Good Times for UK Micro VC's

A colleague has let me have a peak at the Pitchbook data on the UK based micro-VC funds (those that have less than $100M under management) that have raised capital since the 1st lockdown in the spring last year. The data covers the last 19 months and is important to startups because it reveals who really has the funds to invest in your seed stage rounds. Most VC funds deploy capital, particularly "first cheques", over a 3-4 year period from the date the money is raised, known as the commitment period, leaving the subsequent 6-7 years of a typical VC's fund life, known as the "Harvest period", to deploy follow on cheques ( usually to maintain their stakes in the best performing investments and protect themselves from dilution) and reap the rewards from their investments. So it follows that newly raised VC funds are the VC's with most "Dry Powder" to deploy as first cheques in new startups, and Micro VC's by their size, are the funds most likely to invest in early, pre-product/market fit, seed stage startups. So if you are raising investment from VC's for the first time, then these are funds that should be on your radar.

The headline is that there are 29 funds that have collectively raised ￡1,239,000,000 from April 1st 2020 to July 31st 2021. On my rough calculations amount funding in these 29 Micro VC's will be translated into investments in at least 160 pre-seed rounds and around 350 seed rounds in 2021-22.

There will obviously be some over-lap, micro-VC's co-investing together in the same startups but it would be fair to say that probably the majourity of startups that raise a Seed round in 2021-22 will be financed by one of the 29 funds.

If I break this down further, amongst the 29 funds there are:

5 SEIS/EIS Funds with ￡29m to invest including perennial funds such as SFC and RLC and specialist investors such as Sustainable Ventures, RLC, Creator Fund and Science Creates Ventures. I know there are more so I expect that there is a big under-reporting here but nevertheless there are seemingly less tax efficient SEIS funds than in past years. In regards to EIS funds, Fuel Ventures is the only one in the list for most including the big daddies of the scene Octopus Ventures, Albion, Downing, Foresight, as well as funds such as Blackfinch tend to raise more than $100m and tend to invest in late seed/ series A deals. If you are raising a pre-seed round ( under $500,000) then SFC is the place to start.

2 Green Tech funds including the UK Governments own Clean Growth Fund. There are no exclusively focused ESG funds although some new funds such as ADA Ventures has a commitment to serve under-served founders and EKA to sustainable and inclusive consumption.

3 British Business Banks Enterprise Capital Funds, Ada Ventures, EKA Ventures and Redrice (who are focused on investing in new consumer brands). These VC's are the three new funds led by new fund managers that have launched since the 1st lock down. A further 5 long established VC's have in the same period received British Patient Capital funding including Advent Life Sciences, Connect Ventures, Hoxton Ventures, Seedcamp and Kindred. This exemplifies the trend that Beauhurst found in their report on the British Business Bank. They found that 2017 Enterprise Capital Funds invested in 100+ recorded equity rounds whilst in 2020 that had fallen to 50 recorded equity deals whist at the same time the number of BPC deals had risen so that in 2020 the funds they backed were doing over a 100 deals per year. The British Patient Capital Fund is now the "senior service" although both are dwarfed by the number of deals the now closed Future Fund achieved in 2020-21.

4 Life science focused funds including Science Creates Ventures, Start Codon, Advent Life Sciences and Alsa Ventures which focuses on investing in Novel Therapeutic startups. In total these 4 funds have ￡87m under management which strikes me on the low side for seed funds that invest in this long to market, relatively capital intensive sector. But there are now quite a few other general funds including seed funds such as Hoxton and Kindred that do heavily invest in Life Science/ Health Tech startups. So there does seem to be opportunities for Deep Tech startups including Life Sciences to raise seed capital in the UK than ever before and given the quality of the pipeline of Deep Tech startups emerging from the UK's world class universities, this is just as well. The funding gap for Deep Tech startups might (unlike Enterprise SaaS or Fintech startups) is now probably at Series A.

3 funds that will invest mostly outside the UK. These funds may be set up in the UK but predominately invest in startups in other regions including Hambro Perks Mena focused Oryz fund, Nosara Capital and the wonderfully named Sturgeon Uzbekistan Growth Equity Fund. You could also add the 20VC fund to this list as well.

3 funds with Headquarters outside London; Science Creates Ventures in Bristol, Conviction Investment Partners in Newcastle and Start Codon in Cambridge. All the rest are in London, showing that whilst the government might be focusing its equity investments on the regions ( in 2020 the Northern Powerhouse and Midland Engine Fund had a bumper year investing in around 80 startups) the private sector is very much still focused on the Capital.

So that leaves me to reveal who are the funds and people that are presently the most important for first time founders of tech startups raising a seed stage round. In descending order based on the Assets Under Management (AUM) they are

10. Fuel Ventures. (￡45M AUM) Mark Pearson and his young and self declared hungry team are an excellent and active generalist fund that invest in tech startups from pre-seed to Series A.

9. Ada Ventures- (￡50M AUM) Matt Pennycard and Check Warner are my friends so I may be biased but I do think Ada Ventures is a fantastic new fund. Yes they will both fight to get into UK's hottest seed deals and both add lots of value to those lucky teams they invest in but it is there commitment to invest in founders that are underserved, under-estimated and overlooked that makes them stand out. ADA invests at Seed but they do have a scout fund and network which will invest in the pre-seed rounds of exceptional teams especially those led by founders from diverse backgrounds.

8. Piton Capital. (￡52m AUM) For a fund that has been around for a long time it is still difficult to know what is Piton Capital investment thesis, the stage they invest and how they source and select their deals. But their past portfolio is very good and no doubt they will be investing in some great stars of the future.

7. Sova VC. (￡54m AUM for first close) I met Alex the London based partner of B2B marketplace focused investor Sova VC a few months back and was very impressed. I like their strong investment thesis on the potential of B2B marketplaces to transform supply chains and they are a welcome addition to the London Tech ecosystem.

6. Connect Ventures. (￡64M AUM) For micro VC you could hardly better the 3 GP's of ConnectVentures than Pietro, Sitar and Rory. They have the uncanny ability to find and invest in an incredible diverse portfolio of startups that are seemingly all building great products that are "Category Kings" in the markets they operate. Every year since 2012 they seemed to of invested in the seed rounds of startups whose products I use or admire from City Mapper 2012, PACT 2013, Typeform 2014, Soldo 2015, Truelayer & Curve 2016, Kheiron 2017, Lifebit 2018, Purple Dot 2019 and Emma in 2020. An envious track record.

5. EKA Ventures- (￡68m AUM) Camilla Dolan and Jon Cocker are stalwarts of the London Seed stage investment scene first at MMC Ventures and now in their own fund, EKA Ventures. A strong thesis on consumer tech and the growing impact of ESG, I think they will be the first port of call for any innovative B2C startup that is close to P/M fit and ready for investment for their first scale.

4. Seedcamp (￡78M AUM) Reshma, Carlos, Tom and Sia and all the Seedcamp team have built a startup up investing institution at Seedcamp that much more than anyone else has made London the epicentre of Europe's startup ecosystem. Over the past 14 years the "Who's Who" of Europe's startups have had pre-seed/ seed investment and support from Seedcamp and now that they are able to raise even more funds, their impact is no doubt is going to increase. Getting the backing of Seedcamp is the "badge of honour" for any startup raising pre-seed or seed stage investment in the UK.

3. Hoxton Ventures ( ￡80M AUM) - It was seemingly ages in coming but finally Hoxton Ventures fund 2 has come out of stealth and is now open for business. Early days but it looks like the stellar performance of fund 1 ( they backed Darktrace, Deliveroo and Babylon) is likely to be replicated. I am particularly impressed with the medical/ deep tech portfolio they are assembling with the likes of Fabric Nano, Pear Bio, Panekeia, Skin Analytics and Nu Quantum. Also Hussein Kanji remains in my view the No 1 UK VC to follow on Twitter

2. Kindred Capital (￡81m AUM) - Now on their 2nd fund, Kindred have continued to push back boundaries in the UK of what can be done by a fund to attract and support world class teams building ambitious tech startups. They have an innovative model where every founder they back becomes a co-owner of the fund and just as interesting, because they do not shout about it, they have built up one of the best portfolio's of deep tech startups in Europe led by investments in the likes of Lab Genius and Ori Biotech. Kindred are very smart people making very smart investment in some of the UK best scientific and entrepreneurial talent.

1 The Twenty Minute VC. (￡111m AUM over 4 funds). Without question the "Crown Prince" of UK Seed investment is Harry Stebbing. Previously the co-founder of Stride VC and founder and the MC, beyond compare, of the fantastic Twenty Minute VC podcast, Harry now has now the largest pool of seed stage money to invest in the UK eco-system. Although by the looks of it much of this money will be deployed in startups outside the UK, if you are a talented, ambitious UK entrepreneur, then why not DM Harry. Nothing to lose and if you do catch his attention you will find, as I have, that he is super friendly, super insightful and super connected.

So some final thoughts. I think the influx of new money, new funds or established funds with new funding shows that the Seed Funding climate in the UK is good and probably about to get better. Since the pandemic, raising a pre-seed or seed round has not been easy for founders but if we as a nation can keep the pandemic under control and the business angels return to investing in first-time founders pre-seed/ seed rounds, then there seems to be sufficient active Micro VC's in the UK to lead those seed rounds.

In regards to Diversity, it is noticeable that 60% of the top 10 funds ( I have not had the time to check on the rest) have senior GP's who are female and 30% have non-white General Partner, all of whom are British Asian. Which shows progress of some sort but is fair to say the vast majourity of General Partners are male and white.

In regards to sectors there seems to be a greater appetite for Deeper tech and not just with specialist funds and a surprising lack of funds specialising on Fintech, the UK's hottest sector.

There are also innovation starting to happen in Seed investment space. Do check out Moonfire using data science to track and hunt the next generation of founders they can invest in and the fascinating Begin Capital that I think (the websites not clear) not only invests and but also makes a "fly on the wall" TV programme of your startup.

Finally if we compare the UK to the EU, we do not come out too bad. In roughly the same period of time ( since 1st lockdown until now) there have been 39 EU based Micro VC funds that have raised ￡1.517 billion (at the present euro to ￡ exchange rate) with over 3/4 funds being based in either the DACH or Low Countries. Since the pandemic, 45% of all investment in micro VC's in Europe are in the UK and therefore the UK remains by far the best place in Europe for a tech startup to raise a pre-seed/ seed stage round. At least Brexit has not taken this away from us.

So Good times indeed.