UK Start-ups Confront Seed Funding Squeeze

UK start-ups confront seed funding squeeze as capital shifts abroad

Small businesses are the backbone of Britain’s economy. They account for more than 99 per cent of UK firms, employ 16.6 million people, and generate almost half of all private-sector turnover. From retail to manufacturing to technology, the UK’s five and a half million SMEs provide jobs, tax revenues and innovation. Yet within that broad category, a smaller group of technology start-ups faces a growing dilemma: how to secure seed funding in a market that has become cautious at home while proving more generous abroad.

For founders who need modest sums to move from product development to market traction, the gap is particularly acute. Investors remain keen on incubating ideas but are less willing to fund the transition to scale. The result is a rising number of entrepreneurs looking overseas, especially to the US and Middle East, in search of the capital they need.

Seed capital in a cautious market

Seed investment has historically been one of the UK’s strengths. The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) have channelled billions into early-stage companies by offering tax reliefs to investors. These incentives have ensured that entrepreneurs can usually find capital to get off the ground.

But conditions have shifted. Inflation, interest-rate rises and subdued public markets have made later-stage exits harder. That in turn has cooled enthusiasm among venture capitalists and angels to put in the next round of funding. According to Beauhurst, early-stage UK tech start-ups still raised £8.6bn in 2024, nearly double the level of three years earlier, but overall investment fell back sharply from its pandemic-era highs.

The result is a paradox: a healthy supply of seed funding at the very earliest stage, but reluctance to back businesses that need modest sums to cover marketing, customer acquisition and scaling. Investors who once sought bold bets have become more risk-averse, especially outside London.

Start-ups head abroad

This hesitation has spurred some of the UK’s most promising firms to incorporate or relocate abroad. The US, with its deeper pools of venture capital and greater risk appetite, has been the chief destination. ElevenLabs, an AI voice-cloning start-up founded in London, shifted its base to New York to raise larger rounds. Cleo, a fintech app that began in the UK, also expanded its fundraising from American backers after struggling to find sufficient domestic support.

Middle Eastern funds are another source. Qatar’s sovereign wealth vehicle, the Qatar Investment Authority, has signalled an interest in UK technology. Platforms such as Eureeca, originally British, now bridge European and Gulf investors, offering an equity-crowdfunding route that extends beyond local angel networks. Yet the practical effect has been the same: British founders are more frequently pitching to investors in Doha or San Francisco than in Manchester or Birmingham.

The scale of the challenge

For policymakers, this trend is worrying. SMEs already dominate Britain’s economic landscape, and technology-driven firms are viewed as critical to future growth. If founders feel they must go abroad to secure funding, the UK risks losing not only companies but the jobs and intellectual property that follow them.

Reports suggest that up to 60 per cent of late-stage venture capital flowing into the UK now comes from foreign sources. While international investment is not inherently negative, the imbalance raises concerns about whether Britain can capture the full benefit of its innovation pipeline.

MyCopyHub and the seed market reality

The experience of MyCopyHub illustrates the problem at founder level. The company has built and deployed a functioning SaaS product aimed at solopreneurs and SMEs, enabling users to generate authentic LinkedIn, Instagram and Facebook content with AI assistance. It has customers, proof of concept and a clear use case. What it needs is not millions in R&D but relatively modest marketing spend to drive uptake.

Yet despite this readiness, the seed market has shown little interest. Investors appear unconvinced that marketing capital alone is sufficient justification for funding. The contrast with the US is stark: there, SaaS start-ups with early traction routinely raise seven-figure sums precisely to spend on growth. In Britain, the hurdle is higher, and the appetite thinner.

For MyCopyHub, this means pursuing capital has been as much about geography as product. Domestic investors want evidence of revenue scale before committing, while international backers, especially in the US, are more comfortable with the “growth now, profit later” philosophy. The Middle East, flush with sovereign wealth, has also emerged as a possible alternative, though routes to those investors remain complex.

Structural reasons behind the gap

Several factors underpin this cautious climate. Pension funds, which could be a major source of risk capital, remain under-represented in UK venture markets compared with peers in Canada or Australia. Regulatory structures, while slowly shifting, still limit institutional appetite. At the same time, recent volatility has made angels and family offices more selective, focusing on defensive sectors rather than early-stage technology.

Cultural attitudes play a part too. British investors have historically emphasised profitability and prudence. While this can prevent bubbles, it can also slow the scaling of companies that need capital to compete globally. By contrast, Silicon Valley’s willingness to back aggressive growth has created giants that dominate global markets.

Possible remedies

Closing the gap will require both policy changes and private-sector adjustments. Expanding EIS and SEIS limits, encouraging pension-fund participation, and developing more specialist late-seed vehicles could all help. So too could greater collaboration with Middle Eastern and Asian investors, ensuring that British firms can access capital without uprooting themselves.

For founders, the challenge is to present more compelling growth narratives. Investors are wary of funding “marketing spend” without evidence of rapid returns. Firms like MyCopyHub must quantify the potential customer base, project conversion rates, and demonstrate that every pound spent translates into tangible revenue. The more precise the path to scale, the harder it is for investors to dismiss the request.

Conclusion

The UK start-up ecosystem remains one of the world’s most active, supported by millions of SMEs and a culture of innovation. But for founders seeking to bridge the gap between product readiness and market penetration, the funding climate is less supportive than it once was. Many are now looking abroad, lured by deeper pockets and more aggressive investors.

For MyCopyHub, the struggle to secure seed capital reflects a broader issue: Britain risks losing ground not at the idea stage, but in the crucial early steps of scaling. Unless domestic investors adapt, the country may watch as its most promising firms, and the economic value they generate, are captured elsewhere.

The test for the UK is clear: can it evolve its funding structures to keep its start-ups at home? Or will it continue to nurture ideas, only to see them flourish under foreign skies?