How do startups raise money in the UK?

The honest answer is that it depends on various factors, such as the industry you're in, who's on your cap table, and your level of experience.

To keep things simple, here are some thoughts on the rough playbook for UK startups.

How do startups raise money in the UK?
Your First Round - Pre-Seed
Raise from influential HNWs?
What time of year to raise?
How do you prep for your first round?
Typical Valuation: Don't Go Below £1m
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Your First Round - Pre-Seed

For your first round, we recommend raising £250,000, which essentially covers your SEIS allocation.

Top Tip: Avoid blending SEIS and EIS rounds, as it can complicate matters for several reasons:

More paperwork - you need to fill out and sign different HMRC forms for an SEIS vs. EIS round. You have enough on your plate without extra hassle.
Mixed messages - you can either give the SEIS to the first come first served (which can create negative reactions from some investors) or prorate the allocation (e.g., you invite £25,000, and 30% is SEIS, 70% is EIS). For some reason, this always feels underwhelming.
Missed opportunity - by focusing solely on the SEIS amount, you can leverage it to offer a bit of exclusivity to some Smart Money Investors.

Bonus double your first round if your in Wales: DevBanc’s, Angel Invest Wales (AIW) team will 100% match fund your SEIS round if one of their AIW Lead Investors puts money into the round. This means you raise £500,000, and their half does not eat into any SEIS or EIS allocation.

Raise from influential HNWs?

For your first round, it's ideal to find some "Smart Money Investors" for your Cap Table. These are High Net Worth individuals who can open doors for your business and make essential connections.

One big mistake some startups make is giving away Flat Equity to these influential individuals when they would have helped just as much if they actually invested in the round.

Ideally, each High Net Worth individual should invest an average of £25,000. In theory, having six experienced investors in on this round is worth more than one investor dominating the round. The worst case scenario is having an investor who is only there for the return or tax relief, but has no ability to provide extra value.

Top Tip: Use the SEIS as a carrot with investors, and don't accept investment from people who can't contribute to the business. Don't give away board or advisor seats in this round.

What time of year to raise?

In the UK, the financial year runs from April to March. Raising funds in Q4 is ideal, as this is when many high-net-worth individuals evaluate their financial position for the year. They may find it appealing to enhance their tax position by investing in an SEIS or EIS in an exciting company.

Because of the demand on legal resources during Q4, it is important to prepare early. A Q4 raise can also be stressful, as some investors may not want to miss the close of the financial year (which is April 6th, not March 31st, for some reason).

Avoid trying to raise funds during the summer (July-September Q2) as most people are on holiday. Q3 is okay, but try to close by the start of December, as it can be stressful to try and close before Christmas. Q1 is also okay, but typically only if you missed a Q4 raise and it's been rolled over (e.g., you didn't target a Q3 raise).

How do you prep for your first round?

To ensure a successful fundraising round, it's important to have your Investment Deck, Legals, Cap Table, and Data Room in good order. Ideally, these should be presented in the following order:

Investment Deck - Keep this to a maximum of 12 pages, explaining the problem, solution, and opportunity. Ideally, it should only ever be presented; worst case scenario, it can be sent via DocSend or a similar platform (never as a PDF). You can read more on how to perfect your Investment Deck pitch here.
Legals - It's crucial to have a good lawyer, as they can add a lot of value. Worst case scenario, you can use Seed Legals, but ideally only for your first round. They offer an amazing service, but once you have the money, a dedicated, experienced lawyer will always be more beneficial.
Cap Table - It's essential to have a simple spreadsheet outlining who owns what shares and options. A complicated Cap Table will hinder your round, as will a Cap Table where the founders of the business, who are currently running the business day-to-day, have less than 80% equity. VC's and investors will expect the founding team who are running the business to have more than 50% equity at Series A. Therefore, by the end of your first round (Post Money Valuation), the founders need to have ideally at least 80%.
Data Room - The key word here is Full Disclosure. As a founder raising capital, it's important to disclose everything about your business. Failure to do so may result in legal proceedings or worse. A Data Room is a secure cloud-based drive where you can give investors who are about to invest full access. It will contain all your essential documents related to your business, along with an index and a Disclosure Document for the investor to sign. This document is in part NDA and also formally agrees to what you have disclosed.

Typical Valuation: Don't Go Below £1m

The typical valuation varies depending on how much traction you have, where you are located, the sector you are in, and especially if you have a history of scaling your business.

Securing a higher valuation puts pressure on you to deliver more by your next round. Having paying clients and higher revenues can justify a higher valuation.
Securing a lower valuation means giving away too much equity. As a rule of thumb, we do not recommend a valuation below £1,000,000.

Valuation is a balancing act.

Top Tip: Don't Focus on Just One Round. Raising investment and growing a startup is like playing chess. You need to think and plan several moves ahead. Leading up to a Series A, it is not uncommon to do three or four investment rounds. Therefore, it is helpful to consider how much you need to raise, when, what dilution looks like, and most importantly, how the business needs to perform (in terms of key performance indicators) on the pathway to A and beyond.

Investment Playbook