UK Startups Are Struggling To Reach Series A: So What’s The Problem?

It’s a well-worn narrative. VC investment in the U.K, is down from its peaks but there is still plenty of cash available at the Seed and Series A stages. It’s only when businesses set their sights on Series B or C that investor caution becomes apparent.

But is that actually true? Scalewise is a U.K. consultancy that promises to help startup founders - particularly those in the B2B segment - secure funding. Having taken a dive into Crunchbase figures, the company has published an analysis suggesting that times are getting tougher for British startups seeking to cross the bridge from Seed to Series A.

To be more precise, the graduation rate from Seed to the A Round within 24 months has fallen from 12.5% in 2020 to a current level of 4.5%. According to Scalewise, this matters because the ability of startups to step up to the next funding round not only affects their own prospects but also has a wider economic impact.

It’s worth pointing out that Crunchbase itself has already made this observation about the U.S. market. In a 2023 article on the data company’s website, Joanna Glasner noted that while graduation from Seed to Series A had never been easy, the chances of success were getting slimmer. However, in its analysis, Scalewise has sought to highlight the problem as it affects British startups.

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So why is it getting harder to make the jump to Series A? Well, one answer is that VCs continue to be cautious. According to figures published this week by HSBC Innovation Banking and Dealroom, U.K. startups raised $2.9 billion in new funding in the third quarter of 2024, down from the April to June figure. This decline - the report stresses - is in line with seasonal trends but the data does suggest that we’re not seeing a rapid return to the investment peaks of a couple of years ago. And while VC funds have been raising investment capital, much of this is being retained in the form of “dry powder” to be deployed at a later date.

VC Expectations Have Changed

Are the falling “graduation” rates simply a function of continuing investor caution? Tom Glason is CEO and co-founder at Scalewise. He says investor attitudes have changed.

“There is still a lot of capital going into early-stage companies and a lot of cheques are being written at Seed and Series A,” he says. “But there are a few things happening. Certainly, the bar has increased in terms of what Series A Investors are looking for. I think they are more risk averse than they once were, And certainly in the UK, that is more pronounced.”

However, he says the story being told is not necessarily about headline investment numbers and investor appetite. Falling Seed/Series A graduation rates are an indicator that businesses are finding it harder to achieve their commercial objectives. This, in turn, makes it harder to convince VCs that a further round of funding is warranted.

“Competition in the market has increased,” he says. “The barriers to entry have fallen. With AI it is easier to create more products, more cheaply. So we are seeing a proliferation of tools and tech competing in the market.”

Added to that, as Glason sees it, buyers have become more circumspect. In a high interest rate environment, greater care is being taken over purchasing decisions. As a result, startups offering new products are finding it harder to get a foot in the door. “Buyers are more cautious about the tools they buy and the tech they buy and making sure there is a very clear ROI,” he says.

Revenue A Priority

In short, it’s more difficult to meet the revenue targets that might encourage a cautious VC to commit cash to Series A.

But how quickly do companies have to get to a position where they can ring up sales? It will, of course, depend on the nature of the company. The investment pitch of a deep-tech startup may be more about the uniqueness of the science and engineering rather than early revenue targets. However, in the B2B software market, Glason says investors are looking for hard evidence that the product has a viable market.

“At pre-Seed, the company will typically develop an MVP. At the Seed stage, it’s all about demonstrating product market fit and winning a few customers.”

That requires a go-to-market strategy and this, says Glason, is where a lot of early-stage businesses - particularly those with non-commercial founders - tend to fall short.

This is the area where Scalewise has set out its stall around helping its clients develop a strategy that will attract customers and drive revenues. Glason says ineffective go-to-market strategies often center around a mismatch between sales and marketing, two functions that ought to be complementary.

Glason cites the example of a marketing team tasked with delivering leads. The number of leads generated is the KPI and that’s what the marketers work towards. Meanwhile, the sales team is chasing revenues. Problems arise when the leads aren’t of sufficient quality or relevance to drive sales. “It’s a misalignment around goals and KPIs,” he says.

Consistent Messaging

Equally, there may be a misalignment between the marketing message - say, the description of the product on a website - and what the sales team are saying. “That can result in a huge jarring effect on potential buyers.”

So what is to be done? Glason cites the example of using content to drive sales. White papers, blogs, and web content all provide a means to whet the appetites of buyers, but marketing sales teams should be working in perfect step. The content messaging should serve the sales effort.

For very early-stage companies all this might seem a little premature. The founder does the selling, the founder does the marketing and so there is no great organizational split. Even in this situation, it might be worth considering the principle of adopting a unified approach to messaging and sales.

Glason says focus is also important. “In the U.K. there can be a tendency to chase too many customer types, when putting all the wood behind the arrow of a smaller customer segment is what gets you from Seed to Series A. “In the U.S. they tend to be a lot better at identifying their ideal customer profile,” Glason says.

Other Factors

That's the Scalewise narrative but there are other factors of week. A report on the Seed/Series A journey from Dealroom put the conversion rate at 19 percent over a longer period - 36 months to be precise.. The same research noted that one major factor in driving successful graduation was the identity of investors. Put simply, if you raise Seed from a top-tier VC, you are more likely to make the jump to Series A.

Dealroom also points out that the amount of Seed funding varies considerably from almost zero to many millions. The initial sum raised also affects future rounds.

Then there is VC caution. Looking forward, there are signs that VCs are gearing up to invest more. The HSBC Innovation Banking and Dealroom report noted dry powder at a record level translates into a “deep pool” of liquidity, which may come into play in 2025. That said, it probably would do no harm to consider ways and means to win more customers ahead of the next funding round.