Posted on August 18, 2016 by staff

Challenges London VCs face when investing away from capital


There are many challenges London VCs face when looking to invest away from the capital which makes it harder for them to do so.

Julian Carter is founding partner and managing director of venture capital firm EC1 Capital in London, which has invested in 18 businesses.

When he began the fund in 2012, he did decide to venture out of London, he told BusinessCloud, visiting Manchester, Cambridge and Dublin.

“I realised there were probably nuggets across the country that could be found, but I found that the thing about being a VC model is that it doesn’t scale very well,” he said.

“We’ve a set amount of fees we can charge on the assets and management so we can only hire a certain amount of people.

“If we’ve got partners, senior people, going to Leeds, Manchester, Edinburgh, trying to find deals it’s much harder to do that.”

Problems also arise in the way VCs work, typically relying on contacts to pass them leads, which can be difficult if you don’t have links in a particular area.

“To try and find companies that are geographically dispersed where you don’t have a strong local network is difficult,” he said.

“A lot of series A investors get deals from seed investors and so on. I can see how people think VCs won’t get on the train but it’s much harder to discover these companies, especially when you can do back-to-back sittings in London all day long.

“I think also as well with entrepreneurs, we’re trying to find people who are happy to go out of their comfort zone and get on the train themselves.”

While he says businesses should not be afraid to come to London, he has no problem with them then continuing to be based elsewhere, especially because the costs are lower.

“Local angel groups often have things pretty tied up,” he said. “There’s no other funding for these entrepreneurs to go to.

“They go to a limited set of angel investors who often have harsher terms than normal. Naïve funders may be taking terms that may not be what they would get in London.”

Though EC1 has done deals outside of London, including in Newcastle and Glasgow, these businesses usually have London offices and co-working space, meaning they are on hand to meet with investors.

“I think investors do like to sit in front of funders in board meetings and like to see them frequently for coffee,” he said.

“Often you get more information that way. You also find that having companies closer to each other creates a network effect between the portfolio.

“Investors like to be in front of people and not do virtual Skype calls. If you want money you get on that train and go to pitch to people in London.”

The founders of used car search website Carsnip attended about 100 meetings in 18 months to raise the funding they needed – $100,000 of which was secured over the phone from a US investor – but not a penny came from London.

Pedro Madeira, head of research at Beauhurst, says that investors prefer London-based tech firms so they can keep an eye on the founders.

However London is not the bed of roses for tech investment that many people think it is, according to the chief executive of the Manchester Tech Trust.

There are some fantastic investment opportunities for South East VCs in the Northern Powerhouse, according to Philip Hargreaves, head of Access to Finance.

Hampshire-based Morgan Innovation and Technology began investing in medtech companies outside London after encountering funding issues for its own products.

And Leeds-based marketing automation business Force24 resorted to more traditional funding methods after failing to gain funding from VCs with a London bias.