The £5 Million Funding Cliff in the West Midlands

Constraint, Capability Gap, or Moment of Transition?

An Article on Growth Capital, Investability, and Regional Scale

Executive Summary

The West Midlands has established itself as one of the UK’s most active regions for early-stage innovation. Investment in physical and digital infrastructure has underpinned this progress, with near-universal 5G coverage, advanced fibre networks, multiple data centres, and major spatial initiatives such as the Birmingham Knowledge Quarter and the Coventry Warwick Gigapark driving cluster development and R&D intensity.

At the same time, the West Midlands Tech Review 2025, produced by Tech WM in partnership with techUK and Haatch, identifies a persistent challenge: a £5 million funding cliff. While

early-stage capital flows through mechanisms such as Midlands Engine Investment Fund II and an expanding angel syndicate ecosystem, scale-up finance beyond £5 million remains more difficult to secure locally.

This article explores whether that cliff reflects a genuine shortage of growth capital, or whether it is better understood as a transition point where investor expectations, company readiness, and ecosystem maturity intersect. Drawing on investor interviews across venture capital, private equity, and growth finance, alongside national and regional investment data, the analysis suggests that the £5 million threshold is not a hard stop. Instead, it operates as a filter.

Capital has not withdrawn from the West Midlands. Rather, expectations have tightened across the UK since 2020, with governance quality, leadership depth, capital efficiency, and execution clarity carrying greater weight in investment decisions. Regions outside London tend to feel this shift earlier, not because they are weaker, but because their scale-up ecosystems are less mature and less densely networked.

The challenge facing the West Midlands is therefore not primarily one of capital supply, but of progression. Too few companies move cleanly from early traction to scale readiness, and where progression is unclear, capital hesitates. Unlocking more £5 million-plus investment will depend less on creating new funding initiatives and more on earlier preparation by founders, clearer signalling by investors, and stronger coordination across the regional ecosystem to make

scale-readiness visible.

The £5 million funding cliff is not the end of the journey. It is the point at which maturity is tested.

The next phase of the West Midlands economy will be defined by how many companies pass that test without needing to relocate.

Introduction: The Question Behind the Cliff

The phrase “£5 million funding cliff” has become a focal point in discussions about the West Midlands scale-up economy. It reflects a recurring pattern: companies frequently succeed in raising early-stage capital, yet far fewer secure larger follow-on rounds as they attempt to scale.

This pattern has often been interpreted as evidence that growth capital is scarce in the region, leading to an assumption that ambitious companies are forced to relocate to London in order to grow. While compelling, this narrative risks oversimplifying a more complex reality.

Rather than starting from the premise that capital is missing, this article asks a more precise question: what actually changes at the £5 million stage, and why does progression slow at this point?

Momentum at the Early Stage

The West Midlands has made meaningful progress over the past decade. Growth in innovation-led sectors has been supported by universities, science parks, accelerators, and a mix of public and private funding mechanisms designed to support early-stage businesses.

Early-stage venture capital activity remains resilient, and recent data shows the West Midlands outperforming national trends during periods of market volatility, according to the Greater Birmingham Chamber of Commerce. Seed and pre-Series A funding rounds are increasingly common, and entrepreneurial activity remains strong across a range of sectors.

For example, programmes such as Midlands Engine Investment Fund II, launched in February 2024 with £400 million for loans and equity investments of up to £5 million, alongside a growing angel syndicate ecosystem supported by the British Business Bank and managed by Haatch, have strengthened grassroots pipelines and broadened founder access to first cheques.

However, early momentum does not automatically translate into scale. The transition from initial traction to sustained growth is where the system begins to strain.

The £5 Million Threshold as an Inflection Point

Investor interviews consistently showed that £5 million is a turning point in behaviour, not just a funding milestone. At this stage, capital is expected to materially change the trajectory of a business, not simply extend runway or validate a product.

As a result, investor risk tolerance decreases, and execution capability becomes as important as vision. Investors are no longer assessing whether a company could succeed, but whether it can absorb growth capital responsibly and convert it into scalable outcomes.

Importantly, investors do not describe this shift as a retreat from the region. Instead, they describe a narrowing funnel, where fewer companies meet the criteria required for growth-stage investment.

This shift is not unique to the West Midlands. According to StartUp Magazine, the average time for a UK start-up to reach Series C has now stretched to 9.6 years, while the journey from launch to Seed funding has lengthened from 24 months to 40 months. As companies take longer to progress through funding stages, capital efficiency has increasingly replaced

growth-at-all-costs as the dominant expectation.

In regions with thinner follow-on capital pools, such as the West Midlands, the impact of this shift is felt more sharply.

What Investors Mean by “Not Ready”

When investors describe a company as “not ready” for £5 million-plus funding, they are rarely questioning ambition or intent. They are assessing risk.

Across discussions with local investors, five factors consistently shaped investor judgment.

• First, revenue quality matters more than projections, with investors looking for repeatable and defensible growth.
• Second, governance and board maturity signal whether a business can manage complexity and challenge effectively. Independent oversight and financial discipline are increasingly expected earlier in the growth journey.
• Third, leadership depth becomes critical as businesses scale beyond founder-led execution.
• Fourth, investors look for credible exit logic, not a fixed outcome, but a believable understanding of how value might eventually be realised.
• Finally, clarity around the impact of capital is essential, with investors expecting £5 million to materially accelerate growth rather than deliver incremental progress.

These expectations are consistent across the UK and are not specific to the West Midlands.

4.1 Fund Structure and LP Constraints: The Invisible Hand Behind Selectivity

Investor selectivity at the £5 million-plus stage is shaped not only by company fundamentals, but by the structure of the funds deploying capital. Following the 2020–2021 investment cycle, UK venture and growth funds are operating under increased scrutiny from Limited Partners, with greater emphasis placed on capital

discipline, follow-on concentration, and exit visibility, as highlighted in reporting by the British Private Equity & Venture Capital Association.

Fund size further influences behaviour. For a £100–£150 million fund, a £5 million investment represents meaningful exposure. For larger funds, the same cheque must justify opportunity cost, governance overhead, and portfolio construction constraints. As funds mature, reserves are increasingly allocated to follow-on investments rather than new positions, reducing flexibility.

These dynamics mean that investor caution is not purely discretionary. It is structural, and companies that do not clearly meet growth-stage criteria face sharper filtering regardless of geography.

Why London Continues to Attract Follow-On Capital

London’s dominance in later-stage funding is often framed as bias, but investors tend to describe it in more practical terms. London offers dense investor networks, constant deal visibility, faster syndication, and a deeply embedded legal and advisory infrastructure. In periods of uncertainty, capital naturally clusters where execution is most efficient and perceived risk is lowest.

Over time, this dynamic reinforces itself, with follow-on capital concentrating near prior wins and time efficiency influencing allocation decisions. Investors generally frame this not as a judgement on regional quality, but as a function of ecosystem maturity.

5.1 Sectoral Reality: Why Some Businesses Cross £5m More Easily Than Others

Not all sectors experience the £5 million funding cliff in the same way. Data from the British Business Bank and KPMG shows that capital-intensive and IP-led sectors such as advanced manufacturing, clean mobility, energy systems, and deep technology tend to attract larger follow-on rounds earlier in their lifecycle.

By contrast, lower-margin consumer platforms, creative technology, and some SaaS models can face greater scrutiny at the growth stage, particularly where differentiation is limited or customer concentration risk remains high. This divergence reinforces the view that the funding cliff may be structural rather than uniform, reflecting how different business models interact with capital expectations.

The West Midlands Paradox

The West Midlands exhibits a paradox common to growing ecosystems. Early-stage support is strong, innovation is visible, and talent and research capability are present. Founders are generally well supported at the point of formation.

Where the system becomes less clear is in the transition from Series A to Series B. Investors pointed to fragmented initiatives, overlapping programmes, and limited clarity around progression routes. As expectations rise, founders are often left to self-navigate a complex landscape.

This fragmentation does not indicate weakness. It reflects growth without coordination.

6.1 International Capital: Why London Remains the Gateway

International growth capital further reinforces London’s gravitational pull. Analysis from Sifted and PitchBook shows that US and European investors overwhelmingly establish UK operations in London, using the city as a base for sourcing, governance, and legal structuring.

As a result, regional companies can often encounter international capital through London-based intermediaries. This does not preclude regional investment, but it increases the importance of visibility and signalling without requiring physical relocation because “money can come from anywhere,” as one investor had put it.

Capital Is Present, but Selective

It is also important to recognise that the West Midlands is not devoid of investors capable of deploying capital beyond £5 million. Firms with an appetite for growth-stage investment in or connected to the region include BGF, which invests between £3 million and £30 million; Beech Tree Private Equity, which can deploy up to £30 million; Mercia Ventures; and YFM Equity Partners.

Beyond the region, national and international funds such as Octopus Ventures, Gresham House Ventures, and Ferbal Capital are active in the UK market and have invested in West

Midlands-founded businesses where scale-readiness and visibility align.

The presence of these firms reinforces a central conclusion of this paper: the funding cliff is not solely the result of missing capital, but of heightened selectivity at the point of scale.

What Changes Outcomes

The evidence suggests that behaviour matters more than additional capital.

For founders, readiness is shaped well before a £5 million raise is attempted. Governance choices, fundraising timing, leadership depth, and relationship-building all inform investor perception. Approaching growth capital too early can harden judgment, making later raises more difficult even as fundamentals improve. In some cases, founders also make rational decisions to prioritise control or steady growth over dilution and professionalisation, which shapes investability by design rather than constraint.

For investors, earlier engagement without earlier deployment can reduce friction. Clear signaling, expectation-setting, and visible follow-on commitment help build confidence, particularly in regions with thinner syndication networks.

For ecosystem players, coordination matters. Making scale-readiness visible through clearer pathways and shared expectations reduces perceived risk and accelerates capital deployment.

What This Paper Does Not Claim

This paper does not argue that the West Midlands lacks ambition or innovation, that growth capital is absent from the region, or that relocation is inevitable for scaling companies. Nor does it suggest that all businesses should pursue £5 million-plus funding.

Instead, it argues that the £5 million funding cliff reflects a convergence of investor discipline, business readiness, and ecosystem maturity, and that understanding this convergence is essential to designing effective interventions.

Conclusion: From Start-Up Region to Scale-Up Economy

The £5 million funding cliff identified in the West Midlands Tech Review is real in its effects, but not solely in its cause. It reflects the moment where early momentum gives way to more exacting expectations around governance, leadership, capital efficiency, and execution clarity.

If the West Midlands is to retain more IP, talent, and value through Series B and C, the next phase of intervention must focus less on increasing the number of start-ups and more on systematically supporting scale-readiness. As the Tech Review itself argues, building robust scale-up finance infrastructure, combined with clearer regional narratives and global investor engagement, will be critical to converting momentum into lasting impact.

In this context, the £5 million funding cliff is not a failure of ambition or capital. It is the point at which the region’s next chapter begins.

References

British Business Bank - Small Business Equity Tracker (2024–2025)

https://www.british-business-bank.co.uk/news-and-events/news/british-business-bank-commits-ps66bn-back-innovation-part-uks-modern-industrial-strategy-and-unlock

British Private Equity & Venture Capital Association (BVCA) - Venture Capital in the UK Report 2025

https://www.bvca.co.uk/static/79160dc9-1f7b-4cf4-a423fa196d23f5f1/de2d9449-9eaa-48e4-bf53 32144d8a1090/BVCA-Venture-Capital-in-the-UK-Report-2025.pdf