The missing middle of startup funding

That world has largely disappeared.

Today, if you want to start a business and you do not already have assets, the options get thin very quickly. Banks are not generally queueing up to fund unproven new businesses with no collateral. Younger founders are less likely to own property, and if they do, they tend to own it later in life, with more debt attached. The old mechanism of “borrow against the house and have a go” no longer works for large numbers of people.

So the funding route splits.

If you come from a wealthy or comfortable background, you might raise money from parents, relatives, friends, or family friends. That money may come with softer terms, more patience, and less paperwork. It also comes with social pressure. You know these people. You see them at Christmas. You know that if you lose the money, the cost is not just financial. In some ways, that makes founders more careful. You are much less likely to spray money around on growth experiments when the cheque came from someone’s pension pot. Or if you do, you probably know that they can afford to take the loss. 

But this route is obviously closed to lots of people. Not just working-class founders, but plenty of middle-class ones too. Most parents do not have £50,000 or £100,000 sitting around to fund their children’s business ideas. The polite phrase is “friends and family round”. The less polite phrase is inherited access to risk.

At the other end sits venture capital.

The problem is that venture capital is not just “money for startups”. It is a very specific financial product with a very specific return model. Most people outside the industry do not really understand this, and frankly a lot of founders only understand it after they have already shaped their company around it.

A VC fund raises money from its own investors, known as LPs. Imagine a seed fund raises $100m. Over the life of the fund, it needs to return enough money to justify the risk, illiquidity and effort of investing in private companies rather than something simpler and more liquid. A 3x or 4x return target is not unusual. So the fund is not really trying to turn $100m into $120m. It is trying to turn it into $400m. 

That changes everything.

If a fund owns 10% of a company at exit and wants that investment to return $100m, the company needs to sell or go public for around $1bn. That is why VCs are obsessed with unicorns. It is not merely greed or Silicon Valley mythology. It is baked into the maths of the fund.

Once you understand that, a lot of VC behaviour makes more sense. They are not looking for nice, profitable, sustainable companies that might make £2m a year and employ 30 people. Those may be excellent businesses. They may make their founders wealthy. They may serve customers well, create good jobs and improve a local economy. But they do not move the needle for a venture fund.

VCs need companies that could become enormous. Usually global. Usually software or software-like. Usually capable of growing very quickly. Usually capable of becoming valuable enough that one or two winners can compensate for all the failures.

This is not a moral failing. It is the model.

The problem is what happens when this becomes the dominant story about startup funding. Founders with perfectly good small or medium-sized business ideas start pretending they are building venture-scale companies. They write decks about billion-dollar markets, network effects and category creation when what they actually want to build is a solid, profitable, owner-operated business. They contort normal businesses into venture-shaped narratives because that is where the visible money appears to be.

This creates a strange kind of market distortion. VCs see more and more companies claiming to be fund-returning opportunities, even when most are not. Founders waste months pitching investors who were never structurally able to fund them. Businesses that should have been built slowly and profitably get pushed towards an unnatural growth model. Some raise too much money, hire too quickly, and lose the discipline that would have made them good businesses in the first place. Others fail to raise and conclude that the idea was bad, when really it was just not a venture-backed idea.

We have become oddly bad at funding normal ambition.

There are, of course, exceptions. There are investors experimenting with “seedstrapping”, revenue-based finance, shared earnings agreements, indie funding, and models where a company only raises one modest round and then aims to become profitable. In those cases, an investor might put in £250,000 or £500,000 and not require a billion-dollar exit. They might be happy with dividends, buybacks, or a modest acquisition. They are not asking every company to become a unicorn. They are asking whether the bulk of them can become a strong, durable business.

This feels much better matched to the majority of companies people actually want to start.

But there are far too few of these investors, and their capital base is tiny compared with venture. So the market remains lopsided. At one end, family money. At the other, venture capital. In the middle, not enough.

Government-backed schemes help, but they are not enough to rebuild the missing ladder. A £10,000 or £25,000 loan can be useful for some businesses, especially sole traders or very lean startups. But it does not replace the old ability to borrow meaningful working capital against a relationship with a bank that understood your circumstances. It does not solve the problem for a founder who needs £75,000 to £150,000 to quit their job, hire one person, buy equipment, build inventory, or survive the first 18 months.

The deeper issue is that we have financialised entrepreneurship while pretending we have democratised it.

We celebrate founders. We tell people to start companies. We run accelerators, pitch competitions and innovation programmes. We talk endlessly about ambition. But the actual capital pathways are still heavily shaped by class, assets and network access. If your parents can write a cheque, you get one kind of start. If you have a house, you may have another. If your idea can plausibly become a venture-scale company, you have a third. If none of those are true, you are often left bootstrapping from salary, credit cards, consulting work, or exhaustion.

This matters because not every good business should become a VC-backed startup. In fact, most should not.

A good café does not need venture capital. Nor does a small software tool for a niche market, a design studio, a specialist manufacturing business, a local services company, a training business, a profitable community platform, or a B2B product that might one day make £3m a year. These companies may never produce a unicorn exit. But they can create wealth, jobs, craft, independence and resilience. They are part of the economic fabric, not failed startups.

We need more ways to finance those companies.

That might mean expanding government-backed lending. It might mean requiring high street banks to do more genuine small business lending in the communities where they take deposits. It might mean tax incentives for patient local capital. It might mean more support for community development finance institutions, mutuals, credit unions, and alternative lenders who understand smaller businesses. It might mean building a proper market for revenue-based finance or dividend-oriented investment, rather than treating everything that is not venture-scale as somehow uninteresting.

The old bank manager model had plenty of flaws. It was probably conservative, relationship-driven in the wrong ways, and full of its own biases. We should not be nostalgic about it. But it did contain one useful idea that we have mostly lost: the idea that a normal person could start a normal business with patient debt from an institution that had some responsibility to the local economy.

We do not need to recreate the past. But we do need to rebuild the middle.

Because right now too many founders are being asked to choose between inherited money and unicorn theatre. That is a ridiculous way to fund a country’s entrepreneurial energy.