Embracing a Comprehensive Approach: The Need for Holistic Investment in the U.K.
Britain's Funding Discrepancy in Growth: A Perspective from Venture Capitalists
According to James Codling, Managing Partner at Volution Ventures, the U.K. needs a more comprehensive investment strategy, not just an outstanding market for Seed and Series A funding. He argues that the lack of growth finance is hindering the development of our nation's startups.
Volution Ventures, a London-based VC firm with a fresh $100 million fund, aims to support companies in sectors like fintech and enterprise software. This new fund, formed in collaboration with SBI, a Japanese investment company, is one step towards addressing the shortage of growth-stage capital in the U.K.
The issue of insufficient growth finance is well-documented, and it's no secret that U.S. firms manage to raise twice as much capital as their British counterparts, with the gap increasing at later funding rounds. The British Venture Capital Association (BVCA) has acknowledged this issue, noting that foreign investors dominate at later stages, prompting British startups to relocate abroad when they start to generate real value.
Even the transition from Series A to Series B can be treacherous, with Volution citing Dealroom figures suggesting that conversion rates have plummeted by 50% in just five years. "The growth journey from Series A onwards is one of the most difficult any founder will ever face," Codling warns.
So, Why Is This The Case?
Founders often struggle to meet the expectations of venture capitalists (VCs) at the growth stage. Codling explains that VCs are seeking tangible evidence of execution and delivery. "Founders get excited when they raise Series A, but attracting growth finance requires them to be ten to twenty times more impressive than they were at Series A," he says.
It's not just about revenue growth and profits. Companies need to build out their systems, processes, teams, sales, and distribution models if they are to successfully scale the funding ladder.
Structural factors are also at play. The U.K. government's efforts to stimulate investment in startups have been primarily directed towards early-stage funding, with tax incentives like the Enterprise Investment Scheme, British Patient Capital, and the regulation of Venture Capital Trusts. While these measures have been generally beneficial, they have skewed the market, failing to adequately support late-stage investment.
Moving Forward: A Holistic Investment Strategy
Codling advocates for VCs to adopt a more holistic approach. Instead of focusing on specific stages like Seed, Series A, and Series B, they should offer funds to good companies throughout their journey, becoming less stage-focused. This could pose a significant challenge at a time when VCs are adapting to a market characterized by falling valuations and limited exits.
However, Volution Ventures is confident. The firm plans to align with the government's emerging "industrial strategy," providing funding for businesses in sectors like fintech, AI, defense, energy, biotech, and deeptech. These sectors are expected to drive growth in the U.K. while offering opportunities for international sales.
Aside from policy adjustments, the government can take steps to encourage support for businesses at every stage. "The U.K. is excellent at generating companies that can access Seed and Series A funding. But if the funnel isn't broader, we won't be able to support companies as they grow," Codling emphasizes. He urges both the government and citizens to be concerned about this issue, as taxpayer money invested in early-stage companies that fail to secure later-stage funding could ultimately be wasted.
The launch of Volution's fund is just one piece of the puzzle. While addressing later-stage funding is recognized as a pressing issue, HSBC Innovation Banking and Dealroom figures indicate that breakout deals (Series B and C) accounted for the bulk of capital raised in Q1 2025, while later-stage financing amounted to $1.7 billion. It's clear that challenges still remain for individual companies, and creating a framework to support more growth-stage companies is essential for the ongoing evolution of the U.K.'s innovation economy.
[1] Intelligence Squared[2] Financial Times[3] Tech Nation[4] Beauhurst[5] Dealroom
- The lack of growth finance in the U.K., as highlighted by James Codling, is hindering the growth of startups, creating a funding gap that is twice as wide as in the U.S. markets.
- According to Volution Ventures, the transition from Series A to Series B can be challenging for companies, with conversion rates falling by 50% in five years.
- The government's efforts to stimulate startup investment have primarily focused on early-stage funding, creating a discrepancy in the market that fails to adequately support late-stage investment.
- To address this issue, Volution Ventures advocates for a more holistic approach to venture capital, offering funds to good companies throughout their growth journey, rather than focusing on specific stages.
- Codling emphasizes the need for both the government and citizens to be concerned about the lack of growth finance, as it could lead to wasted taxpayer money invested in companies that fail to secure later-stage funding.