

Strong management team 100%100%

2% 2%96%

% Agree

96%

95%95% 3% 2%

94%3% 3%94%

94%1% 5%74%

90%4%6%90%

81%

4%16%42%39%

75%

16%4%81%

14%12%75%

21%18%36%16% 7%NeitherNot importantImportant

Source:


The bottom line is that many – perhaps most – UK entrepreneurs and business leaders in the UK tech sector believe VCs here are cautious about investing and taking risks. For their part, VCs say they would understand why the tech community might say this but that, as stewards of other people’s money, they’re just setting the bar justifiably high. And many of the ideas they see are not good enough to reach it.

Against this background, both entrepreneurs and funders need to seize the initiative. Major opportunities are presented by the UK’s flow of compelling, scalable ideas backed by strong management. True, not all propositions will win funding. But for the ones with high potential and proven traction, and that meet the criteria we’ve highlighted, investment is available.

VC funding in the UK tech sector is not dead. Far from it. For companies that can deliver the attributes that funders want, its very much alive.

There is not a funding gap just a perception and expectations gap.

Our view

Contacts

Jass SaraiDirect: +44 (0)1895 522206

[email protected]

Brian HendersonDirect: +44 (0)20 7804 9018

Email: [email protected]

Follow us on Twitter: @PwC_Growth_UK

Natalie LangleyDirect: +44 (0) 20 7804 4718

[email protected]


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This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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