Ebusiness Despatches: Now VCs must hold their nerve

Many start-ups are struggling to get second and third round funding. Entrepreneurs and even big companies are taking the right steps says Rene Carayol, our columnist at the front line, but he demands more from the VC community...

I was recently at two events, both held at renowned UK centres of innovation. What I saw encouraged me about the future of tech start-ups - but it depressed me too.

Let me start on an up note. At a Scottish Enterprise conference in Silicon Glen I met a number of promising young businesses, with a heavy bias towards wireless and mobile technologies.

Sounds good so far. Only the down side was the stage many of these start-ups are at now. They've had seed funding, mainly of the family and friends variety, but the venture capital (VC) firms are not getting involved.

There is a good reason for their reluctance. Many have been burnt over the past three years. They are de-risking, as they might say, and are looking at later stage investments, certainly post family and friends.

My gripe is that they should have learnt their lessons from the 1980s and 1990s. After relatively recent tremendous gains and investment levels they knew there would be a bounce back. We're still in the middle of this natural reaction, but their response - cutting investment and choking many good companies in their infancy - has been too severe.

The companies I met in Scotland are having to go elsewhere. Those I met specialising in wireless are often going to Scandinavian investors who know the sector. The trouble is these people, good though they invariably are, don't bring the same networks, advice and shared cultural knowledge a VC based in the UK would.

I wish the start-ups I met and their investors - whether Scottish, Scandinavian or the in-laws - all the best, but there is a past we can learn from here. Before the latest downturn we saw a period where Scottish businesses found investors from the US. We saw innovation coming from Scotland, execution from or in the US.

The US VCs recognise something very important, something I'm not sure we get over here. They recognise the people behind a company. Take a mediocre strategy and a brilliant management team and - with the right advice, contacts and investment - you have a success story. Take a brilliant strategy with poor people at the helm and the odds are you have a failure on your hands.

The UK investment community must act on this or else the country as a whole will continue to lose out.

A second event I was at last week gave me some hope. I was at the University of Cambridge Entrepreneurship Centre. This is a place trying to marry strategy to business and leadership to management, for example running six week courses for entrepreneurs by entrepreneurs and others who can help.

The attendants weren't who I expected. Around half were 20 to 30 year old entrepreneurs, the other half were what I call corporate soldiers from big companies such as BT, Vodafone and some of the pharmaceuticals giants. The worm is beginning to turn and I was glad not to be confronted by the usual geeks and hobbyists but people with personality and passion. They represent the brave individuals and brave employers in the current climate and I'm sure they will benefit.

After get-togethers like this, we will start to see some strange bedfellows in business, start to see role models and - crucially - role models for the role models even.

We know stories of failure are more powerful and instructive than stories of success but now most of us realise we must share our secret formulas and find ways of making more businesses succeed. That's what I saw going on in Cambridge.

Is there the backing for this change? Corporates are starting to get it. They are supporting individuals, whether employees or standalone start-ups, in several ways. They provide money, which is actually the weakest form of support, but also advice and new direction.

Banks are also doing more than they used to - their support is often sustainable these days. If a start-up has revenue the banks can do debt-based financing without taking large - sometimes crippling - equity stakes.

Only the VCs are lacking the nerve. They have reverted to being too risk averse. Now is the time for us all to smoke investors out of their cubby holes. After all, they do need to be making investments and being ultra conservative will be the worst kind of VC failure. I'm talking about survival of the bravest.

Come on guys, there are great (small) companies in Scotland, Cambridge and across the country depending on it.