Funding is a key component of start-up growth. Even when new companies already have positive EBITDA, they still need sufficient funding to grow in a controlled yet aggressive way. With the market being as uncertain and competitive as it is today, funding becomes essential leverage that takes start-ups closer to success.
In the UK, funding for start-ups is widely available. In hubs like Manchester and Cambridge, start-ups have the opportunity to receive funding from various sources. But if you are a start-up looking for additional capital in the UK, here are some of the options to consider.
To Raise or Not to Raise
Before we get to the funding options, we need to take a closer look at the decision to invite more capital itself. This is a big decision to make regardless of the size and scale of your start-up, and there are a lot of reasons behind that decision too.
You may, for example, be looking for additional capital to transition from a prototype to ready-to-sell products. Raising money when you already have a working prototype lets you speed up the go-to-market process substantially.
Funding for the sake of valuation is also not uncommon. When fresh capital enters the company at a higher valuation, the implications are substantial. Even smaller effects such as the PR generated by your round of funding can be immensely beneficial to the company. There are also risks to anticipate. For starters, you have to be appealing as a start-up before raising money from investors, particularly investors with big portfolios. The last thing you want to do is fight for investors’ attention. You also have to take into account the fact that the funding process is complex and resource-consuming. A lot of UK-based start-ups have failed simply because they direct their energy towards getting funding rather than surviving the changing market.
Self, Friends, and Crowdfunding
Raising capital is best done with extra care, which is why you should always start with self-funding. If it is still possible to self-fun the start-up, then there is little need to invite more investors. Your decision to bring investors in can then be based on more strategic thinking; you can have investors in for their networks and expertise rather than only for their capital.
Friends and family are also your sources of funding. In fact, friends and family are the most commonly neglected sources of capital in today’s start-up landscape. You’ll be surprised by how many friends believe in your idea, and the only thing you need to do to get them involved in the company is allow them to invest.
There is also crowdfunding, which is quickly becoming the most popular way of raising capital. Crowdfunding lets you raise the capital you need, usually for bringing your products to the market
without losing ownership of the start-up. It is easier to gain capital this way when you have products that actually solve market problems.
Next, we have start-up loans. In the UK, start-up loans are provided by banks, government organisations, and other financial institutions. They are widely available due to the growing start-up landscape in this country.
Start-up loans also don’t require the release of ownership. They are, after all, loans that can be used for a wide range of applications. Since these loans are designed specifically for start-ups, they also come with additional benefits such as mentorship and access to a wider network of start-up owners and industry experts.
The process of getting a start-up loan, however, is still challenging. You have to have market validation and a product that is deemed as having potential. More importantly, you have to be very close to – or already in the process of – your go-to-market phase. To compensate for the more complex application process, start-up loans are designed to be easy to manage thanks to their fixed interest.
As mentioned before, the start-up landscape in the UK is booming. One of the reasons why we are seeing sustainable growth is because of government support in this area. The government has several funding programs for start-ups based in the UK.
The Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) are both popular programs from which you can raise capital for your start-up. They are UK government programs designed for boosting growth and encouraging SMEs. SEIS and EIS have terms that are easy to meet and the programs themselves are incredibly useful. Under EIS, for instance, investors have the ability to be exempted from the Capital Gains Tax or CGT. Investors can also invest up to £1 million per year. Sebastian Newlove, co-founder and director at Antibodies.com, commented “EIS allowed us to fundraise and attract strategic investors to support our research programs,”. As a knowledge-intensive company, Antibodies.com was able to benefit from the £20 million lifetime cap of the EIS program.
R&D tax credits, SBRIs, and other government programs are just as valuable. It is worth noting that a start-up may qualify for multiple government programs and earn capital from them.
VCs and the Conventional Funding Rounds
Naturally, start-ups can raise capital from investors directly, usually by executing a funding round. Whether you want to connect with angel investors or gain serious valuation from VCs, fundraising is part of the process.
Working with VCs in the UK is easier; once again, the healthy start-up landscape is to thank for this. Nevertheless, proven market value, market validation, and a solid business plan are all needed to convince investors to join the start-up.
Series of fundraising campaigns can be executed at different points in your start-up’s journey. Before launching a Series A fundraising, pre-series funding can also be used to bridge the gap in the company’s cash flow and maintain market competitiveness.
There are still a lot of funding sources to benefit from in the UK. Finding capital for start-ups is never an issue with so many funding sources to explore. The real challenge is earning a solid market validation, coming up with products that solve real problems in the market, and generating sufficient interest to qualify for a boost in capital.