Funding

UK Funding: What is Your Route?

November 9, 2018

We at the Business Funding Show are proud to say that our Investment Conference is an official part of GEN's Global Entrepreneurship Week celebrations, and we are excited about our continued involvement with their network spanning 170 countries, united in the goal of inspiring and promoting entrepreneurship around the globe!

With a specific focus on the business funding industry, we aim to bridge knowledge gap present within the entrepreneurial community in the UK. There is plenty of choice available for all when it comes to funding, but unfortunately, too many business owners are still unaware of the full variety of their options. At our upcoming equity-centred Investment Conference, attendees will be able to learn, pitch and showcase, as well as connect with top equity funders.

In anticipation of our Conference, we have decided to share some insights about the importance of funding. However, in an effort to avoid being biased, we have also considered when certain companies shouldn't pursue external funding, and the preference for a customer-funded model. Depending on your stage, industry, and business model, we think there might be space for both strategies in your business growth toolbox!

Crowdfunding

Crowdfunding can be a way of raising finance relatively quickly. It can help you to generate funds for a project and can also allow a business to market test a product that may only be in planning phase, ultimately helping to promote the business or product before it has launched.

We have seen many companies use crowdfunding to achieve major success, with unicorns Monzo and Revolut having begun their funding journey on Crowdcube and Seedrs respectively. The marketing opportunities created for them on these platforms earned their brands the trust and loyalty of the wider public.

Business Angels

According to the UKBAA recent stat, Business angels in the UK collectively invest an estimated £1.5B per annum and are the country's largest source of investment for startups and growing early-stage businesses. Typical investment from an individual angel varies between £10K and £500K per company per round.

Although angels can make investment decisions quickly, they will still need to see that you have a good business plan before they commit. Many specialise in particular industries, being a potentially valuable source of expert knowledge and mentoring.

The right angel investor should be willing to contribute real value to a business and uphold its sustainable growth, and examples of such partnerships are plentiful, with some of the biggest companies in the world today; e.g. Facebook, Google, PayPal & Airbnb all getting angel investment early on in their life span, setting themselves up for subsequent success.

VCs

VC funding is usually the hardest out of the three to obtain. Investing between £250K and £10M, VCs provide not only big financial capital but also possible future rounds, alongside expert management support and strong connections. VC funding can therefore lift the potential of your business in an exponential way.

It is quite often the last funding destination for entrepreneurs looking for growth, and in certain cases allows great companies to become industry giants. There are many examples of this, including all previously mentioned brands, as well as other household names like Deliveroo, Just Eat, ASOS or Dropbox, and many, many others.

However, VCs are very particular about who they do business with. According to the data from investors' profiles on Funding Matches – a matchmaking service we set up for entrepreneurs to meet institutional investors – the preference amongst VCs for post-revenue businesses is obvious (over 90% stated this as a necessary criterion), with the expected minimum revenue ranging from a few thousands to a few million. This is likely explained by the fact that revenue is the best evidence of traction and market demand.

Moreover, a third of our VCs require businesses to be EIS/SEIS eligible, due to a desire to minimise the risks and losses involved in investment, as it is no secret that only a few investees will bring the desired 5-10x returns.

Analysing funders' preferences of sectors, we clearly see that tech businesses are the number one choice, accounting for 54% of total funders' preferences, with FinTech being the top supported field, followed by Health and MedTech.

Customer-funded business

A long-held notion in entrepreneurial circles is that the way to start and grow a thriving business is to come up with a great 'idea', write-up a convincing business plan, raise capital from angels or VCs, flawlessly execute the plan, and (voila!) get rich! Easy, right…?

But taking into consideration the incredibly demanding VC criteria which we just mentioned – let alone the fact that even after having received VC funding, only a small amount of companies achieve the kind of major growth which VCs seek – we will start to see a very different picture. Entrepreneurs can certainly run into problems when raising angel or crowdfunding money also, where the capital amounts are a lot lower.

The fact is that a large proportion of SMEs never (or rarely) raise external capital, whether this be equity, or even debt or grants. Therefore, perhaps external funding should not be seen as the first port of call for getting nascent entrepreneurial ventures off the ground.

There are a number of big businesses around the globe who decided not to raise external funding, or raised it only after their brand had already become famous worldwide. These include names like Microsoft, Dell, Banana Republic, Dyson & Specsavers.

In his bestselling book The Customer Funded Business, author John Mullins uncovers five business models which make this approach possible:

           - Matchmaker models

           - Pay-in-advance models

           - Subscription models

           - Scarcity models

           - Service-to-product models

Essentially, in each of these five customer-funded models, the entrepreneur gets their hands on their customers' money before having to pay suppliers. That's exactly what Michael Dell did to get his personal computer business off the ground more than 30 years ago. It's also what Bill Gates and Paul Allen did to start Microsoft.

This of course, is not for everyone, and works better for B2C companies with a working product, and a decent amount of traction, rather than those who only have a prototype, or have to undergo long and arduous research and development projects.

However, if one of these five models is appropriate for the business which you want to start, or are already running, relying on your customers for capital can be a very prosperous way forward. The obvious benefit is the avoidance of dilution and unwanted outside influence over your business – only you are in control.

This can go two ways however. If you have a specific vision, and a great team in place, focused on executing this vision, excellent industry contacts, and early customers who believe in your brand, you might be perfectly fine without external help.

On the other hand, if you're lacking any of these things, the relevant experience and network of an angel or VC (more so than their capital), might prove invaluable in propelling your business forward – from this point of view, a percentage of your equity might seem like a small price to pay.

Having the knowledge of the different types of funding available, as well as when and if to utilise them, is a virtue which should be sought after by all entrepreneurs. Ultimately, you as the founder will know whether or not you need help in growing your business, and the Business Funding Show is here to support you along the journey!

The Investment Conference will feature all pillars of equity funding – including accelerators, crowdfunding platforms, business angel networks & VC firms, as well as guest speaker John Mullins, who will discuss the customer-funded strategy.

The event will take place from 12:00-7:30PM on Nov 13th at Cocoon Networks London. Join us to Celebrate Global Entrepreneurship Week in style! Click here to secure your tickets

Do you have a question? Contact us now!

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