What’s up with UK venture capital?

Another week, another report. This one points out the disparity between venture capital landscapes in the US and the UK.

60% of top-tier VCs in the US have experience working at or running a startup. In the UK, that number is just 8%. It’s a stark data point and one we’ve recognised in our experiences getting Origin off the ground.

A very British problem

In many respects, this isn’t surprising. For decades now, the British economy has over-indexed on “professional services” (finance, consulting, law) over manufacturing, technology, or software. So there’s an abundance of young finance and consulting talent that wants to do something cool in the startup era. There is certainly a generational hump post Global Financial Crisis, with a lot of aspiring investment bankers realising that their skills may not be needed by the big banks, but could be redeployed in venture capital. Others choose to plunge headlong into entrepreneurship, as I did.

Just as there’s an over-abundance of finance and consulting talent thanks to the dominance of the City of London in the UK’s economic life, the entrepreneur-investor ecosystem isn’t as mature here in Britain as it is in the US. That means less former entrepreneurs turning to the investment game.

The US invented the VC model, and the tech/VC revolving door has been spinning for over 50 years. It’s important to note that most of the pre-eminent figures of the 2019 tech world got their start in the 1999-2000 Dot Com rush. Names like Uber’s Travis Kalanick. Paypal’s Elon Musk and Peter Thiel and of course, Jeff Bezos. Unfortunately, the UK tech scene is yet to see its first big wave of tech exits, which means it’s yet to create a stable of semi-retired operators and entrepreneurs who can transition to investing.

But the will to invest remains strong, despite the lack of hands on experience, so when VCs construct their teams they end up being staffed with a high proportion of bankers instead of operators.

Awkward questions

The lack of operator experience amongst British VCs is worrying, since it betrays a lack of bottom-up knowledge on how to take a startup from cool idea to scale. The banker/consultant style of investing over-prioritises a “top-down” investment strategy. This can lead to an over-weighting of a particular line of questioning being asked by investment committees, along the lines of:

  • “What are the big themes in the world over the next 3-5 years?” “
  • “What technologies are emerging to address those teams?”
  • “What businesses and business models do we expect to see?”
  • “Let’s go find some startups that fit that description!”

And sometimes they go one step further…

  • “Let’s find some aspiring entrepreneurs that might be familiar with that industry, give them some capital and build the company ourselves.”

The former, operator style of investing is more bottom-up:

  • “Who are you and what are you trying to solve?”
  • “If the initial model doesn’t work, do I believe you and your team are flexible and tenacious enough to pivot into something that will?”
  • “What is your unfair advantage versus your peers in the sector?”

While both investment styles have their merits, we know that humans are bad prognosticators, and some of the most influential founders and businesses (household names that now rule the world) started out with crazy ideas that didn’t fit into a Gartner quadrant – social media being a huge example.

The importance of balance

We are keenly aware of this at Origin. We’re proud that nearly all of our investors and advisors have either been entrepreneurs themselves or worked extensively in the capital markets. A few have even been entrepreneurs in the capital markets. We feel very lucky to have found a few of these unicorns, people who know how to ask the right questions of us as founders.

Former bankers know the ins and outs of the industry and have been instrumental in helping us form connections and relationships with the clients that matter. But it’s the entrepreneurs who know the white-knuckle ride of making another desperately needed hire with only a few months of money left in the bank. They can relate to the stress of chasing down a client contract that was supposed to be signed 6 months ago. And they can guide us on when we’re being too paranoid about something, or not paranoid enough. 

The adage about 1% inspiration and 99% perspiration is so true, and it’s practical advice on how to navigate the journey that makes or breaks a company. We’re also grateful that we got our start within the Techstars ecosystem, which truly understands this and so insists that every MD who runs an accelerator program has started and successfully exited a business. They look into your soul to “test your mettle”, as they know that when the going gets tough, it’s resilience that counts.

At the same time, we are also grateful to have investors and mentors with more of a “top-down” perspective on things, especially as we grow and start to encounter more strategic decisions. Just as a great football team isn’t filled with 11 strikers, it’s good to have balance in your cap table and advisor network. As we continue to build partnerships and grow into our ecosystem, a diverse array of investors and advisors is going to be invaluable.

Hopefully, the UK tech scene is nearing the end of its first era. The signs are there and we just need to be patient and wait for some big exits in the coming months and years. The next generation will have plenty of successful former operators who can join the bankers and consultants in the VC industry, deepening the diversity and quality of the British VC landscape.