Guest comment from Steven Mooney
Small businesses act as the backbone of the UK economy, significantly contributing to job creation, fostering innovation and promoting diversity. Nevertheless, contemporary start-ups face difficulties stemming from turbulent economic conditions, a lack of government support and rampant inflation, all of which limit their ability to secure the necessary funding.
The Government announced the SME’s action plan earlier this year outlining how the Government plans to support small and medium-sized businesses over the next three years and more recently launched an inquiry into their financing.
It is evident that more support is necessary and, as economic pressures make securing funding harder than ever, awareness around the various strategies entrepreneurs can use to raise capital for their businesses is vital.
Firstly, there’s the importance of Networking, which can play a crucial role in securing funding, so going out of the way to build relationships with investors can ultimately enhance trust, credibility and facilitate access to further knowledge and resources. Conducting thorough research, attending industry events and staying in regular contact can too present a plethora of benefits. But in terms of attracting investment:
Crowdfunding
One of the most popular ways to raise necessary funds to jumpstart a business is through crowdfunding. It emerged as the main source of funds for digital projects between 2009-2015, proving itself as the entrepreneur’s first choice. The widespread use owes its popularity to its unparalleled accessibility, the sites being easy to use, as well as being able to harness the power of the internet to attract international investors from across the globe.
Think of a scenario where an innovative tech start-up wants to develop a mobile application that revolutionises the management of personal finances. Traditional sources of funding, for example, venture capital firms or bank loans, may prove inaccessible due to the untested nature of the business venture.
In such a scenario, crowdfunding connects the start-up directly with a vast array of investors interested in the venture’s fintech solutions, caught by a clear and engaging pitch.
Angel Investing
Angel investors are able to provide capital to a business in exchange for convertible bonds or shares in a company. Many of the biggest names in tech today, including
Yahoo, Google and Facebook, have received substantial funding from angel investors.
Venture Capital
Venture capitalists can funnel significant amounts into young businesses with high growth potential. Primarily taking on a leading role during the second funding round once the company has already amassed some resources for their product development and needs a boost in order to continue its research and development work.
Consider a scenario where a biotech start-up has secured seed funding and commenced initial product development – as the venture progresses and displays promising results, it may reach a point where additional financial backing is necessary to sustain the momentum of its research and development. At this point, venture capitalists step in, their expertise and capital providing the necessary resources for the start-up’s continued growth. Note that venture capitalists also sometimes step in at the early stages of the development.
Typically, upon gaining a venture capitalist’s contribution, there are high-performance requirements on the side of the entrepreneur. Though venture capitalists do not expect equity ownership like angel investors, they do expect high returns on their investments. Therefore, it is necessary to have a well-thought-out business plan before reaching out to venture capitalists.
Bootstrapping
This is a great way to raise the capital needed for a young business without surrendering any portions of equity and without the scrutiny of venture capitalists. The method is one that requires businesses to harness their own resources – for example, pulling cash out of their savings account or mortgaging some of their assets. According to research by the Ewing Marion Kauffman Foundation, self-funded companies expand their income more quickly than those which receive venture capital funding – bootstrapped start-ups have an average growth rate of 20 per cent per year.
Small Business Loans
Securing a microloan for your business can prove beneficial in the long run, with inherent advantages, such as favourable interest rates, flexible repayment terms, as well as the potential to establish a positive credit history. Loans are one of the most sought-after business funding options as gross lending (excluding overdrafts) to SMEs by all UK banks in 2022 was £65.1 billion, increasing by 12.8 per cent from £57.7 billion in 2021.
Innovation Grants
These are funds given by an entity, such as the Government or a grant funding institution, to businesses presenting an innovative project or new product linked to public benefit. Unlike business loans, they do not have to be paid back.
Funding bodies, such as Innovate UK, are key players in supporting innovative ideas and business growth and cover a variety of cost-centres including staff costs at a rate of up to 70 per cent if you are an SME.
Small Business Administration (SBA)
Government programmes, such as the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investing Scheme (EIS), can be a viable method, particularly in light of the recent tax relation for emerging businesses in the country.
Some 3,455 applications for EIS were received between 2021 and 2022 in the UK, of which 2,510 or 73 per cent received approval. Similarly, 2,760 SEIS applications were received in the same period, of which 1,970 or 72 per cent were approved. These numbers attest to the strength of the British business sector, illustrating plenty of room for growth but also the presence of the programmes designed to foster such development.
In terms of raising funds for a growing start up, there are plenty of options too:
Pre-sales
Offering clients the possibility to pre-order products before they hit the market gives businesses visibility while helping to win over a number of clients before the launch. In fact, companies with strong presales capabilities consistently attain win rates of 40-50% in new business and 80-90 per cent in renewal business.
Competitions
If you’re running a creative enterprise, active engagement in competitions presents a beneficial way to procure the funds. Business competitions provide a platform for showcasing enterprises, amplifying its visibility, leading to enhanced recognition and increased opportunities for securing financial resources. Simultaneously they foster creativity and innovation in business.
Partnerships
Partnering with key players in the industry – from suppliers to distributors and technology provides that complement offerings – is a way to propel a business to the top. Through engaging in these partnerships, entrepreneurs can tap into a network of established players, access valuable resources and capitalise on market expertise and mutually beneficial alliances.
Incubator and Accelerator Programmes
Start-up incubator and accelerator programmes are designed to offer emerging businesses easy access to resources, funds, and the necessary guidance for growth. Incubators and accelerators support businesses more than just financially – they also provide mentorship and specialised leadership/entrepreneurship training, equipping business owner with necessary skills to successfully navigate the landscape. The programmes also facilitate the foundation of networks, fostering valuable business connections.
SMEs come up against a number of challenges, including navigating economic uncertainty, securing access to finance and contending with market competition. However, they play a crucial role in fostering economic growth in UK and therefore addressing these challenges is imperative.
Steven Mooney is CEO of FundMyPitch