Alt Investments
Seed Financing Trends For Startups, Angel Investors

As wealth managers' clients can play a part in supporting venture capital and other forms of seed financing of startup firms, this article looks at current trends in the UK.
Wealth managers and family offices are targeted by firms and
funds seeking "seed" financing for various projects. It pays to
learn about how the different stages of seed financing work and
what trends are in this space. To address these issues is
Alexander Sleigh, investment director at Newable
Private Investing. The editors are pleased to share these
thoughts and invite readers' replies. Remember that the
publication does not necessarily share all views of guest
writers. Email tom.burroughes@wealthbriefing.com
A startup funding trend from the US - for fewer, but larger,
early-stage rounds - has come to the UK. But what does it mean
for the UK investment and startup ecosystem?
The percentage of US Series A funding rounds exceeding $50
million increased by an incredible 721 per cent between 2008 and
2017. This has had a trickle-down effect on seed rounds, which
have grown in size from an average of $550,000 to one of more
than $2 million. It has also spread across the Atlantic to be
replicated in the UK and European markets, with 23 companies in
the region - from Revolut and Atom Bank to Graphcore and
Benevolent AI - raising rounds of €100 million or more in
2018.
Providing startups with a longer financial runway is good for
both parties in the funding relationship. Investors can rest
assured that the entrepreneurs they back will be able to focus on
achieving key growth milestones rather than getting trapped on a
never-ending funding treadmill. Those entrepreneurs, meanwhile,
enjoy the opportunity to focus on the core of their business that
is afforded to them by greater financial stability.
An investor cannot spend the same dollar twice, though. So while
early-stage funding rounds have increased in size, the number of
startups securing these vital investments has gone down.
Cream of the crop
This means that startups are likely to encounter a lot more
“tough love” from investors - whether at the angel, VC, or
corporate or institutional level. Those who might have easily
secured funding before are having to work even harder to provide
solid proof of concept or indeed commercial viability. For the
lucky few, however, securing a larger round is a great vote of
confidence, and they could also benefit from more individual
attention and support as part of a smaller portfolio. In time,
this greater selectiveness could drive up the overall quality of
startups, with the cream rising to the top.
Larger seed rounds do not negate risk
Investors who put their trust - and their money - in only the
most promising startups are not immune to risk. On the surface,
if the quality of startups goes up, then so should overall
success rates and investor returns. However, fewer but larger
investments also means there is less diversification within the
VC’s portfolio to hedge against failures. No matter how promising
a company, at such an early stage in their development
catastrophic failure remains a very real possibility.
Co-investment is becoming more commonplace as a way of minimising
the risk attached to less diverse portfolios, enabling individual
funds to diversify while retaining sufficient firepower to
support their investee companies through follow-on funding
rounds.
Changing the nature of angel investors
While VC funds are largely riding the wave of the “fewer, but
larger” trend, there is a risk that larger rounds at seed stage
could start to price out another crucial class of investor in
early-stage innovators. Alongside the much-needed cash injection
that angels provide, the value they add in terms of expertise and
access to their networks can be crucial to a startup’s growth
before VCs come on board. Startups which target a sizeable early
round that precludes angel involvement could be doing themselves
and the wider ecosystem a massive disservice.
Many smaller angel investors are, therefore, increasingly
investing via consortia and funds in order to be able to access
larger deals - and larger potential upside, as many funds
(especially at seed stage) are starting to demand larger equity
slices for their investment.
Investors going down this route should study a fund’s investment
process before committing - the best angel groups now have
sophisticated due diligence and high-calibre investment
committees in place that see them increasingly match those of
early-stage VCs.
The concentration of risk as a result of funds investing more
capital in fewer deals should be offset by portfolio companies
being better capitalised. Many larger venture capital firms
managing funds raised from retail investors are nevertheless
choosing to be less active in seed rounds as they look to protect
their ability to invest in larger high-growth companies further
down the road. There is, therefore, a significant opening for
this new generation of angel investor to continue to play a
pivotal role in the early-stage growth of the UK’s most promising
startups.
The high-stakes game of investing and securing funding has never
been straightforward, but it is clear that we are at a
crossroads. The investment economics that have seen a number of
recent UK unicorns raise several plus-sized rounds are now
trickling down and impacting businesses at the earliest stages
too. Gone are the days where startups were rewarded with
"participation prize" investments. We are now in a race where the
“winner takes all”, and angels have a big part to play in getting
entrepreneurs off to the best possible start.