Developing a great business takes commitment, diligence, patience and in most cases, quite a great deal of money. Navigating the tricky waters of dialing in your MVP or finding product/market fit is one thing, finding and securing the resources that will allow you to focus and grow is another.�?
Finding financing for your start-up and fuelling the fire of your scale-up with new capital are necessary rites of passage for every entrepreneur, but they can prove to be a huge headache if you don’t know where to look. When you’re in the thick of it, and your runway has a ticking countdown, it can seem that getting funded is more of a full-time job than running your company.
Luckily, there are many ways to solve the problem of access to capital. Also, more and more solutions are popping up every year, helping you put your company out there to attract investment and leverage your assets for loans. Since the dot com boom in the 90s, there has never been such a huge influx of investment capital, such a wide variety of debt funding sources or government incentives for small and medium enterprises.�?
We’ve created this guide to serve as a starting point on your journey. It includes the low down on every form of financing we could think of, who to talk to, where to go, useful links, and more resources from an army of ultra-smart people than you could read in a lifetime.
Now to get to the first important question:�?
Do you need funding?
Contents
startup funding via bootstrapping
Despite the current bull run in start-up investment, not every company needs to get funded.�?
For many businesses, the development time and investment are so large, that there is no revenue possible for a very long time. Other business models can work just as well (or even better) bootstrapped. Keeping the business lean and growing organically is not going to be Blitzscaling, and you won’t be in any danger of overtaking Uber any time soon, but holding on to equity, maintaining control and having only your own skin in the game can work wonders in the long term.�?
It might surprise you to know that most start-ups (by far) are bootstrapped. Founders cash and savings represent a good chunk of that seed capital, but bootstrapping doesn’t just mean going for the nuclear option on piggy banks.�?
One way of bootstrapping your startup is by selling your services. As a start-up founder, you’re very probably talented in at least some key area and have knowledge and expertise to trade.�?
Figuring out the monthly cash needs of the business is the first step, followed by plugging your talents into the demand for them so you can generate the needed cash. This could be anything from web development, copywriting, SEO, marketing, PPC to programming and even server admin work. Anything you can do and sell for a good price is potentially a good funding mechanism for your startup. It pays to think creatively and test the waters with different freelancing gigs.�?
At the same time, it pays to consider this:�?
How much money am I willing to sink into this business?�?
If you go the freelance financing route or just funnel money from your day job into the new venture, it may be wise to keep tight books on how much you’re spending on the business and how much you want to sacrifice to reach your goals.�?
And the good news on bootstrapping - it’s the ultimate proof of concept. Even if you do end up raising money from investors in the end, the fact that you have a working, revenue-generating business that you’ve created sustainably is a great way of getting savvy VCs interested. There’s nothing sexier than a business that’s already making money.�?
useful resources on bootstrapping (well)
The Incredible Secret Money Machine
This cult classic of the start-up world is the bootstrapping manual. This book was created to offer guidance to the technically or creatively self-employed, but the ideas are far reaching for businesses as well. The examples from the 1970s’ are dated, but the principles aren’t. Kevin Kelly has a few excerpts in on his Cool Tools blog, but you can find the whole book as a free .pdf if you scroll to the bottom.�?
A Masochist’s Guide to Bootstrapping Your SaaS Startup to Profitability
Geared towards SaaS, but you’ll feel Dave’s pain and benefit from his advice regardless of your sector. Great points on patience, growth tools and how to stay sane while bootstrapping.
The Definitive Guide on How to Bootstrap Your Startup
Neil Patel bootstrapped himself from humble SEO consultant to CEO of several multi-million dollar businesses. He’s made every mistake you can make, and also a whole lot of right moves. Neil moves, that’s his MO and he has quite a few great nuggets of insight about staying lean, outsourcing and branding.�?
A Step By Step Guide To Startup Bootstrapping By Self-Funding And Pre-Selling�?
Abdo Riani has been involved in over 50 start-up launches and runs StartupCircle.co. This guide is chock full of highly actionable advice on how to do the seemingly impossible, bootstrap your startup to success without harassing your mom for her savings and not getting into a dark pit of debt.�?�?
Looking for funding for your business?
Our team has been working with investors, debt finance specialists, and advisors for years, so we know the market better than anyone. If you want a no-obligation recommendation for a specialist that fits your business, simply contact us.
the VC basics
the book: Venture Deals by Brad Feld & Jason Mendelson�?
There are surprisingly few books dedicated to teaching you everything you need to know about venture capital. There is one, and it’s Venture Deals. This book was written from the perspective of the VC with the entrepreneur in mind. Feld & Mendelson take you from pre-seed to exit, with a focus on the deal and how to make it work for both you and your investors without falling into the many, many traps that the fundraising journey involves.
the playbook
The Startup Playbook by Sam Altman. This little web repository is the distilled knowledge of Y Combinator’s famous investment team, in bite-sized chunks and with beautiful illustrations. In the beginning, this was the information package companies received when they became part of the Y Combinator universe, but now it’s in the public domain and any entrepreneur or curious cat can have a look at the accelerator’s accumulated wisdom.�?
the pitch deck
This is how you get your foot in the door and it’s somewhere at the intersection of an art and a science. You could tell your life’s story and present about 100 slides, because there is just so much to say, but keeping it brief helps both you and your potential investor. If the proposition is so wishy-washy that it needs seven slides to get to the point, it’s a good sign that it might need some sharpening. The structure of a pitch deck is now pretty much standard practice, so we wouldn’t advise you to mess with a good thing too much.�?
StartupGrind’s The Quick and Dirty Guide to Creating a Winning Pitch Deck is a good starting point as it outlines the classic structure and the major pitfalls.�?
Also, have a look at 30 of the most successful heavy hitters’ first pitch decks for some inspiration. And you could do worse than use Peter Thiel’s no-nonsense pitch deck template.�?�?
the term sheet�?
This is the key document you are working towards with your investors and it’s complicated. The legals on venture deals are probably the most painful and important elements to keep an eye on. Even though it’s not work on your core business and it’s often so boring as to cause spontaneous eye bleeding, you will kick yourself down the line for not being in the know early.�?
Here’s a little intro to what you can expect in the straight-forward Term Sheets 101 from Menabytes. For more details, Venture Deals is a great source, as is the more in-depth Venture Capital Deal Terms by De Vries & Van Loon.�?
valuation
If the term sheet is the most important document, your valuation is the most important number. This figure and how you got to it can position you anywhere from ultra-competent to ridiculous in the eyes of a potential investor. At the same time, a valuation that is too low means you’re giving away too many shares, while a valuation that’s too high (if for some reason undetected by your VC - also a problem in itself) means you’re giving away too few. So, making reasonable assumptions and using a considered valuation method are essential to getting to a number that’s realistic.�?
There are many ways to do a valuation for a seed stage company, but Joachim Blazer at Hackernoon boiled it down to 38 (yes) easy steps. You might even experiment with this Valuation Calculator from Seedrs, much more accurate than the horoscope, but probably not something I’d mention using in a conversation with an investor.�?
a note on venture debt
It might surprise you to know that around 10% of the global venture cake is not comprised of equity, but debt. As part of an equity deal, often VCs will offer a company additional funding as venture debt. This helps to reduce the dilution of the founding members (or postpone it until a Series B+ round) and but can still offer investors significant returns. Quite significant, as the average cost of venture debt is around 20% of the loan value over the typical two year period.
In most cases, this form of financing also has covenants attached and warrants for liquidation preferences that might result in a multiple of the initial cost.�?
If the company is in a sustainable growth phase, is generating a lot of revenue and has stopped tinkering around with product-market fit, venture debt may be a great option. The better the company is doing, the less attractive a sale of equity is looking for the founders, as simply being short on cash isn’t a good enough reason for further dilution.
Great resources for understanding Venture Debt and when it pays off are this basic primer from Howard Marks and A founder’s guide to venture debt by Sarah Marion.
the VCs - these are the UK’s top venture capital firms
This list covers both early and later stage VCs, while many of the firms cover the whole spectrum from seed to Series B+. As always, it pays to research your target VC well and it’s best to get a warm introduction.�?
So, please don’t look at this like a mailing list. Each of these companies is looking for a very specific type of investment, be it in terms of sector, size, growth trajectory, B2B/B2C orientation, etc. Trying to talk to anyone with a bag of money and a .vc domain is a giant waste of everyone’s time (including yours).�?
A great source to delve into if you’re reserching VCs on the early-stage end of the spectrum is Fred Destin’s The definitive guide to London Seed Venture funds ( Sep 2018 edition). Fred is the founder of Stride.VC and a veteran UK venture capitalist with investments in Zoopla, Deliveroo, Pillpack and Secret Escapes. The guide sums up the basics about each VC fund and splits the pack into generalists, specialists and company builders (the pre-seed, even pre-company mavericks). Fred has a no-nonsense style, is ultra-knowledgeable and is also one great writer, so this guide is about as good as it gets.�?
- Passion Capital�?
- Octopus Ventures
- Balderton Capital
- Seedcamp
- Draper Esprit
- Initial Capital
- DN Capital
- Startup Funding Club
- Atomico
- Oxford Capital
- Fuel Ventures
- Albion
- Anthemis
- Farview Equity Partners
- Downing
- Episode 1
- Notion
- SAATCHInvest
- Forward Partners
- First Minute Capital
- Kindred Capital
- Playfair
- ProFounders Capital
- Ascension
- Pentech
- Walking Ventures
- Mercia�?
- Augmentum�?
- FrontlineVC
- ForceOverMass�?�?�?�?
- Beringea
- Illuminate
- Index Ventures
- Entrepreneur First
- London Venture Partners
- Accel
- Northzone
- Delta Partners
- Hoxton Ventures
- Crane
- Dawn Capital
- Piton Capital
- Mosaic Ventures
- London Co-Investment Fund
- Spark Ventures
- Talis Capital
- Beacon Capital
- Business Growth Fund
- Felix Capital
- JamJar Investments
- EC1 Capital
- Allegro Capital
- LocalGlobe
- Sussex Place Ventures
- Exponential Ventures�?
- Connect Ventures
- Amadeus Capital Partners
- Scottish Equity Partners
- MMC
- Stride VC
- Frog Capital
- Charlotte Street Capital
- Ballpark Ventures�?
- Wellington Partners
- Pi Labs
- Rook’s Nest Ventures
Incubators and Accelerators
While the line between Incubators and Accelerators is often blurry, they can be differentiated by the growth stage of the company: Infancy - Incubators (easy), Adolescence - Accelerator.�?
Both of theses types of programmes provide advice, mentoring, often a coworking space and occasionally also some amount of capital. Incubators tend to work with startups at the earliest stages, sometimes at a point where the company is still refining its proposition and doesn’t require capital yet. Accelerators, on the other hand, often fish in a pool of later stage companies which have a bit more meat on their bones. Often, the application process is fierce and for accelerators like Y Combinator or Techstars, only 2-3% of applicants are accepted.�?
Though it might seem like an easy step to just throw yourself into an incubator, it might be good to consider the options carefully before you make any commitments. Incubators will most often want an equity stake in the company, and in that way they are acting like VCs - you will need to negotiate. At the same time, not all incubators are alike. Selecting an incubator that’s relevant for your business, has a solid track record and can open doors for you in terms of the right network is key and often worth giving up a few percentage points. Giving up equity is a cost, but it’s also a tool to get people to have some skin in the game in the success of your company.�?
If you’re at incubator stage, it might be a good idea to have a look at Startup School - a free 10 week course on the basics of entrepreneurship from the mothership, Y Combinator. The Library on this website is probably the single greatest reading list in entrepreneurship history, chock full of hard earned advice and deep wisdom from the greats of Silicon Valley.�?
London’s best incubators & accelerators
- Hatch
- State Zero Labs�?
- Entrepreneur First
- The Imperial Incubator
- RocketSpace
- JP Morgan In-Residence�?
- White Bear Yard
- IDEA London�?
- Seedcloud
- Tech Hub
- Cylon
- FFWD
- IncuBus London
- Activate
incubators and accelerators outside London
- Ignite - Newcastle
- Seedbed - Devon
- C4DI - Hull
- FirstBourne - Bournemouth
- Catalyst - Southampton
- Entrepreneurs for the Future - Birmingham�?
- Accelerate - Cambridge
equity crowdfunding
Equity crowdfunding means raising funds from many individual investors by selling securities like shares (or convertible notes) in a company that isn’t listed on a stock exchange. Investors stand to make a profit if the company is successful, but can also lose their investment if it flops.�?
For companies, equity crowdfunding is a great opportunity to not only gain investors, but also comments, feedback, and essentially a small army of incentivised advocates that will strive to make the venture successful. This adds exposure and credibility to the company, and often the initial investors will follow up their investments in further rounds. Platforms like SyndicateRoom ensure pre-emption rights as a standard, where the initial investors can protect themselves from dilution by getting right of first refusal for shares in subsequent funding rounds.�?
This comprehensive guide to equity crowdfunding is skewed towards an American audience, but the main points hold (ignore the regulation part, the UK is quite different on that point). To have a look at the UK’s regulation on crowdfunding, check out this post by Sarah Kenshall at Burgess Salmon.
the main equity crowdfunding platforms�?
Seedrs
Crowdcube
Crowdfunder�?
rewards-based crowdfunding
In rewards-based crowdfunding, individuals or companies create a pitch to raise small amounts of capital from many participants in return for specific rewards if the company meets its funding goal. The rewards are usually small and proportional to the funded amount. In most cases, the reward is the final version of the funded product.�?
The most typical examples of this model are the platforms Indiegogo or Kickstarter.�?
The main advantage of rewards-based crowdfunding is the fact that the company does not need to lose equity. It’s also an ideal way to test market demand for a B2C product, especially if it’s visually demonstrable. The challenge is that for a campaign to succeed, you need to create a strong and convincing brand first. Your video pitch is the most important asset in this fight as is how and where you distribute it. If you’re a strong marketer and have a consumer oriented product idea, rewards-based crowdfunding might be the best choice.�?
the main rewards based crowdfunding platforms
Kickstarter
Unbound - Rewards-based publishing platform�?
Patreon - Rewards-based subscriptions for creators
debt financing�?
Debt has a lot of sinister connotations, but in many cases it’s a better idea than selling more equity or facing stagnation while bootstrapping. I won’t go into all the wonderful sides of debt funding that we often forget about, because I’ve already done that in: Why debt financing might be exactly what your company needs. Long story short: don’t dismiss debt. It’s often a low cost way of growing your business while also getting to keep it.
Need Help?
Fundsquire is a UK Debt Funding Specialist, we can point you in the right direction.
bank loans�?
For pre-revenue startups, getting a bank loan isn’t something that’s on the main menu of options. Most banks like to see money coming in and mentioning that you’re going to raise a series A sometime in the future leaves your average banker pretty cold.
Despite the seemingly bleak outlook for startup bank finance, there is still hope.�?
The British Business Bank’s Enterprise Finance Guarantee (EFG) gives lenders a 75% government-backed guarantee on the facility balance that’s still outstanding. There are a few application criteria, like showing a great track record in getting VC finance and being surrounded by trusted, high-profile advisors.
The EFG guarantees growth loans from £1,000 to £1.2 million, but the emphasis is on growth here, as these aren’t bailouts.
A company has to work with a pre-vetted lender and the loans would have to be initially rejected because of insufficient security and no other due diligence requirements.�?
While some banks will offer you a small overdraft facility based on your personal credit score, most banks will often not consider extending credit for companies that aren’t generating significant revenue.
That’s why many founders default to using personal credit cards to finance their start-up at the beginning. Some even go the riskier route and get a personal loan borrowed against an asset, like their house. Though very common, this form of financing should be carefully considered as the downside is huge.�?
alternative p2p lenders�?
While a bank may be the first thing that comes to mind when thinking of loans, some of the most active lenders in the SME space are something else entirely. Alternative lenders have sprung up to cover the whole lending market, offering secured and unsecured loans from a few thousand to quite a few million. This new breed of lenders is leveraging machine learning and various API integrations to get data straight from the source and profile their clients with a greater degree of precision than the old school banks.�?
Virgin Loans, though not exactly a bank, offer loans from £500 to £25,000 for 6% p.A. and they offer start-up friendly conditions and quite a solid range of support and mentorship.�?
Companies like Spotcap and Iwoca can lend up to £200,000 and £250,000 respectively with rates ranging from 1-3%/month.�?
ThinCats is a lender that specialises in the upper half of the market, offering loans from�? £250,000 to £15 Million.�?
Peer-to-Peer lending or debt crowdfunding is another spin on the more well-trodden equity crowdfunding. For startups that are already generating some revenue, P2P lending could be a great source of low cost finance. With rates from 5-12% APR, P2P lending is on the lower end as far as the cost of capital is concerned.�?
the main p2p lending platforms�?
Growth Street
Archover�?
r&d finance
R&D finance or R&D tax credit loans are a completely new type of debt where companies who are eligible to receive R&D tax credit loans can access them earlier in the form of a secured loan. R&D tax credit factoring is very similar to invoice factoring. The difference is that the “invoices” that are discounted are based on predicted payments from HMRC, not clients.
This type of finance works best for technology heavy companies who are either pre-revenue or pre-profit and wouldn’t be attractive for banks or other alternative lenders because they lack profitability, large receivables or assets like equipment and land. What these companies do have is significant investment in research and development, and now they can use that as an asset.
Because the R&D tax credit is a predictable source of cash for many UK companies, but very slow to materialise, lending against it makes sense.
For a pre-revenue company, it can seem like selling equity is the only viable funding option. R&D tax credit finance can be a great alternative, as it leverages an asset that will materialise in the future to fund the cash needs of the present. This can be a good way of protecting the current position of shareholders and shielding them against dilution.
The best resource on the how, what and why of R&D tax credit finance is our very own�?The Complete Guide to R&D Tax Credit Loans. Not to brag, but it’s as complete as it gets.
And if you think you might be eligible or are just interested in how it works, don’t be afraid to reach out. We’re always happy to help or at least point you in the right direction.
invoice discounting
A classic of commercial finance, invoice discounting is how many a retail business ensures a healthy cash flow. For many startups, invoice finance doesn’t even register as an option. But for companies that have high implementation costs and long timelines, it might be helpful.�?
Companies like MarketInvoice have brought speed, a considered use of technology and user friendliness to invoice discounting, and now it’s more simple to access than ever.
the main invoice discounting platforms�?
government funding
Though most of the startup and scaleup funding in the UK is done through private means, there is quite a big slice of government funding that goes to funding innovation and regional development projects.
Though the money on offer can often sound quite enticing, the downside is that the application process is laborious, the competition is stiff and the money comes with many strings attached. Actually, it’s kind of like VC funding, venture debt or anything else outside of your grandma’s piggybank.
Here is our roundup of the most important government gunding options for startups and scale-ups in the UK.
R&D tax credits
R&D tax credits are often the most easy and accessible form of government funding for startups, especially for those with a tech component. In short, companies can access up to 33% of what they’ve spent on eligible R&D activities as a repayment from HMRC after their yearly accounts are filed. This includes salaries, contractor invoices, consumables, software, almost everything that a high tech company would spend on development. This refund can amount to anything from a few thousand up to several Million pounds, so it’s essential you get interested in R&D as soon as possible on your startup journey.�?
Claimable costs under the R&D tax credit scheme are subcontracted developer or engineering costs, direct staff costs, and software and consumables that were indispensable to creating the R&D.
Ineligible costs are infrastructure-related, and this includes everything that isn’t directly involved in the R&D process.�?
The most complete guide I could find on how to DIY your R&D tax credit was created by our friends at GrantTree. And if you think DIY-ing complex government tax documents is a bit of a headache, they’re happy to step in and take care of everything. This is also essential if you’re seeking to apply for R&D tax credit loans, as the quality and diligence of the R&D provider is one of the cornerstones of the due diligence of your lender.�?
innovation grants
Innovation Grants are available for many emerging areas of science and technology and most grant calls are sector specific. At the same time, there are open competitions with significant “prize money”, but because of their openness they also tend to be the most competitive. The two main bodies that handle innovation grants are Innovate UK and Horizon2020 (a Europe-wide initiative, so it might be less relevant in future).�?
If you have a highly innovative technology that needs funding to be fully developed and go to market, the best way to explore the often complex waters of innovation grants is through an advisor. Our partners at GrantTree offer comprehensive advice on what might be available to you and free consultations on eligibility. The caveat here is that for a technolgical advance to be eligible for innovation grant funding, there has to be innovation present in the core aspect of the technology, not just in the fact that the new product or service is an innovation in a specific market. Think “new blockchain algorithm with innovative applications” not “blockchain innovation in the cat food market” (using pre-existing technology). So, for the sake and sanity of the grant advisors, it’s best to only contact someone if your technology is the key innovation rather than just the business concept.�?
regional growth funds
There are quite a few local growth initiatives run all across the UK. For companies looking for funding of less than one million, it is well worth contacting your local RGF program manager. They can tell you all about the eligibility criteria and any open calls that you can participate in.
UK Government Regional Growth Funds�?
SBRI grants
The Small Business Research Initiative (SBRI) runs a series of competitions that are set up with the purpose of allowing the UK public sector to have access to the most cutting edge technology. Essentially, an SBRI is a government contract with an innovative company for a solution, similar to a tender offer.�?
patent box
Under Patent Box, a company that owns a patent from either the UK or an EU based patent office can apply for a reduced level of Corporation Tax (10%). This is a significant tax break that also applies to companies that own certain medicinal or botanic innovation rights.�?
startup loans
Start-Up Loans are a government-backed financing scheme that aims to help entrepreneurs just starting out. The interest rate is 6% and companies can borrow up to £25,000. While it’s no multi-million pound Series A, it might be a useful addition to a company that’s just taking off without having to sell equity in the first instance. Applicants who are successful also have access to some mentoring options with successful entrepreneurs.�?
We hope this guide is useful and you find lots and lots of (monetary) value in it. If you think we’ve missed a spot, feel free to berate us in the comments and we’ll complete it. Beyond just having an awesome guide, our idea is to have this be a work in progess, constantly updated and improved with new, useful information.
If you’re curious about R&D finance or government funding in general (or, to be honest, almost anything on this list) feel free to contact us at Fundsquire. We’re always happy to help and at least point you in the right direction.
