Correspondence

Innovation finance definitions (HTML)

Updated 11 August 2023

The purpose of this document is to clarify financial and business investment terminology. It has been developed to support members of the Council for Science and Technology to develop clear advice to government on the innovation ecosystem.

This document has been reviewed by government officials and analysts working in this policy area but is not intended to be the last word. Please email CSTSecretariat@go-science.gov.uk if you want to suggest an update.

Describing businesses

A business: An organisation, person, group of people or entity that sells goods or services in order to make a profit. In the UK, a business can be described as a company if it is registered as a legal entity.

An industry: A broad group of companies that operate in the same general space or ‘sector’. For example, energy or healthcare are well-established industries that represent the breadth of the term.

An industry vertical, however, is more specific and describes a group of companies that focus on a shared niche or specialised market spanning multiple industries, for example, Fintech.^{[footnote 1]}

Start-Up: A company that is young, typically operating for two years or less, which is independent and operates privately.^{[footnote 2]} These companies are usually founded by one or more entrepreneurs who want to develop a product or service for which they believe there is demand. They generally start with high costs and limited revenue, which is why they look for capital from a variety of sources such as venture capitalists.

Start-up subgroups include:

• bootstrapped – a start-up using their own funds, debt, and revenue to grow and scale

• venture-backed – a start-up using formal equity-based funding and classical staged financing to grow and scale

Note: A spinout is a particular type of start-up.

Spinout: A spinout is a company that has been created to exploit research, expertise or IP developed in another context for example, either a university, national laboratory, or a parent company. For spinouts, the new company’s development would usually be supported by the parent institution’s enterprise team and the parent institution (or a connected venture arm), which will usually retain a significant stake in the company.

Corporate spinouts are companies that have separated from their parent company to pursue a defined business goal.^{[footnote 3]}

University spinouts are usually founded by researchers (or sometimes students) to exploit knowledge or inventions developed from university or publicly funded research.

Note: When spinout companies are first formed, they would be classed as a type of start-up.

SMEs: Small and Mid-size Enterprises (SMEs) are businesses that have below

250 employees. The Government further categorises these businesses

into:

• micro - less than 10 employees and an annual turnover under €2 million

• small - less than 50 employees and an annual turnover under €10 million

• medium - less than 250 employees and an annual turnover under €50 million^{[footnote 4]}

A SME would be classed as a start-up if it has been operating for two years or less, but it could be a longer established company.

There were 5.6 million SMEs in the UK in 2021, which was over 99 percent of

all businesses.^{[footnote 5]}

Note: In defining SMEs, employee measures are more commonly used than turnover rates due to exchange rates.

Scale-Ups: A scale-up is a distinct phase of company growth and can also be referred to as a ‘high growth’ company. These are enterprises with an average annualised growth greater than 20 percent per annum of either turnover or employee count, over a three-year period, with a minimum employee count of 10 at the start of the observation period, as defined by the Organisation for Economic Co-operation and Development (OECD).^{[footnote 6]}

Unicorn: A privately held (unlisted) company worth over $1 billion which has received venture capital funding,^{[footnote 7]} but has not yet exited from the market (such as an Initial Public Offering of shares or acquisition). A type of start-up.^{[footnote 8]}

Note: An Initial Public Offering is the first time a business raises finance publicly.^{[footnote 9]} It is sometimes referred to as either ‘listing’ or ‘floating’ on the public market, for example, on the London Stock Exchange.

Note: These are companies that have grown quickly, generate excitement around their potential for bringing disruptive innovation to the market, and are expected to provide a significant return to early-stage investors. They can be a measure of the capacity of a country to support innovation.

Describing business financial maturity

Pre-Seed Funding: This stage typically refers to the period in which a company’s founders are first getting their operations off the ground. In the UK the most common “pre-seed” funders are the founders themselves, as well as close friends, supporters, and family.^{[footnote 10]} Funding may also come from venture capital (VC) funds, accelerators, incubators, and business angels. On average, start-ups secure approximately €475k.^{[footnote 11]}

Seed Funding: Seed funding rounds are typically €1 to 4 million deals.^{[footnote 12]} Funding is likely to come from venture capital firms, but in a minority of cases grant-awarding bodies, equity crowdfunding, and business angels are involved.

Companies receiving seed funding are typically less than 2 years old and at the time of investment will have no more than £200,000 in gross assets, less than 25 employees and not previously carried out a different trade.^{[footnote 13]}

Series A: A company’s first full round of VC finance14 usually occurring within 5 years of the company’s founding date. Typically, this funding is used to further optimise its user base and product offering.^{[footnote 15]}

Series A are deals often between €4 to 15 million.^{[footnote 16]}

[Deal size may range by sectors, see table in Annex]

Series B: Series B funds are a stage of VC financing to support businesses in the development stage and to expand market reach.

Series B deals are typically between for €15 to 40 million.^{[footnote 17]}

[Deal size may range by sectors, see table in Annex]

Series C: Series C funding is aimed at later stage more established companies and these rounds are usually between for €40 million to €100 million.^{[footnote 18]}

The recipient will typically have been around for over 5 years, has multiple offices or branches, has either got substantial revenues, some profit, highly valuable technology or secured regulatory approval.^{[footnote 19]}

Series D onwards: Rounds raised beyond series C can be used as further funding for the development of the business, or as a bridging round before an exit via a trade sale or an Initial Public Offering (IPO) (where a bridge round is defined as obtaining another round of venture financing from the same investors as the last round). The funding can also be used to acquire another business.

Series D deals vary in value dependant on the sector and what it is required for. These can be in the range of €40 to €100 million.

Megaround: Megaround deals are between €100 to €250 million deals.^{[footnote 20]}

Megaround+: Megaround+ deals are €250 deals and over

Describing technologies in a business context

Tech: A superset: Technology covers all practical applications from scientific knowledge.

‘Tech’ can sometimes be used as shorthand for ‘Digital Tech’, but it is broad ‘superset’

‘Deep tech’^{[footnote 21]} is often used to distinguish from digital tech and indicates technologies not focused on end-user services, including artificial intelligence, robotics, blockchain, advanced material science, photonics and electronics, biotech and quantum computing.

Digital: An enabling medium: the branch of scientific or engineering knowledge that deals with the creation and practical use of digital or computerized devices, methods, and systems.

Digital technologies can enhance or enable other technologies, for example, artificial intelligence in robotics, or drug discovery, or manufacturing optimisation.

Tech company: A company that creates and sells technology as its output, for example, software or platforms, IP, semiconductors.

A digital tech business provides a digital technical service, product, platform or hardware, or heavily relies on it, as its primary revenue source.^{[footnote 22]} A digital tech business’s margins reflect their product, often near zero marginal cost (software), and defended by IP allowing them to reach huge scale and profitability, for example, Google (software), Facebook (platform), Amazon (AWS).

A deep-tech company provides technologies relevant to a wide range of industries. The company is often based on an emerging technology with the potential for disruptive impact on a wide range of industry sectors, for example Riverlane (quantum computing), Graphcore (semiconductors for artificial intelligence), Oxford Nanopore (biomolecular analysis).

Tech-enabled company: A company that uses technology (usually digital technology) to enhance the delivery of its products or services, for example, ecommerce is digital tech-enabled retail, fintech is digital tech-enabled finance. Their margins reflect the products they sell (such as clothing, or forex), slightly improved by tech process at scale. Typically, they will not be as profitable or scalable. For example, The Hut group (ecommerce), Transferwise (forex), Amazon (retail).

Annex A: British Business Bank examples of stage of company or technology development in different sectors

The British Business Bank have created the following table to define each stage of financing across different sectors.

1. https://cdo.mit.edu/blog/2021/06/17/what-are-industry-verticals/ ↩

2. Defining the UK’s startups and their potential’ Beauhurst, 2018 ↩

3. The British Business Bank 2022 ↩

4. Small and medium-sized enterprises action plan, Department for International Trade, 2020 ↩

5. Business Statistics, UK Parliament: [https://researchbriefings.files.parliament.uk/documents/SN06152/SN06152.pdf](https://researchbriefings.files.parliament.uk/documents/SN06152/SN06152.pdf) ↩

6. ‘Eurostat-OECD Manual on Business Demography Statistics: High-Growth Enterprises’ OECD, 2007 ↩

7. ‘Small Business Equity Tracker’ British Business Bank and Beauhurst, 2021 ↩

8. ‘Unicorn’ Investopedia, 2022 ↩

9. Initial public offering (IPO) – What is an IPO’ British Business Bank Definition ↩

10. How funding works – Pre-seed Funding’ Investopedia, 2022 ↩

11. What is pre-seed funding’ Crunchbase, 2022 ↩

12. https://knowledge.dealroom.co/knowledge/investment-funding-rounds ↩

13. ‘‘Use a venture capital scheme to raise money for your company’ HMRC Guidance, 2016 ↩

14. Investopedia: ‘Series b-c funding – what it all means and how it works ↩

15. https://knowledge.dealroom.co/knowledge/investment-funding-rounds ↩

16. https://knowledge.dealroom.co/knowledge/investment-funding-rounds ↩

17. https://knowledge.dealroom.co/knowledge/investment-funding-rounds ↩

18. Beauhurst, 2022 ↩

19. https://knowledge.dealroom.co/knowledge/investment-funding-rounds ↩

20. https://techcrunch.com/2020/03/11/what-do-we-mean-when-we-talk-about-deep-tech/ ↩

21. 2018 Tech Nation report: https://technation.io/insights/report-2018/ ↩