Why the hell is every startup in the UK raising £400K as a first round
I have seen this so so many times now it is getting silly. So a startup works out that in needs £400K to run for 18 months – great except where you going to get the £400K and how long is it going to take you to do it?
Lets be practical:
– there are probably 100 tech angels in the UK and they on average they write cheques for £25K each – thus you need 16 of them, nightmare and almost impossible
– there are about 20 VC’s in the UK who can write £400K cheques and they only write a few each year each
– most VC’s who write £200-400K cheques like to coinvest with another VC
– raising £400K will take you 6 months if you ever get it
– to raise £400K and keep the cap table nice you have to be valued at £1.5 million
– £400K from angels means you are a mixed deal of SEIS and EIS – thus tax relief changes massively.
How do you solve this:
– I advise every early stage startup I know to do the same thing:
– raise £150K under SEIS from some friends and maybe some angels. If you go bust the angels and friends will not care as they get the tax relief.
– raise at a lower valuation at about £1 million
– you now have 6-9 months of cash but can get back to work quickly
– if in 3-6 month you get some interesting numbers on the board you can raise again on some solid stats.
– if you raise next round at over £2 million the cap table will be the same and maybe even to your advantage and also to the angels who originally backed you. Plus the deal has been de-risked for the next round of investors. WIN WIN WIN
SEIS existing for a reason to allow investors to invest quickly and simply into very early stage high risk companies – USE IT.
Doug
PS. Some of the above is not quite true