A Guide To Venture Capital Funding For Start ups in the UK

If you’re a startup owner considering seeking venture capital funding, it’s important to understand the process and what to expect.

Seed funding enabled by a UK venture capital fund is often the difference between success and failure for many businesses. It is not easy to raise security though, and there are pitfalls that can lose you your business if this process isn’t handled well. This article explains the basics of what you should know about seed investment from a venture capital fund. 

This guide will provide an overview of the venture capital funding process and highlight some key considerations for startups.

Raising Venture Capital Funding For Your UK Start Up

Obtaining Venture Capital Funding For Your Start Up

To get start up funding in the UK, it’s important to know what a venture capitalist is looking for. They typically focus on specific industries, stages of company development (such as Seed funding or Series A funding) or geographical locations (UK, Europe, USA etc). It’s also important to have a strong elevator pitch and investor pitch deck to catch their attention. Keep in mind that the venture process can be very time consuming getting a meeting with a principal can take weeks, and there are many steps from there until the investment is final.

Aside from the benefit of raising the funding itself, a venture capitalist helps you increase your chances of success by playing multiple roles. First, they offer advice and guidance throughout your start ups’ development process. Second, they often use connections within their network of investors to get venture funding or introductions to angel investors in London or elsewhere. Third, they will be an important ally after venture capital funding is achieved.

The Venture Capital Fund Term Sheet

Most start up fundings in the UK are initially documented by a “term sheet” prepared by the venture capital fund and presented to the entrepreneur. The term sheet is an important document, as it signals that the venture capitalist is serious about an investment and wants to proceed to finalise due diligence and prepare definitive legal investment documents. Before term sheets are issued, most VC firms looking to provide start up funding to a UK start up will have gotten the approval of their investment committee. Term sheets are not a guarantee that a deal will be consummated, but in our experience a high percentage of term sheets that are finalized and signed result in completed financings.

The term sheet will cover all of the important facets of the start up funding: economic issues such as the valuation given to the company (the higher the valuation, the less dilution to the entrepreneur); control issues such as the makeup of the Board of Directors and what sorts of approval or “veto” rights the investors will enjoy; and post-closing rights of the investors, such as the right to participate in future financings and rights to get periodic financial information.

Valuation of the Company

The valuation put on the start up is a critical issue for both the entrepreneur and the venture capital investor. The valuation is typically referred to as the “pre-money valuation,” referring to the agreed upon value of the company before the start up funding has taken place. For example, if the investors plan to invest £5 million in a financing where the pre-money valuation is agreed to be £15 million, that means that the “post-money” valuation will be £20 million, and the investors expect to obtain 5/20, or 25%, of the company at the closing of the financing.

Seed Funding UK start ups tend to occur around the £5-10 pre-money price range. Whilst Pre-Seed Funding of UK start ups tends to occur around the £1.5 to £5m pre-money range. Angel investors in the UK tend to invest at the pre seed funding stage but may also follow on in later rounds.

A angel funding, pre-seed funding or seed funding valuation range can be influenced by the following factors:

The experience and past success of the founders (so-called “serial” entrepreneurs present less risk, and often command higher valuations)

The size of the market opportunity created by or available to the company

The proprietary technology already developed by the company

Any initial traction by the company (revenue, partnerships, satisfied customers, favorable publicity, etc.)

Progress towards a minimally viable product

Valuations of comparable companies in other seed funding rounds in the UK (i.e., back-up your seed funding valuation with data of similar similar seed fundings in the same are in the UK)

Whether the company is “hot” and being pursued by other investors

The current economic climate (valuations generally climb when the overall economy is strong, and are lower during economic slumps)

The capital efficiency of the business model (i.e., will the company need to burn through significant capital before reaching profitability?)

Thank you for reading our guide on venture capital funding for start ups in the UK. We hope you found this information useful and informative.