London’s vibrant community of tech startups is driving exciting new innovations across a range of different industries, taking advantage of the city’s extensive business networks and a substantial talent pool of skilled workers.
Moreover, by leveraging its status as a leading financial hub, London has also become renowned for its alternative finance sector. And this has certainly spread to the UK as a whole, which is why there are fast-growing businesses emerging in pockets across the country.
From debt crowdfunding to private equity investment, startups now have before them a greater range of financing opportunities than ever before, backed by investors with an appetite to support UK businesses.
Alternative finance has opened doors for a new generation of startups in need of capital to fulfil their growth potential. But as with all things, it’s important not to be hasty – for any tech startup looking to raise finance, it is important they ask themselves the following questions.
It may seem obvious, but you’d be surprised how often such a basic question can be overlooked.
Fundraising should not be seen as an end in itself, and success should not be determined by the amount of money raised.
This is not a numbers game – rather, fundraising should be seen as the catalysing force that puts into motion a long-term and detailed business strategy. Failing this, startups run the risk of misallocating resources, and quickly spending money hastily.
Also see: Startup UK News
What will the funding be used for?
Having determined how the funding fits into a broader business strategy, the next question to consider is how the funding will be used.
Will it support the launch of a product to market? Is it to hire new staff? Or is it to kick-start a PR and marketing strategy?
Answering this question will naturally inform a realistic fundraising target, and in some instances businesses may find it easier to launch smaller funding rounds at intervals dedicated to specific company objectives, as opposed to a larger lump sum investment to try and do everything at once.
Equity or debt?
Now knowing why and what fundraising is needed, the next question concerns the type of finance best suited for the company – equity or debt.
Generally, early-stage startups launching a seed or Series A funding round will look to equity finance, open to getting investors on board who can also offer a wealth of knowledge, experience and connections.
On the other hand, debt finance rounds are more suited to established companies with proven turnover that are in need of funds quickly without watering down their stake in the business – something similar to a business loan.
Typically, when you see headlines covering the completion of large funding rounds for young tech businesses, these stories are more often than not concerned with equity finance. This is because equity can generate significant capital for young businesses that demonstrate huge potential, but have yet to fully mature in their particular market.
It’s true that most founders begin their journey as an entrepreneur by starting their own business from literally nothing. By the time entrepreneurs prepare to launch their first funding round, the amount of time, finance and personal sacrifices that have been made to grow the business can often make the decision to sell off portions of their stake in the company a difficult one.
However, equity finance can also deliver significant advantages for the long-term progression of the business, particularly through angels and VCs, with seasoned investors useful in helping to increase the future value of the business rather than passively hoping for a financial return.
So, how can alternative finance work for your startup?
There is no simple answer when it comes to the type of alternative finance best suited for your company – every startup is unique and every situation is different. However, by simply knowing how the finance will be used to support the long-term progression of the business, a handful of viable and relevant options should become apparent.
Most importantly, the question should never be ‘how can I raise the most amount of capital for my business?’ Rather, entrepreneurs need to take full advantage of all the alternative finance options available to them here in the UK. Fundraising is a significant milestone company, and if managed successfully, can transform a startup into a fully-fledged scaleup and beyond.