Seed stage funding rounds drop for the second year in a row – who or what is to blame?

Most recent data indicates that 2020 has been the second consecutive year to register a decline in the number of first-time funding rounds into UK seed-stage start-ups. And while one cannot pinpoint the precise cause of this decline, there are a few factors that come to mind.

The elephant in the room, COVID-19, had very much changed the investing landscape for the duration of 2020, as companies’ valuations were more speculative and the much-needed faith of those investing in start-ups was eroded.

However, the numbers point to the fact that there may be more underlying factors – the downturn had started pre-pandemic, as early as 2019, when seed-stage deals decreased to 1,715 from a previous peak of 2,055 in 2018. The subsequent drop to 1,427 deals in 2020 cannot, therefore, be attributed to the pandemic alone.

Discussing the reduced numbers, Henry Whorwood of Beauhurst suggests that “changes to the Seed Enterprise Investment Scheme (SEIS) in 2018 may be responsible for some of the decline in initial seed-stage deals”.

Launched in 2012, the scheme incentivised investment in early-stage companies, providing tax relief to those contributing with equity to eligible start-ups. Since its introduction, SEIS saw many individuals previously afraid of the high-risk sector turn into early-stage investors. Reportedly, the median deal size of the past 10 years is £140k, falling just under the £150k SEIS cap.

The changes introduced to the scheme in 2018 have complicated the application process with a mandatory requirement, among other things, to disclose the names and addresses of potential investors and the company’s future business plans.

Seed-stage deals, or lack thereof, are momentous for new companies, as they provide the capital to develop one’s product and/or set the business in motion. In collaboration with SFC Capital, Beauhurst has analysed seed-stage investment and offered recommendations to improve the decline in first-time funding rounds.

From job creation to medical and environmental innovation – seed-stage companies are intertwined with many aspects of our daily lives. If the trend continues and without reform to the SEIS time and amount thresholds, the downtrend may well persist; making it increasingly difficult to find promising SEIS eligible opportunities.

This could create a potential knock-on effect for the entire early-stage funding eco-system with consequences for the long-term success of many young innovating companies in the UK and may well make finding the quality EIS and Pre-Series A opportunity to fund, that much harder – only time will tell!

1. Beauhurst Report,”Seeding to Succeed: The Seed Stage of the Ecosystem”
2. Ibid.

Become a member – follow the lead of experienced investors. Sign Up