A wealth of sources for startup fundraising — A Primer for first time founders (London version)
Earlier this week I posted a tweet about sources of funding:
Sources of funding for startups (London edition)
Angels (seis incentives)
Accelerators- 205 incubators and 163 accelerators
Grants- Catapult, Innovate UK, Nesta, etc
Equity crowdfunding — seeders, Crowdcube, others
VC funds — over 67 seed funds in LDN
It’s never been better! pic.twitter.com/8R8hUuCtd0
— Eze Vidra (@ediggs) March 24, 2018
The financial side of technology entrepreneurship means that almost from inception, an entrepreneur has to think about and plan his or her sources of financing. Wether you like it or not, startups can merely get a break between rounds of fundraising. The tweet didn’t go much into detail, and it’s hard to know where to start sometimes, so this post should hopefully serve as a friendly primer for founders looking to raise money (with a spotlight on the UK).
Startup funding sources 💰
For example, new startups based in the UK can receive a maximum of £150,000 through SEIS investments on which their investors can claim relief. The regulation offers UK accredited investors with income tax relief against the amount invested.
- SEIS: 50% of the amount invested
- EIS: 30% of the amount invested
- No capital gains tax on any profits
In case of failure, angels can offset the loss and reduce their taxable income. This can make a big difference for angels, and both EIS and SEIS have been widely adopted (although there are some flaws created as well, which I won’t go into in this post). More about the schemes here.
- UKBAA database (UK Business Angels association)
- Angel clubs such as LBS E100, HBS Angels, Cambridge Angels
- Israel has done really well by curating ‘the spreadsheet’ of all active angels (myself included!)
Accelerators and incubators
According to a recent report by NESTA, there are 205 incubators and 163 accelerators operating in the UK alone. Normally the funding component is minor, but the mentorship and support that some of the programs can provide can be a real game changer. Notable programs include Ycombinator in the valley and Techstars (also with local fintech presence in the UK). Company builders including EF and Forward Partners are more focused on talent and the founding team vs the product. Some corporate accelerators like Microsoft Accelerator or Startup Bootcamp (which operates several programs backed by corporates around Europe)and specialised programs like FCA Sandbox (an accelerator launched by the regulator) can be really helpful to learn and build connections especially for first-time founders. Public.io, for example, is an accelerator that seeks startups who want to work with the public sector. Cylon and works with cybersecurity companies. Telefoniaca’s Wayra is collaborating with GCHQ. There’s plenty of choice, so do your research.
- Business incubators and accelerators directory
- f6s — an aggregator of the various programs. Enables simpler applications.
Non-equity grants can be a great source of early funding if you’re willing to endure the bureaucracy of a ‘call for startups’.
- Startup Europe funding resources — not sure how applicable these will be to the UK in light of Brexit climate
- Innovate UK,
- Nominet Trust — for social impact startups
- Innovation funding — the UK government investment
- Innovation grants by sector
- R&D Tax relief
The UK is probably one of the leading hubs for equity crowdfunding. In the US, regulation stipulates that in order to invest in the risky asset class of startups, you have to be an “Accredited Investor” — which means one must have a net worth of at least $1,000,000, excluding the value of one’s primary residence, or have income at least $200,000 each year for the last two years. In the UK however, anyone can invest in startups as little as £10 via equity crowdfunding platforms. The competition on the hottest deals (not all necessarily in tech) sometimes result in free marketing campaigns and other freebies.
- AngelList (especially Syndicates led by angels you want to work with)
- Directory of equity crowdfunding
“The most important thing is not to let fundraising get you down. Startups live or die on morale. If you let the difficulty of raising money destroy your morale, it will become a self-fulfilling prophecy.”
― Paul Graham
Over 67 seed funds operate in London alone. They range from top tier venture funds with billions under management to newly formed micro-funds with vertical focus. There are of course pros and cons to each on one hand, the ability of the top funds to open doors is significant, but the negative signal of a deep pocket fund not following on for whatever reason could kill a startup.
Notable seed funds in London include: Seedcamp, LocalGlobe, Passion Capital, Connect Ventures and the new kids on the block AI Seed, ADV and FirstMinute Capital. There are many more good ones, and some rotten ones — ask for recommendations.
In 2017 alone corporate VCs invested $37.4 billion according to a report by Pitchbook and NVCA. Corporate venturing grew at an unprecedented rate in the last three years. 30% of the Fortune 500 companies have a venture arm, and in Fortune 100 that rate increases to 50%. As all industries get disrupted by technology (think AI/ML across industries) it’s logical to assume that this trend will continue, particularly with publicly traded companies.
The fact that most ICOs are scams doesn’t reduce the attractiveness of this relatively new form of financing. Initial Coin Offerings mean that founders are able to ofer tokens (in some cases considered a utility and others a security) to buyers who are interested in the token either as a form of payment for the underlying service offered by the issuer, or as a store of value. For Decentralised tech startups, this has become an increasingly attractive form of financing including London-based Spice.vc. Ouriel Ohayon, founder of codenamedjango.com explained it well on Quora:
it’s a great way if your product truly requires the usage of the token and the first “owners” or buyers of the token are going to use it for your service. Even if you are not a scam and make wrong or illegal claims, you want to avoid a situation where your token is merely an object of speculation so that you can indeed engage with your users early on and bootstrap your network effect. A good example of that is 0X which provides decentralized exchanges a way to operate trades through their token.
In Israel for example, some of the equity crowdfunding platforms like iAngels have pivoted to focus on curating ICOs.
Scaleups like Uber and Airbnb choose to stay private for longer, to avoid certain limitations that come with an IPO (transparency, quarterly growth, analyst expectations etc).
ELITE from London Stock Exchange Group is a programme designed to help growth stage companies understand the capital markets. AIM is LSE’s growth market designed to help companies IPO at the equivalent of Series C or D. Businesses that are cash generative may want to consider a listed retail on LSE’s ORB market (as Lendinvest have done).
SAFE (simple agreement for equity) notes popularised by Ycombinator enable startups to raise debt financing that converts into equity. This is how SAFE notes work.
There are also institutional lenders who actively look for companies in need of working capital. VCs are not big fans of debt, as it sits in front of equity in liquidity preferences, which means that the debt holders get paid first in case of a liquidation. Debt is an instrument best used for more mature companies who are generating revenue, as a cheaper alternative than equity for operating capital, however, debt lenders are pursuing earlier stage startups.
In conclusion, it’s never been a better environment to fundraise for startups. Plan in advance, manage your cash wisely and don’t get discouraged by the first few ‘no’s’ you will inevitably receive.