The reason for Britain’s dearth of digital media unicorns – the funding gap
Much has been written in these pages about the dearth of British start-up success stories in comparison to our US cousins. Digital media companies are no exception. But what is causing this discrepancy? Perhaps most significant is the funding gap.
In the UK, there is a strong angel investment culture thanks to seed enterprise investment (SEIS) and enterprise investment (EIS) tax relief schemes. Introduced in 2012, SEIS acts as an incentive for UK taxpayers to make seed investments in early stage companies. Investors receive up to 50 per cent tax relief on investments up to £100,000. EIS offers investors up to 30 per cent tax relief on investments up to £1m a year. Thanks to these programmes, startups seeking investment can find seed capital of between £100,000 and £500,000 with relative ease.
The next obvious step for a growing digital media company would be to turn to a venture capital (VC) provider for a series A funding round. However, our clients tell us that, in the UK, a vacuum exists between the amount they can raise via seed funding and the entry level for most VC funds.
Read more: VCs have invested $200m in UK tech since Brexit
Although some funds do offer seed and pre-series A funding, this is far less prevalent than in the US. UK based VCs, if specialised at all, tend to focus on fintech, edtech or healthtech rather than adtech or martech.
Why is this? Non-specialised VC funds tend to have a negative perception of adtech due to a history of poorly performing initial public offerings. Rocket Fuel’s stock, for example, is down more than 80 per cent since its flotation in September 2013. But despite the bad press, adtech and martech are continuing to grow, with Gartner predicting that chief marketing officers will spend more on technology than chief investment officers in 2017.
Read more: Watch out unicorns: A third of $1bn startups will fall in value
In the US, specialised funds continue to invest. But in the UK, the negative perception remains, meaning that digital media companies looking to grow – often at a crucial stage when they are signing big deals with brands and media agencies – must look for alternative options or face difficult choices. With banks’ persistent scepticism of digital media companies, this is the point when they are often bought by rivals or, regrettably, the company fails. They may consider debt instead of equity, alternative lenders, or a venture debt hybrid model to enable their growth until they reach the point where VCs regard them as a safer bet.