As UK start-ups rush to be a part of the digital revolution, the choice of funding options is increasingly important. Digital businesses have boomed in recent years, as the start-up costs for a business idea based around a niche-marketed website or a brilliantly intuitive app are relatively low compared to the profits to be made. The app-based taxi company Uber is one such global success story that has used innovative technology to disrupt the market and rewrite the ground rules in their favour. However, while initial start-up costs may be affordable, taking your idea to the next level and fulfilling its profit-making potential will almost certainly require significant investment, whether that’s after six months or a few years down the line.
Happily, funding is now far easier to acquire than it was 4-5 years ago in the immediate aftermath of the global financial crisis. The expanding alternative finance industry and the rejuvenation of the venture capital sector mean that now it’s about choosing the funding option that’s right for your business, rather than grabbing the first opportunity that comes along.
Funding from a VC is a good option if you need major funding and foresee 2-3 years before you reach your goals. Venture capitalists inject large sums into a business they anticipate will gain a significant market share, but this means giving up a large chunk of your equity and with it, your control. This doesn’t matter so much if you ultimately intend to sell your company on at a profit. In fact, if you take on major VC investment this has to be your goal as this is what every VC will push you towards so that they can realise their profit. If you want to keep control of your company, especially in the long term, you should probably look elsewhere.
Bank loans are the most straightforward way of financing your business, but they can be hard to come by for start-ups as new companies usually lack collateral, a significant steady revenue stream and a proven track record. Banks don’t provide the mentorship and coaching that a VC brings, but a business loan can get you the capital you require without ceding control to an outside party.
The UK government has several schemes to help small businesses, many operating under the auspices of the Technology Strategy Board. This agency aims to stimulate research and development into products and processes with commercial potential, with various funding options including loans and grants. Applicants need to show innovation- defined as using new ideas to meet the needs of customers- as well as demonstrating commercial value.
Other options include angel investors and crowdfunding, but these are of more use for smaller sums. Nevertheless it’s worth remembering that a good business plan, solid fundraising strategy and a steady revenue stream are more important than raising huge amounts of funding off the bat as a status symbol. Ready cash can give you many business advantages and the means to grab opportunities when they come your way, but securing funding costs, either in interest payments, equity or control. Choose your investors wisely, as they could be your business partners for a very long time.