While many companies fuel growth organically through generating revenue, depending on your sector, competitor landscape and business model, you may look to seek external funding at some stage of your journey. But what options are there, and when should you start thinking about it? Mark Sykes, Head of BDODrive Accelerate and Tech Nation Rising Stars judge gives us the lowdown on funding routes for early-stage tech companies. BDODrive are partners of Tech Nation’s Rising Stars competition.
Most businesses only consider funding less than one month before they need finance, and search engines remain the main starting point for answers. Leaving it to the last minute can lead to panic decisions, more expensive solutions and outcomes which restrict longer term growth.
Giving yourself more lead time when considering options will likely only lead to better opportunities, and more of them, but also options better suited to your stage of evolution. And perhaps most importantly, companies who take time to consider are less likely to give away equity too soon.
What kind of funding do we need?
The first thing to do is to clarify what you want the funding for and over what timescale. Once you’ve figured that out, you then need to consider the three core funding buckets: equity, debt and ‘free’ money, and work out which one will work best for what you require.
Equity finance, where you give away a portion of your company in return for investment, needs to be considered with care. Entrepreneurs who give away too much equity too soon could find themselves becoming minority shareholders during later rounds.
Angels: For early-stage enterprises, business angels and friends and family can be attractive. Entrepreneurs receive support in the form of business expertise, as well as a cash injection. Whenever you offer shares, it’s essential to have shareholder agreements and a framework for decision-making and settling disputes, even with family members.
Crowdfunding: Equity can also be raised through crowdfunding, particularly by startups with a direct business to consumer product offering, where incentives, in addition to shares, can be offered to investors. As a bonus to the capital, a successful crowdfunding campaign can create much needed buzz and publicity around your product, and create (literally) invested users championing your brand through word of mouth. Some caution should be taken though, as often businesses can find themselves overvalued. This can have an impact on future funding rounds, and concern over the need for increased investor protection might trigger tighter regulation within the crowdfunding industry in the future.
Venture Capital: Moving up a gear brings us to venture capital (VC) – seen as “risk money” due to its focus on venture and high-growth businesses. Businesses can raise large sums, but need to produce robust financial and growth information and face more intense scrutiny. Even startups at pre-revenue stages may attract backers, if they have evidence of market traction and possess a management team with a proven track record for building scalable businesses.
Private Equity: Finally for the proven businesses with real market traction, private equity (PE) is a major source of growth money and business exit. There is overlap between PE and VCs, but businesses backed by PE generally have strong proven products and robust financials.
Your business should also look to secure Advanced Assurance for either the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) so investors benefit from the tax relief available. This will make your business much more attractive to investors, but comes with strict qualifying criteria – so professional advice should always be sought.
The second funding bucket, debt finance, has multiple forms. Although there are many debt funding options on the market, these can be hard for tech businesses to access due to lack of assets and often unproven revenues. Options range from merchant cash for businesses selling direct, invoice finance to reduce the time from invoice to cash, and asset-based finance for buying equipment – they all represent viable options. For more established businesses, some banks offer venture finance, but these are aimed at proven technology.
New debt models, such as peer-to-peer lending, fill the need for many. Regional options also exist, such as the Northern Powerhouse Investment Fund, with small loans often supported through unsecured personal guarantees.
A wide range of grants and incentives exist, but the list is extensive and can be time consuming to source and apply for. Alongside the likes of Innovate UK, there are local government or regional pots to stimulate growth in your region or encourage international trade. If funding research is your aim, you could consider Knowledge Transfer Partnerships (KTPs) with universities which will give access to research capability.
The ‘free’ category also includes your own cash from savings or part-time work, or revisiting the way you charge for services or incur costs to adapt the timings of cash flows.
Finally, don’t leave ‘free’ money on the table and make sure you claim research and development tax credits. Even abortive projects can qualify. Businesses yet to make a profit can receive a cash refund from HMRC, while profit-making businesses gain enhanced tax relief.
Where we can help
With so many options available, it can be useful to get help from those who’ve done it before, and at BDO our services can offer just that. We regularly help make introductions to both angel syndicates and high-net-worth individuals with capital to invest in seed-stage businesses, and offer our services in assisting with finding the right grants and incentives schemes available to early-stage tech companies.
Additionally BDODrive delivers Accelerate workshops to help businesses identify their most appropriate funding options, and prepare for investment (email for details).
This Autumn, BDODrive and Envestors are running a UK-wide roadshow of free events, with the opportunity to learn more about the equity and state sector finance options available for growing businesses, so do come along and meet us at an event near you.
And later down the line our outsourcing servicescan help deliver reliable financial information to give investors’ confidence around business performance, and allow you to focus on business growth.
Above all though, remember to start looking at this stuff before you need it, in order to get the best deal for you and your business. There’s no harm in starting conversations and application forms even if think you’re not going to need them, so that they’re there if you do. As Daniel Kahneman would say, sometimes you need to ‘think slow’, in order to go fast.
Applications for Rising Stars are now open. Apply today.
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