This article was originally posted on the Tech City UK website.

The Importance of Funding – Guest Post From Nezahat Gultekin – Future Fifty Advisory Panel

The UK’s technology scene is at a very vibrant stage. Having worked in the technology sector for 15 years, including eight years of formation in Silicon Valley, it is terrific to see technology becoming increasingly fashionable across the UK – attracting talent, investment and proactive government support and delivering serial entrepreneurs and global category leader companies.

Year to date, four UK based leading technology companies (all belonging to our Future Fifty family!) have raised substantial growth equity, of which two have a publicly stated valuation of $1bn! World Remit ($100m), Transferwise ($58m) Farfetch ($86m @~$1bn), and Shazam ($30m @~$1bn). According to my analysis, in 2014 there were 10 tech IPOs in the UK raising £1.7bn proceeds and representing £5.3bn market value at the time of IPO.

Ecosystems take time to build. Silicon Valley has been forming over the last 50 years, starting with the establishment of semiconductor and hardware giants including Intel, Fairchild Semiconductor (noted as the first VC backed company) HP etc… Today, the stretch from Mountainview to San Francisco houses primarily software and Internet based companies, capitalising on all the resources Silicon Valley has to offer. Stanford and Berkeley have played a profound role in producing talent, driving entrepreneurial spirit, forging close cooperation with the private sector – professors advising senior management of leading tech companies, senior execs teaching classes (my Entrepreneurial Finance class was taught by a partner from a top VC firm). Kleiner Perkins Caufield & Byers (KBCP) and Sequoia, both preeminent Sand Hill Road VCs, were founded in 1972, leading the emergence of independent VC firms.

1978 was a key year for the US VC industry as the US Labor Department relaxed some Employee Retirement Income Security Act (ERISA) restrictions on holding certain risky assets under the “prudent man rule,” therefore allowing corporate pension funds to invest in venture capital. This has led to a profound boost to the VC industry, funding tech companies to start, scale up and build world-class businesses. KPCP filed to raise $1.2bn for its fund XVI last year, and Sequoia raised $553 million for its fund XIV in 2013. According to NVCA, US VC investments reached $48bn in 2014, up 60% from 2013, where Silicon Valley represented 50% and total investment in software was $20bn.

According to analysis by London & Partners, a total of $2.1bn of VC investment was made into UK tech companies in 2014, twice the amount in 2013, of which $1.4bn was invested in London based companies. This is a testament to the growing importance of the tech sector and the attraction of capital to fund its growth. However, we continue to hear from entrepreneurs that UK/European VCs don’t have sufficient risk appetite to invest in tech. I believe we are at a good place for seed to Series A funding due to government policy and the emergence of significant angel investors and early stage funds.

The UK government has been unique in its efforts to support new business creation by establishing EIS and SEIS (introduced in 2012) schemes to help entrepreneurs raise seed funding to turn their ideas into a business, raising money from angel investors. Total amounts invested through these schemes almost doubled to £1bn in 2013 from £545m in 2012. According to analysis by the Financial Times, 25 new VC firms have been established in London since 2010 collectively raising $2bn. We have more early stage funds and corporate VCs investing from seed to Series A in the UK compared to five years ago. Examples of these new early stage funds include Mosaic Ventures ($140m), Google Ventures ($100m), and Hoxton Ventures ($40m).

The funding gap in the UK is at the Series B level. Companies looking to raise Series B generally have their product/solution proven with increasing adoption– in the case of B2B companies, few key reference customers generating few million in revenues. It is a very critical stage for a tech company’s life, defining “transition to scale up stage” – land grab, growing the customer footprint significantly, and expanding the team, all happening at a fast pace. In Q1’2014 the average size of Series B funding in the US was $15m (£10m), 20% y-o-y and this upward trend continues. It is a much more competitive market where a war chest is important to get ahead.

It is a stage where, I would argue, founders should also discriminate against money – bringing on board the right institutional investor(s) is crucial for these companies to attract key hires, build a proper infrastructure for future expansion, open up channels for partners and customers etc. In the UK, we have a shortage of VCs with substantial funds under management focusing on the Series B level – Index Ventures, and Atlantic Bridge Capital are to name a couple. We need to look deeper into the Series B challenge. These investments are bigger cheques; hence require VCs to have larger funds under management to make such commitments.

Traditional LPs, e.g. Pension Funds and Insurance firms in the UK, classify VC as a risky asset class and thus tend to invest in Private Equity instead. Due to a much longer and proven track record of success and relaxing of ERISA rules over 35 years ago, US based VCs have larger funds under management, hence, are able to write much bigger cheques, taking higher risks – it is a portfolio game. Therefore, it is no surprise that a number of Series B and later rounds of UK’s leading tech companies are led by US based VCs.

In the end, money follows success! We need more and bigger success stories to drive the recycling of intellectual and financial capital back into UK’s thriving tech ecosystem. Successful realizations of the VC funds will deliver attractive and sustainable returns to LPs, which in turn will invest more into VCs that are the key source of capital for tech companies. And British media, please cheer the success and the magnitude of our ambition.

SUCCESSFUL TECH COMPANIES ARE CRITICAL TO THE FUTURE OF THE UK. So here is to creating many more multi billion tech businesses competing on the global stage – for our economy, for our future!

Let me know your thoughts on the role financing plays in the future of UK tech companies!


Nezahat Gultekin is a former technology investment banker. Now an independent advisor to tech firms, Nezahat is a member of the Future Fifty Advisory Panel.

Data & research, funding, Opinion