From left, Alex Hoye of Runway East leads a lively discussion at Runway East Moorgate on the possibility of a London funding crunch with Robin Klein, formerly of Index Ventures and founding partner at Local Globe and Reshma Sohoni founding partner of Seedcamp
If a London funding crunch were to happen, we know we’d want to be in Robin Klein and Reshma Sohoni’s bunker.
Funding is fractious in the USA right now. In the fourth quarter investors funded fewer U.S. startups than any period in more than four years. Since November, at least a dozen tech companies, which combined raised well over $2 billion in venture funding, have announced layoffs, letting go hundreds of people that in most cases represented at least 15% of their staffs.
Is a London funding crunch coming? What can UK startups do to prepare?
Robin has invested in companies like Secret Escapes, Graze and CityMapper whilst Reshma has led Seedcamp in investing in Transferwise, eMoov and UberVu. So we invited them to Runway East for a conversation facilitated by Runway East co-founder and Faction CEO Alex Hoye.
We’ve zeroed in on five key tips our experts gave to UK founders to help them understand and react to the current funding climate.
- Understand that the mood is down
In the US both experts had noticed that the mood was down amongst investors. Reshma warned ‘I’m hearing it’s very very tough..funnily from investors not from startups – investors warning startups not to get their hopes too high, to be cautious about what’s coming’.
In the famously growth-centric West Coast, where zero revenue and no monetisation strategy could be fixed with a cheery ‘we’ll worry about that later’, Robin had met investors saying ‘growth is off the table right now.’ With both investors concurring that mood is down, the question is: what’s the practical effect?
- Prepare for deals taking longer
‘Deals are taking much longer’ said Robin ‘and the implication of that is that you need longer runway’. The ideal amount of Runway? ‘18 months. You should look at your cost base, not taking revenue into account, and say ‘have I got 18 months’ when you’re kicking off – because these bumps happen’.
Reshma concurred, pointing out that investors are being far more rigorous in the USA and in the UK, with ‘lots more due diligence, lots more drilling down on the business model and the core economics’.
- DON’T PANIC – in London the situation is still bright
‘There are so many more sources of funding today and access is being democratised in significant ways’ says Reshma. From a host of VC’s (Local Globe, Seedcamp, EF, Backed VC..), from crowdfunding to family offices and high net worth individuals, our experts were enthusiastic about the wide range of funding options open to startups in London beyond VC’s.
Pointing to Matthias Ljungman’s article which argued that the European startup valuations have been less hyped than US valuations Robin agreed. ‘The fundamentals are undoubtedly great in Europe, and particularly in London’.
- Chase talent
So you’ve managed to secure some funding: what to spend it on? Reshma made it clear that ‘talent is everything. If you have the capital to bring on great talent you will take the lead over people who don’t have that advantage’.
Worried it sounds like the US might have a leg up on London in that field? No need. London’s startups don’t face the competition for talent their counterparts in the US have from the likes of Facebook and Google.‘London is a magnet for talent, it’s all about talent and we have it here in abundance’ said Robin, with Reshma saying ‘I hear of more and more people leaving the valley and moving out here’.
- Find an investor who shares your ambition
Some investors just want to see a billion dollar exit according to Robin, and if you’re not building a billion dollar company, don’t bother talking to them. But for others, financial ambitions needn’t be so extreme. ‘I tend to find with founders there are mercenaries and missionaries; those who want to make lots of money and those who want to change the world. Both can work, both can find investors’.
Reshma stressed international ambition. ‘You can’t become a big business without internationalising’. VC’s want to see ambitious plans and that means looking beyond the UK, and looking to move beyond the UK quickly at that. She also stressed realism – ‘have a plan A,B and C for raising funds, where A is your ideal investor, B ok and C survival’.
‘Surviving the London funding crunch’ was held at our 200 member co-working community in Moorgate. To find out about joining and our other coworking locations, see here.