Bridging the gap between Start Up Loans and a £150k seed round: Why non-tech startups shouldn’t be left behind
Earlier this year, applications for the London Co-Investment Fund opened. The fund, backed by £25m of funding from the Mayor’s Office, plans to invest over £80m in science, technology and digital companies over the next three years, creating 2,600 jobs in the process. The fund is obviously a great option for London tech companies that are at the point of being able to ask for the £250k — £1m of seed round investment the Fund offers, but it’s not so great for the small business founders that are having a tough time raising the, say, £40k they need to hire new staff and grow their businesses.
There’s a real investment no man’s land for (especially non-tech) companies wanting to raise sums over £10k but below £150k. £10k is the maximum companies can get from Start Up Loans without considerable difficulty, and forget about trying to raise anything less than £150k from Venture Capital firms. The cost of conducting the required due diligence makes investing amounts like £30k, £70k and £125k commercially unviable for VCs. There is the option of angel investment — which the SEIS scheme has done great things for — but securing this is both time consuming and challenging. Raising money from angels is also more tough for non-digital businesses as investors increasingly favour scalable tech companies.
To illustrate my point I’m going to use an example. Jade is an entrepreneur and the founder of Vidloxx, a digital animation company. Jade could really galvanise the growth of Vidloxx by hiring four more members of staff, allowing her to take on bigger contracts. For this purpose, let’s say that she wants to raise £40k. However, despite Jade’s company being three years old, making revenue and employing four members of staff, raising the £40k it needs will be a challenge.
A Start Up Loan won’t cover it and a bank probably won’t lend it (and even if it did, its terms would probably be pretty bad). Jade could go to one of London’s many accelerators, but the ‘one size fits all’ deals cut by accelerators may not be the best for Vidloxx. She has the option of approaching an angel investor, but it’ll likely prove challenging as Vidloxx isn’t a ‘sexy’ app or piece of software that angels are leaning more towards. Jade’s company needs staff — artists, creatives and designers — which make it a more difficult sell to investors enamoured with lean, scalable technology businesses. Without other funding options, Vidloxx can’t grow as much as it should be growing.
Don’t get me wrong, the launch of the Co-Investment fund is great. It will boost London’s tech scene, create jobs and allow digital companies to raise the amount of capital they need to scale properly. However, non-tech businesses create jobs too. They shouldn’t be neglected because they aren’t looking to raise £1m of investment. Bridging the gap between Start Up Loan and seed funding is a worthy cause for the public or third sector to get behind, especially when circumstance makes it unviable for the private sector.
More imagination should be applied to the small, non-tech businesses looking to raise smaller amounts of capital. It would be a terrible shame to leave them behind.
