Britain is brilliant at creating consumer start-ups. Just look at some of the acquisitions already made this year – Wild, Biotiful, The Collective, and Two Chicks have all been snapped up by big strategics because of their clear traction with consumers. The UK has no shortage of ambitious, creative founders building businesses that customers love. But when it comes to scaling those businesses, the investment eco-system can be ill-equipped to support their rapid growth.
The aforementioned brands are the lucky success stories: too often promising consumer start-ups find themselves wasting precious time as funding rounds are drawn out, delayed or getting tangled up in complex deals/terms which ultimately kill their businesses before they even get the chance to hit true scale.
At the earliest stage, UK start-ups have it pretty good. The excellent SEIS and EIS schemes offer favourable tax incentives for individual investors, meaning pre-launch or early-stage businesses can usually find Angel investors, or leverage crowdfunding through their communities, to raise initial capital. The limit of £250K SEIS means that’s often the first amount raised by a start-up, and then maybe if things go well, they’ll go on to raise, say, another £500K EIS from a combination of their current investor base and maybe some new Angel investors who have been impressed with their early traction.
So, let’s say they get to £1M in revenue. They’ve tapped out their Angel networks and gone big on crowdfunding; they need to raise a decent amount to buy themselves a minimum of 18 months runway and scale up into mass retail and all the expenses that come with that. Then they turn to the Venture Capitalists. Most VCs would say the business is ‘too early stage’ for them. They want to see between £3-£5M in revenue. Some VCs have started coming downstream to get into these sorts of deals but, the issue is, they end up treating these early-stage businesses like they’re much later stage deals. Often leading to suffocating due diligence processes or trying to force aggressive and restrictive terms over the line.
Therefore, there is a clear ‘funding gap’ that exists in the UK market.
Why FMCG start-ups need a different kind of investment
Founders often fall into the trap of pushing for higher and higher valuations for their businesses. On the surface, this makes sense. Give away less of your business, you’ll make more in the long run or have more left on the cap table to go out and raise again down the line. But this can be a dangerous game to play. Every inflated valuation, at each round, needs to be lapped by the next round. And so a simple change in market conditions, or a few operational challenges, and suddenly you’re looking at a down round and all the complexity that comes with it.
And VCs will often fuel this, operating a ‘unicorn hunting’ approach where they’d rather you set huge goals and put the business under immense pressure on the off-chance you can pull it off and realise a rare mythical exit. But it’s not a level playing field. The VCs can protect themselves through a combination of factors such as liquidation preferences, participating preferred shares and anti-dilution terms.
This tension between valuations and the need to make a return within a certain timeframe can create unaligned interests in the boardroom with investors incentivised completely differently to founders. This can lead to poor decision-making that exacerbates inherent problems. In worst-case scenarios, founders may never see a penny from their start-up business.
When we think of VC funds, we think about them as sitting on huge pots of money and therefore being incredibly wealthy businesses. The reality is, many of them exist on their two percent management fees, which only go so far when you have a large team and a fancy Central London office. It’s for this reason, we’ve begun to see more and more ‘questionable’ terms including things like extortionate board fees or compulsory high-interest loans which seem to be geared much more to short-term cash generation than to long-term value for all shareholders.
The VC model has been incredibly fruitful in industries like tech and B2B SaaS where there is the potential for exponential growth. But, in the consumer space, where brand value and customer affinity (not to mention retail sales distribution) take significantly longer to build, there is a need for more patience and a longer-term view. For so many FMCG challenger brands, the challenge of bridging this funding gap (whether directly or indirectly) can so often be the reason for their eventual failure.
The opportunity to do things differently
So, if you’re past Angel investor stage but don’t want to do the VC dance yet, where do you go? There are alternatives to Angel investors and VCs, but they can be hard to find.
Family Offices can be a great option. For a start, they are deploying their own money and therefore can take a longer-term view on how and when the investment will be returned than VCs who are beholden to their ‘fund economics’ and the promises they have made to their LPs. This means Family Offices can be more flexible when it comes to the terms they offer. The issue is, most of them operate under the radar and can be almost impossible to contact.
Often, they won’t have a website and your only hope is a warm introduction from a fellow entrepreneur or a friendly investor. For FMCG brands in categories where progress is likely to be steady, not explosive, what’s needed is patient capital tailored to a slower burn and a shallower trajectory. However, whilst Family Offices can take a more longer-term view, without the pressure of a strict timeframe for return on investment, they will often not have a huge amount in value-add experience.
What FMCG founders need are investors who can offer long-term support without forcing them into a breakneck race for growth at all costs. Ideally someone with operator experience who has worked in their industry, or even better category, and has a working understanding of the challenges they will inevitably face.
They want someone on their board who is be able to offer expertise, an understanding of the specific challenges, and above all the ability to add real value through direct experience and insights.
What we need is a new playbook—patient capital, operator-led funds, and deal structures that don’t hinge on unicorn outcomes. It’s not about giving up ambition. It’s about giving FMCG founders a fair shot at building something lasting.
Until then, too many brilliant brands will fall into the gap between early hype and sustainable scale.
Joe Benn is a Director at MNC
