Thinking out loud: Funding gap

March 5, 2019

I recently attended the release of British Business Bank’s new finance report. Again there is unused money left as in previous years but still there is a funding gap.

Apparently, not all businesses want money… Over 40% prefer not to use external funding. And this figure remains proportional to the SMEs’ awareness of funding.

Of course, a positive trend is also there. More SMEs become funding-savyy, getting to know various funding routes, but the issue still remains and businesses are still struggling to secure funding.

The key reasons for the knowledge gap are that entrepreneurs lack an understanding of which type of funding is best for certain companies, who to approach and how to secure it.

Of course, the answer could be quite simple and straightforward — come to the Business Funding Show ;)

But I wish things were that simple. Although we provide business owners with the opportunity to meet top financiers, there’s still a great deal of work to be undertaken by businesses themselves. For example, businesses need to be clear about what they plan to achieve, and that will help them to become clearer on their tactical steps.

After that they will be able to see the funding landscape better and realise what the best funding options for them are.

We often see very determined founders who apply to millions of funders when in fact only a handful of these are a fit for them. It is no surprise therefore that this determination doesn’t pay.

Once they have found appropriate funders they should then invest their efforts into making a tailored approach to each one — one size doesn’t fit all. Moreover, there is no size that will fit one’s business growth equally at the various stages.

Hence, if you’re looking for funding, first of all try to understand your long and short-term goals, and then based on what you want to achieve work out how to get there. That will help you work out your funding strategy.

Just to give you some practical examples;

If you’ve spent a lot over the past year or even a few years — Research & Development Tax Credits can be a great solution.

However, if you’re a trendy bakery making biscuits in all funny shapes and forms with a great b2c proposition and plenty of followers and you aren’t so concerned about IP, crowdfunding could be a great solution for you.

And, if you’re just starting out with only an incredible idea and a justified business plan — you can approach StartUp Loans delivery partners like Transmit Startups, who not only will give up to £25K to each funder for up to 5 years but will also provide you with an industry mentor.

However, be careful reaching out for investors’ money too early — your equity stakes are too cheap at the beginning and you might end up losing in the valuation exercise.

For the early stage projects, grants are still a great alternative. The reason I use the term ‘project’ is that grants are given to projects and not companies; hence, an older company with a new project would have a better chance than a younger company with an older ongoing project. In the past year alone there were 20 new schemes launched and there are hundreds of them out there. If you’re uncertain of which one to go for - you might want to hire grant writing specialists like Granted Consultancy or RIFT. But be cautious of dealing with those who charge you upfront with no guarantee whatsoever. None of them of course can guarantee your absolute success in securing a grant but a serious agency will do thorough research of your business first before onboarding you as a client.

Now, back to my previous point regarding equity funding. It’s in fact a great solution where investors take an impressive risk. But trying to raise equity funding too early also puts you at risk. For example, it could close potentially valuable doors for your future far too early. As in my reference to the entrepreneurs who apply to all funders they can find, we often see entrepreneurs applying to angels and VCs whilst they are not yet investment-ready. In case of Angels-level money, businesses are not yet investment-savvy, i.e. they can’t yet secure a promising valuation and that inevitably will affect their fundraising future. In the case of VCs we see that over time, the market keeps changing and puts new requirements on businesses. For instance, 9 out 10 VCs we have on Funding Matches require business to be post-revenue, with some expecting businesses to even be post-profit. The majority of UK investors unsurprisingly want to benefit from SEIS/EIS advantages; they want to see wise teams behind running businesses with actual clients. Which is all common sense. Wouldn’t you want at least this minimal protection of your risks if you put a few million of yours or your investors’ money into a relatively new venture?

So, the best way to approach funding is to use a combinative approach, researching all available options in the market (and in the UK market there are plenty) and applying for them at the relevant stages of your business growth.

Still unsure of your options - why not come and meet funders, lenders and growth support organisations at our March 20th, Funders & Founders; Networking Reception at WeWork Paddington. Learn more and secure tickets here.

Do you have a question? Contact us now!

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