It is undeniable that the UK has become a centre for startups and entrepreneurship. In 2017 alone, 589,000 new businesses were launched across the country – marking a 22% rise on 2012. And even more impressively, in the past five years an impressive 3.5 million companies have been founded across the country. Below Total Business hears from Salvatore Minetti, CEO and Co-Founder of Prospex.ai, who discusses the prospects of investment and what might be right for your business.
With an abundance of investors on the lookout for new businesses to grow and nurture, there lies a wealth of opportunities for entrepreneurs looking to take the plunge and start their own business. In fact, it is this abundance of financial support that has proven important in encouraging entrepreneurialism in the UK.
Given the range of funding options readily available – from private sector funding like equity financing to public sector investment schemes – the task of deciding which form of capital is right for a particular business can be especially daunting.
There are a number of key lessons that entrepreneurs should keep in mind when raising investment for their startup. And as the CEO and Co-Founder of Prospex.ai – a company that has just launched a crowdfunding round on SyndicateRoom – I have become well versed in the challenges that typically face startups when attempting to run a successful crowdfunding round.
Making the right decision between debt and equity finance
Private funding options can largely be divided into either equity or debt investment. While both can deliver promising returns, there are key aspects that business owners should be aware of when choosing which route to take.
Debt financing is widely available for small business owners and is a popular option for many entrepreneurs. It works in a similar fashion to a traditional loan, whereby the company accepts finance from an investor – be it an individual, group or company – in return for agreeing to repay the total sum with interest over time.
This form of finance is particularly popular as it is considered relatively straightforward, low-risk, and allows owners to maintain full control of their business. However, the repayment of the loan can take a toll on fledgling companies that do not yet have a healthy turnover.
Unlike in debt financing, equity financing involves ceding a share of the business to an investor which entitles them to a share of the overall profits. Positively, this also means that business owners aren’t faced with steep interest rates and stringent repayment terms.
Equity finance can come from be sourced from seasoned angel investors, venture capitalists and equity crowdfunding platforms. Like debt financing, this is also a popular option for small business owners seeking the funding they need to grow their business.
Importantly, this form of finance has the added benefit of offering expert insight from investors with a wealth of experience and skills. With a personal stake in a company, these investors are often much more willing to share their expertise to help a business grow – giving startups and small businesses an added advantage in this competitive climate.
Regardless of what type of investment is eventually chosen, it is important for entrepreneurs to carefully weigh up their options and consider the pros and cons of both debt financing and equity financing before making this critical decision.
Another finance option to be aware of is government-backed funding – an option often overlooked by small business owners. In reality, there are several government programmes which can provide a great source of growth capital for entrepreneurs.
The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) are two examples of government-backed initiatives that aim to support the growth and development of small businesses and encourage entrepreneurship. Introduced in 1993, the EIS initiatives channelled £1.8 billion worth of investment into 3,470 UK SMEs in 2016-17, with investors receiving tax breaks in return for backing scaling companies. The schemes thereby encourage private investment into UK startups and early stage businesses.
How much money do you need to raise?
Entrepreneurs often face the pressure of raising the most amount of money that they actually need. While there may be plenty of news stories about successful high-profile funding rounds, entrepreneurs need to be realistic when setting their fundraising goals. Trying to secure massive amounts of investment can in fact be counter-productive. Instead, setting out clear targets before launching a funding campaign will establish exactly how much external investment is required to meet your business milestones.
Given the UK’s palpable entrepreneurial spirit and positive investor sentiment geared towards young companies, there are some fantastic opportunities available for entrepreneurs looking to make their mark. This is particularly true when it comes to funding. Taking the time to decide what type of investment is the best fit for your startup and planning exactly how much capital you will need to reach your business goals are therefore key to securing the right funding to successfully scale your startup.