The complete (really) guide to startup funding in the UK

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Fundsquire

33 min readAug 9, 2019

In this complete (really) guide we’ve tried to round up every single UK startup and scale-up financing option in one compact place. With over two hundred useful links and resources, if you still are clueless about how to finance your company after reading this, it’s on you.

Developing a great business takes commitment, diligence, patience and in most cases, quite a great deal of money. Navigating the tricky waters of dialing in your MVP or finding product/market fit is one thing, finding and securing the resources that will allow you to focus and grow is another.

Finding financing for your start-up and fuelling the fire of your scale-up with new capital are necessary rites of passage for every entrepreneur, but they can prove to be a huge headache if you don’t know where to look. When you’re in the thick of it, and your runway has a ticking countdown, it can seem that getting funded is more of a full-time job than running your company.

Luckily, there are many ways to solve the problem of access to capital. Also, more and more solutions are popping up every year, helping you put your company out there to attract investment and leverage your assets for loans. Since the dot com boom in the 90s, there has never been such a huge influx of investment capital, such a wide variety of debt funding sources or government incentives for small and medium enterprises.

We’ve created this guide to serve as a starting point on your journey. It includes the low down on every form of financing we could think of, who to talk to, where to go, useful links, and more resources from an army of ultra-smart people than you could read in a lifetime.

Now to get to the first important question:
Do you need funding?

Bootstrapping

Despite the current bull run in start-up investment, not every company needs to get funded.

For many businesses, the development time and investment are so large, that there is no revenue possible for a very long time. Other business models can work just as well (or even better) bootstrapped. Keeping the business lean and growing organically is not going to be Blitzscaling, and you won’t be in any danger of overtaking Uber any time soon, but holding on to equity, maintaining control and having only your own skin in the game can work wonders in the long term.

It might surprise you to know that most start-ups (by far) are bootstrapped. Founders cash and savings represent a good chunk of that seed capital, but bootstrapping doesn’t just mean going for the nuclear option on piggy banks.

One way of bootstrapping your startup is by selling your services. As a start-up founder, you’re very probably talented in at least some key area and have knowledge and expertise to trade.

Figuring out the monthly cash needs of the business is the first step, followed by plugging your talents into the demand for them so you can generate the needed cash. This could be anything from web development, copywriting, SEO, marketing, PPC to programming and even server admin work. Anything you can do and sell for a good price is potentially a good funding mechanism for your startup. It pays to think creatively and test the waters with different freelancing gigs.

At the same time, it pays to consider this:

How much money am I willing to sink into this business?

If you go the freelance financing route or just funnel money from your day job into the new venture, it may be wise to keep tight books on how much you’re spending on the business and how much you want to sacrifice to reach your goals.

And the good news on bootstrapping — it’s the ultimate proof of concept. Even if you do end up raising money from investors in the end, the fact that you have a working, revenue-generating business that you’ve created sustainably is a great way of getting savvy VCs interested. There’s nothing sexier than a business that’s already making money.

Useful resources on bootstrapping (well)

The Incredible Secret Money Machine

This cult classic of the start-up world is the bootstrapping manual. This book was created to offer guidance to the technically or creatively self-employed, but the ideas are far-reaching for businesses as well. The examples from the 1970s’ are dated, but the principles aren’t. Kevin Kelly has a few excerpts in on his Cool Tools blog, but you can find the whole book as a free .pdf if you scroll to the bottom.

A Masochist’s Guide to Bootstrapping Your SaaS Startup to Profitability

Geared towards SaaS, but you’ll feel Dave’s pain and benefit from his advice regardless of your sector. Great points on patience, growth tools and how to stay sane while bootstrapping.

The Definitive Guide on How to Bootstrap Your Startup

Neil Patel bootstrapped himself from humble SEO consultant to CEO of several multi-million dollar businesses. He’s made every mistake you can make, and also a whole lot of right moves. Neil moves, that’s his MO and he has quite a few great nuggets of insight about staying lean, outsourcing and branding.

A Step By Step Guide To Startup Bootstrapping By Self-Funding And Pre-Selling

Abdo Riani has been involved in over 50 start-up launches and runs StartupCircle.co. This guide is chock full of highly actionable advice on how to do the seemingly impossible, bootstrap your startup to success without harassing your mom for her savings and not getting into a dark pit of debt.

SEIS/EIS

An extremely important factor in the challenge of getting investment in the UK is a company’s SEIS/EIS eligibility.

The Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) are two government programs that have been created to incentivise investment into innovative startups through significant tax breaks.

SEIS covers very early-stage companies, as the acronym implies, mostly at the Seed stage. This scheme allows any single individual to invest £100,000 every tax year and receive a 50% tax break. Any single company can raise a maximum of £150,000 is SEIS funding.

EIS allows an individual to invest up to £1,000,000 per tax year and get a 30% tax break. For companies, the maximum EIS funding they can receive is £12,000,000.

At the same time, with both EIS and SEIS, there is the added advantage of not having to pay inheritance tax on shares owned for a minimum of two years. And if shares are at any point sold and a loss is registered, these losses can be offset against the investor’s capital gains tax burden.

Useful resources on SEIS/EIS

Most trades will qualify for EIS/SEIS, but the exclusion list is also quite chunky and sectors like banking, lending, property trading, accounting and legal services are not eligible for this status. You can have a closer look at your company’s status by consulting the Venture Capital Schemes Manual on the HMRC website.

Given that it offers an enormous advantage in the final ROI, SEIS/EIS status can make or break a deal for investors. That’s why getting Advance Assurance from HMRC is essential if you are talking to investors and floating an EIS/SEIS coloured deal. You can do this fairly quickly on the UK government website.

The Guide on SEIS from our friends at Seedrs

This guide goes extremely deep and shows you all the intricacies and potential pitfalls of the scheme.

Friends, family & fools

This one is outside of the normal lines of financing and it does what it says on the tin — this is funding from your closest humans (and, of course, the gullible).

This is one of the most prevalent forms of SME financing, accounting for 38% of funds raised by startups.

Friends & Family are clear categories of lovely people who either share your genes or have other reasons to think you’re at least an acceptable person. Fools, on the other hand, are people who don’t particularly love you, but who you’ve convinced by great sales talent or sheer enthusiasm that your “Uber for <insert sector to be disrupted>” will make it big. They are not professional investors and will be unable to run the necessary due diligence, but they will have expectations, sometimes wildly misinformed ones about the potential success of the business.

The potential pitfalls of FFF are many, but so is the advantage — this will probably be your easiest to access form of financing. It’s very unlikely that they’ll sneer at your valuation, ask for securities or grill you on the most minute details of the business plan. At the same time, it’s a good way to show future investors that there are others with significant skin in the game. Never underestimate the value of social proof.

The risk, of course, is painfully falling out with your mother over a pet food e-commerce train wreck or the creation of a mortal enemy if one of your “fools” was expecting an IPO and you haven’t even started generating revenue. There are ways to manage this risk, mostly through clear communication and setting transparent expectations from the start. The problem there is that often it’s hard to assess how much someone knows about investing when they aren’t a professional investor. It’s common that uncertainties and friction can come up in the process when more details are “revealed” (i.e misplaced expectations).

There is a reason why mixing business with pleasure is a commonly accepted no-no, FFF financing is a classic example of this axiom. If you do need to access this type of funding, don’t skimp, it could be a good idea to hire a lawyer with experience in venture deals. Also, getting everything in writing and explaining the risks in detail are the most basic prerequisites to your deal not turning into a flaming car crash two years down the line.

Useful resources on how to handle the sensitive friends, family & fools financing

8 Best Practices to Seek Funding From Friends, Family, and Fools

A few more things to consider before betting grandma’s pension savings on red.

Friends, Family and Fools: the worst investors

Some sobering advice from serial entrepreneur Dan Tenner on why FFF could be a big can of worms that’s best left unopened.

Avoiding the pitfalls of raising money from friends and family

If FFF is not avoidable, its biggest pitfalls might be. Here is a little more clarity on how to manage it properly and set yourself up for success rather than see it turn into an inextinguishable relationship tyre fire.

Equity financing

Equity financing means raising capital through the sale of shares. Through an equity sale, the company sells part ownership of their company in return for funding. Though often “equity” refers to companies traded publicly on stock exchanges, in the world of startups and scale-ups, equity is traded privately between the owners (usually the founders) and investors like VCs and Angels.

Equity deals can be very complex and include not only the sale of shares but also many associated rights through mechanisms like preferred stock, convertible preferred stock, common shares, and warrant rights.

In this guide, our aim is to give you the basics and guide you to the right places for deeper knowledge. And there is nothing more basic in the world of equity financing for startups than understanding the fundamentals of funding rounds.

A primer on startup funding rounds

Though bootstrapping your way to a multi-million exit is the dream, for many companies, the path to success looks more like a ladder. And each of the rungs corresponds to a funding round which reflects the stage the company is in at the time.

Pre-seed

This is often an unofficial round of funding and in most cases, no outside investment is taken in. Pre-seed is usually the term given to the founder’s initial out-of-pocket startup funding. Sometimes this is sprinkled in with some FFF (friends, family & fools) money, but most savvy investors are still a mile away at this point. I say most because pre-seed VC is starting to become much more common.

VCs like Forward Partners now have pre-seed funds and if your company qualifies, they will do a lot of hand-holding until your idea becomes reality. Also, Seedcamp offers a standard £100,000 at 7.5% target ownership in pre-seed, an incredible network, and comprehensive support, even if all you have at the moment is an idea.

Seed

The Seed round commonly refers to a series of investments in which a group of investors, often up to 15, put up to $2 million into a new company. The seed stage is usually dedicated to building the foundations of the new company and is ideally based on the company having an MVP and showing at least a little bit of traction with clients. Convertible notes, preferred stock or straight equity are all typical ways of rewarding investors at this stage.

The Seed round is a great opportunity to get the core competency of the company right. Finding and refining product-market fit is the most important step an early-stage company needs to take to set themselves up for later success. At the Seed stage, having the option to access the wisdom and network of a variety of seasoned investors is an amazing advantage, so it pays to not rush through seed straight into Series A. This opportunity to lay the groundwork might never come up again.

An important source of seed funding are Accelerators, Angels and specialised VCs. At the same time, major banks and tech corporations have an assortment of seed VC branches to be able to capitalise on the next big thing.

Check out Y Combinator’s excellent Guide to Seed Funding. They aren’t the most coveted seed accelerator in the world for nothing.

Series A

Series A funding usually comes from a smaller number of VCs and Angels who will invest $2–10 million, in most cases for equity. The series is named after the type of shares the participating investors will (hope to eventually) receive — Series A Preferred. This is usually the first round of preferred shares.

If the seed round is dedicated to laying healthy foundations for the company and not speeding up before finding product-market fit, Series A will turn up the heat and demand high growth. That’s why the main question to ask before going in for a Series A is: Does it scale? Is the company’s main growth constraint cash or is it that ideal product-market fit isn’t quite there yet? VCs will want to see that you know *exactly* what you’re doing and have the right foundations before sending in that coveted term sheet. That usually means a proven track record with clients and a very credible plan on how to 2–5x revenue in the next 18 months.

A great source of knowledge if you’re planning or researching a Series A is Justin Kan’s The Founder’s Guide to Raising a Series A Venture Financing. Justin is the founder of Twitch and Atrium and served as a Partner at Y Combinator (essentially the seed funding mothership).

Series B

While in a Series A the goal is usually to support a business model that works, scales and prove that the company can reach well-defined goals, the Series B is there to pour fuel on that initial fire. The companies that access a Series B are usually already starting to turn a profit and their major challenge is scaling fast on the cash they have now. At the same time, a company in Series B may be targeting international expansion or branching out into related product ranges.

Compared to Series A, where a lot of the investment still rests on the “promise” of the new company, in a Series B, the investment is based on cold hard realities, like market share, revenue, profits, assets, etc. That’s why, compared to Seed and Series A, a Series B round is usually much harder to access.

While in a Series B you might still have a few Super Angels populating the ranks of investors, most of the money will come from established VC funds and the transactions are rigorous and structured. The amount invested in this round is between 10–30 Million.

An honest look into Paddle’s experience by CFO Hugo Grimston: Learnings from our $12.5m Series B is worth reading if you’re interested in the nitty-gritty of raising a Series B in the UK, as it is quite a bit different to most of the experiences coming out of Silicon Valley.

Series C and beyond

A Series C round is usually raised to prepare the company for a buyout, to make one or more acquisitions itself or for an IPO. Series C is most definitely the big leagues, and the first of the “later stage” rounds, reserved for companies with huge traction and a whiff of unicorn potential. A series C can lead to a D, E, F if the company is interesting enough.

At this stage, even the VC funds are thinning out and private equity companies, hedge funds, and banks start to become much more common.

A Series C and beyond, companies can raise anywhere from 15 Million to multiple hundreds of Millions.

As deals become increasingly more complex and there is no predefined way of handling a late-stage funding round I can’t simply send you to a “guide”. There is none and there can’t be one, really. So, a little bit of current context on how much Series C and beyond matters to VC nowadays might help and a world on late-stage venture from one of the most accomplished funds in the world, Andreessen Horowitz.

Angels

Angel investors are usually high net worth individuals who invest in startups in exchange for equity or convertible debt. The Angel could be from any background, but they are usually either former entrepreneurs or professionals who are retired, or high net worth individuals interested in innovation and the start-up world.

The main difference between an Angel and a “fool” (see Friends, Family, and Fools above) is that an Angel is a sophisticated, savvy investor who will do comprehensive due diligence and understands what they are getting themselves into. Angels usually invest their own money, in contrast to VCs who are essentially fund managers. That gives them a more personal stake in the transactions and often allows for more flexibility in how the deals are constructed. Venture capitalists are usually bound by stricter operating procedures and formalities, so Angels have more free rein to negotiate customised arrangements. This might mean more flexible terms, but it might also mean more equity, as the exposure and involvement for any one deal is likely to be higher for an Angel than a VC.

The risk born by Angel investors is very high, so their target return on investment is usually 10x or higher — sometimes even 20–30x. Their investments are very early in the company’s life cycle and the threat of losing the investment or dilution is a constant worry. This makes Angel investment quite an expensive form of capital, as all these risks need to be mitigated and reflected in the cost of financing.

Useful resources on angels in the UK

Angels can invest anywhere from a few tens of thousands to a few million, mostly in the Seed to Series A funding rounds, but they tend to stay on the lower side of this interval. Angels investing more than 500k on a Series A round are called Super Angels because “Angel” isn’t congratulatory enough for heavy hitters. Similarly juicy details on the complex world of Angel investing can be found in HackerNoon’s The Hacker Guide To Angel Investing by Benjamin Joffe.

The UK Angel Investment Network

A good place to start getting in touch with potential investors. Their aim is to connect innovation with money and they run a very slick operation.

The UKBBA

Another good place to start conversations about investment, but also a great place to network and learn, as they run events (mostly geared towards investors and consultants, to be fair) that are well attended by people who are probably looking for a company like yours.

Angel networks and syndicates

Slightly more unstructured and informal than Venture Capital funds, Angel networks are groups of semi-independent angels, usually headed by a few industry specialists. Given the added structure, angel syndicates tend to be more risk-averse than single investors, but they also represent a bigger pool of money. These networks fill a needed space between the often quite loose world of solitary investors and the normally quite rigid universe of VC funds.

Angel syndicates are similar to VC funds in that they often specialise in certain sectors. It’s not uncommon to have medtech, fintech or cleantech (green) Angel syndicates that only invest in businesses with that profile.

Because Angels are often people with deep experience and passion for their industry, working with an Angel investor can mean introductions to the right people. Compared to a VC fund, Angels and Angel syndicates are usually more hands-off, preferring to not get involved in the day to day running of the business, but can still be a huge asset. The value of an investment, in this case, can’t always be measured in simple monetary terms, it’s also a function of the investor’s connections and the quality of their wisdom.

The best angel networks and syndicates in the UK

Family offices

Angels also often represent family offices, which are essentially a pool of rich families’ money. These are funds where the goal is a long-term, stable investment with a secure, tax-efficient return. They also have a lot of flexibility in the kinds of investments they make, as they aren’t tied to any rigid investment principles or constraints from multiple stakeholders. And given that they aren’t in it for a quick exit, but to reliably piggyback on to a company’s long term growth, their incentives often align better with those of the founder.

The problem with family offices is that they don’t have a website, they don’t advertise and finding them on a Google search is about as probable as winning the lottery. That’s why angel networks and networks, in general, are great places to get the scoop on these mysterious pots of money and an introduction to the people who hold the keys.

VC funds

VC Funds are usually what people imagine when they speak about investment. These are managed pools of funds that are invested in start-up and scale-up companies with high growth potential.

Funds come in all shapes and sizes, but the main ways each VC differentiates themselves is in three dimensions: Geography (ex. UK, European, Global), Stage (Seed, Series A, Late Stage), and Sector (MedTech, IoT, cleantech). This is important to keep in mind if you were planning a spray and pray approach with a mailing list of VCs in hand.

It pays to do a bit of research on the specifics of each fund and their current investments before you start poking and prodding their staff. You’ll save time and energy in the long run and your future investor will actually take you seriously if you do your homework.

The best way to start a conversation with a VC is through a warm introduction, so it pays to do some serious networking if you’re planning on raising funding.

Seedlegals has set up a list of the best places to “bump into” people that could help you out on your funding journey: The 11 best events to meet investors in London. Also, their blog is pretty much a gold mine for anyone starting a business in London and the UK, so it doesn’t hurt to look around.

Getting VC funding is an adventure in itself, and you’ll learn a lot along the way, but being in the know before you make those calls and sign those papers will be invaluable in the long run, so, here are the resources you need to set you on the right path.

The VC basics

The book: Venture Deals by Brad Feld & Jason Mendelson

There are surprisingly few books dedicated to teaching you everything you need to know about venture capital. There is one, and it’s Venture Deals. This book was written from the perspective of the VC with the entrepreneur in mind. Feld & Mendelson take you from pre-seed to exit, with a focus on the deal and how to make it work for both you and your investors without falling into the many, many traps that the fundraising journey involves.

The playbook

The Startup Playbook by Sam Altman. This little web repository is the distilled knowledge of Y Combinator’s famous investment team, in bite-sized chunks and with beautiful illustrations. In the beginning, this was the information package companies received when they became part of the Y Combinator universe, but now it’s in the public domain and any entrepreneur or curious cat can have a look at the accelerator’s accumulated wisdom.

The pitch deck

This is how you get your foot in the door and it’s somewhere at the intersection of art and science. You could tell your life’s story and present about 100 slides, because there is just so much to say, but keeping it brief helps both you and your potential investor. If the proposition is so wishy-washy that it needs seven slides to get to the point, it’s a good sign that it might need some sharpening. The structure of a pitch deck is now pretty much standard practice, so we wouldn’t advise you to mess with a good thing too much.

StartupGrind’s The Quick and Dirty Guide to Creating a Winning Pitch Deck is a good starting point as it outlines the classic structure and the major pitfalls.

Also, have a look at 30 of the most successful heavy hitters’ first pitch decks for some inspiration. And you could do worse than use Peter Thiel’s no-nonsense pitch deck template.

The term sheet

This is the key document you are working towards with your investors and it’s complicated. The legals on venture deals are probably the most painful and important elements to keep an eye on. Even though it’s not work on your core business and it’s often so boring as to cause spontaneous eye bleeding, you will kick yourself down the line for not being in the know early.

Here’s a little intro to what you can expect in the straight-forward Term Sheets 101 from Menabytes. For more details, Venture Deals is a great source, as is the more in-depth Venture Capital Deal Terms by De Vries & Van Loon.

Valuation

If the term sheet is the most important document, your valuation is the most important number. This figure and how you got to it can position you anywhere from ultra-competent to ridiculous in the eyes of a potential investor. At the same time, a valuation that is too low means you’re giving away too many shares, while a valuation that’s too high (if for some reason undetected by your VC — also a problem in itself) means you’re giving away too few. So, making reasonable assumptions and using a considered valuation method is essential to get to a number that’s realistic.

There are many ways to do a valuation for a seed-stage company, but Joachim Blazer at Hackernoon boiled it down to 38 (yes) easy steps. You might even experiment with this Valuation Calculator from Seedrs, much more accurate than the horoscope, but probably not something I’d mention using in a conversation with an investor.

A note on venture debt

It might surprise you to know that around 10% of the global venture cake is not comprised of equity, but debt. As part of an equity deal, often VCs will offer a company additional funding as venture debt. This helps to reduce the dilution of the founding members (or postpone it until a Series B+ round) and but can still offer investors significant returns. Quite significant, as the average cost of venture debt is around 20% of the loan value over the typical two year period.

In most cases, this form of financing also has covenants attached and warrants for liquidation preferences that might result in a multiple of the initial cost.

If the company is in a sustainable growth phase, is generating a lot of revenue and has stopped tinkering around with product-market fit, venture debt may be a great option. The better the company is doing, the less attractive a sale of equity is looking for the founders, as simply being short on cash isn’t a good enough reason for further dilution.

Great resources for understanding Venture Debt and when it pays off are this basic primer from Howard Marks and A founder’s guide to venture debt by Sarah Marion.

Photo by Madison Kaminski on Unsplash

The VCs — these are the UK’s top venture capital firms

This list covers both early and later-stage VCs, while many of the firms cover the whole spectrum from seed to Series B+. As always, it pays to research your target VC well and it’s best to get a warm introduction.

So, please don’t look at this as a mailing list. Each of these companies is looking for a very specific type of investment, be it in terms of sector, size, growth trajectory, B2B/B2C orientation, etc. Trying to talk to anyone with a bag of money and a .vc domain is a giant waste of everyone’s time (including yours).

A great source to delve into if you’re researching VCs on the early-stage end of the spectrum is Fred Destin’s The definitive guide to London Seed Venture funds ( Sep 2018 edition). Fred is the founder of Stride.VC and a veteran UK venture capitalist with investments in Zoopla, Deliveroo, Pillpack and Secret Escapes. The guide sums up the basics about each VC fund and splits the pack into generalists, specialists and company builders (the pre-seed, even pre-company mavericks). Fred has a no-nonsense style, is ultra-knowledgeable and is also one great writer, so this guide is about as good as it gets.

Incubators and Accelerators

While the line between Incubators and Accelerators is often blurry, they can be differentiated by the growth stage of the company: Infancy — Incubators (easy), Adolescence — Accelerator.

Both of theses types of programmes provide advice, mentoring, often a coworking space and occasionally also some amount of capital. Incubators tend to work with startups at the earliest stages, sometimes at a point where the company is still refining its proposition and doesn’t require capital yet. Accelerators, on the other hand, often fish in a pool of later-stage companies which have a bit more meat on their bones. Often, the application process is fierce and for accelerators like Y Combinator or Techstars, only 2–3% of applicants are accepted.

Though it might seem like an easy step to just throw yourself into an incubator, it might be good to consider the options carefully before you make any commitments. Incubators will most often want an equity stake in the company, and in that way they are acting like VCs — you will need to negotiate. At the same time, not all incubators are alike. Selecting an incubator that’s relevant for your business, has a solid track record and can open doors for you in terms of the right network is key and often worth giving up a few percentage points. Giving up equity is a cost, but it’s also a tool to get people to have some skin in the game in the success of your company.

If you’re at the incubator stage, it might be a good idea to have a look at Startup School — a free 10-week course on the basics of entrepreneurship from the mothership, Y Combinator. The Library on this website is probably the single greatest reading list in entrepreneurship history, chock full of hard-earned advice and deep wisdom from the greats of Silicon Valley.

London’s best incubators & accelerators

Incubators and accelerators outside London

Ignite — Newcastle
Seedbed — Devon
C4DI — Hull
FirstBourne — Bournemouth
Catalyst — Southampton
Entrepreneurs for the Future — Birmingham
Accelerate — Cambridge

Equity crowdfunding

Equity crowdfunding means raising funds from many individual investors by selling securities like shares (or convertible notes) in a company that isn’t listed on a stock exchange. Investors stand to make a profit if the company is successful, but can also lose their investment if it flops.

For companies, equity crowdfunding is a great opportunity to not only gain investors, but also comments, feedback, and essentially a small army of incentivised advocates that will strive to make the venture successful. This adds exposure and credibility to the company, and often the initial investors will follow up their investments in further rounds. Platforms like SyndicateRoom ensure pre-emption rights as a standard, where the initial investors can protect themselves from dilution by getting right of first refusal for shares in subsequent funding rounds.

This comprehensive guide to equity crowdfunding is skewed towards an American audience, but the main points hold (ignore the regulation part, the UK is quite different on that point). To have a look at the UK’s regulation on crowdfunding, check out this post by Sarah Kenshall at Burgess Salmon.

The main equity crowdfunding platforms

Rewards-based crowdfunding

In rewards-based crowdfunding, individuals or companies create a pitch to raise small amounts of capital from many participants in return for specific rewards if the company meets its funding goal. The rewards are usually small and proportional to the funded amount. In most cases, the reward is the final version of the funded product.

The most typical examples of this model are the platforms Indiegogo or Kickstarter.

The main advantage of rewards-based crowdfunding is the fact that the company does not need to lose equity. It’s also an ideal way to test market demand for a B2C product, especially if it’s visually demonstrable. The challenge is that for a campaign to succeed, you need to create a strong and convincing brand first. Your video pitch is the most important asset in this fight as is how and where you distribute it. If you’re a strong marketer and have a consumer-oriented product idea, rewards-based crowdfunding might be the best choice.

the main rewards-based crowdfunding platforms

Kickstarter

Indiegogo

Unbound — Rewards-based publishing platform

Patreon — Rewards-based subscriptions for creators

Debt financing

Debt has a lot of sinister connotations, but in many cases it’s a better idea than selling more equity or facing stagnation while bootstrapping. I won’t go into all the wonderful sides of debt funding that we often forget about, because I’ve already done that in: Why debt financing might be exactly what your company needs. Long story short: don’t dismiss debt. It’s often a low-cost way of growing your business while also getting to keep it.

Bank loans

For pre-revenue startups, getting a bank loan isn’t something that’s on the main menu of options. Most banks like to see money coming in and mentioning that you’re going to raise a series A sometime in the future leaves your average banker pretty cold.

Despite the seemingly bleak outlook for startup bank finance, there is still hope.

The British Business Bank’s Enterprise Finance Guarantee (EFG) gives lenders a 75% government-backed guarantee on the facility balance that’s still outstanding. There are a few application criteria, like showing a great track record in getting VC finance and being surrounded by trusted, high-profile advisors.

The EFG guarantees growth loans from £1,000 to £1.2 million, but the emphasis is on growth here, as these aren’t bailouts.

A company has to work with a pre-vetted lender and the loans would have to be initially rejected because of insufficient security and no other due diligence requirements.

While some banks will offer you a small overdraft facility based on your personal credit score, most banks will often not consider extending credit for companies that aren’t generating significant revenue.

That’s why many founders default to using personal credit cards to finance their start-up at the beginning. Some even go the riskier route and get a personal loan borrowed against an asset, like their house. Though very common, this form of financing should be carefully considered as the downside is huge.

Alternative p2p lenders

While a bank may be the first thing that comes to mind when thinking of loans, some of the most active lenders in the SME space are something else entirely. Alternative lenders have sprung up to cover the whole lending market, offering secured and unsecured loans from a few thousand to quite a few million. This new breed of lenders is leveraging machine learning and various API integrations to get data straight from the source and profile their clients with a greater degree of precision than the old school banks.

Virgin Loans, though not exactly a bank, offer loans from £500 to £25,000 for 6% p.A. and they offer start-up friendly conditions and quite a solid range of support and mentorship.

Companies like Spotcap and Iwoca can lend up to £200,000 and £250,000 respectively with rates ranging from 1–3%/month.

ThinCats is a lender that specialises in the upper half of the market, offering loans from £250,000 to £15 Million.

Peer-to-Peer lending or debt crowdfunding is another spin on the more well-trodden equity crowdfunding. For startups that are already generating some revenue, P2P lending could be a great source of low cost finance. With rates from 5–12% APR, P2P lending is on the lower end as far as the cost of capital is concerned.

The main p2p lending platforms

R&D finance

R&D finance or R&D tax credit loans are a completely new type of debt where companies who are eligible to receive R&D tax credit loans can access them earlier in the form of a secured loan. R&D tax credit factoring is very similar to invoice factoring. The difference is that the “invoices” that are discounted are based on predicted payments from HMRC, not clients.

This type of finance works best for technology-heavy companies who are either pre-revenue or pre-profit and wouldn’t be attractive for banks or other alternative lenders because they lack profitability, large receivables or assets like equipment and land. What these companies do have is significant investment in research and development, and now they can use that as an asset.

Because the R&D tax credit is a predictable source of cash for many UK companies, but very slow to materialise, lending against it makes sense.

For a pre-revenue company, it can seem like selling equity is the only viable funding option. R&D tax credit finance can be a great alternative, as it leverages an asset that will materialise in the future to fund the cash needs of the present. This can be a good way of protecting the current position of shareholders and shielding them against dilution.

The best resource on the how what and why of R&D tax credit finance is our very own The Complete Guide to R&D Tax Credit Loans. Not to brag, but it’s as complete as it gets.

And if you think you might be eligible or are just interested in how it works, don’t be afraid to reach out. We’re always happy to help or at least point you in the right direction.

Invoice discounting

A classic of commercial finance, invoice discounting is how many a retail business ensures a healthy cash flow. For many startups, invoice finance doesn’t even register as an option. But for companies that have high implementation costs and long timelines, it might be helpful.

Companies like MarketInvoice have brought speed, a considered use of technology and user-friendliness to invoice discounting, and now it’s more simple to access than ever.

the main invoice discounting platforms

MarketInvoice

Bibby Financial Services

GapCap

FundingInvoice

Metro Bank Invoice Finance

Government funding

Though most of the startup and scaleup funding in the UK is done through private means, there is quite a big slice of government funding that goes to funding innovation and regional development projects.

Though the money on offer can often sound quite enticing, the downside is that the application process is laborious, the competition is stiff and the money comes with many strings attached. Actually, it’s kind of like VC funding, venture debt or anything else outside of your grandma’s piggybank.

Here is our roundup of the most important government gunding options for startups and scale-ups in the UK.

R&D tax credits

R&D tax credits are often the most easy and accessible form of government funding for startups, especially for those with a tech component. In short, companies can access up to 33% of what they’ve spent on eligible R&D activities as a repayment from HMRC after their yearly accounts are filed. This includes salaries, contractor invoices, consumables, software, almost everything that a high tech company would spend on development. This refund can amount to anything from a few thousand up to several Million pounds, so it’s essential you get interested in R&D as soon as possible on your startup journey.

Claimable costs under the R&D tax credit scheme are subcontracted developer or engineering costs, direct staff costs, and software and consumables that were indispensable to creating the R&D.

Ineligible costs are infrastructure-related, and this includes everything that isn’t directly involved in the R&D process.

The most complete guide I could find on how to DIY your R&D tax credit was created by our friends at GrantTree. And if you think DIY-ing complex government tax documents is a bit of a headache, they’re happy to step in and take care of everything. This is also essential if you’re seeking to apply for R&D tax credit loans, as the quality and diligence of the R&D provider is one of the cornerstones of the due diligence of your lender.

Innovation grants

Innovation Grants are available for many emerging areas of science and technology and most grant calls are sector-specific. At the same time, there are open competitions with significant “prize money”, but because of their openness, they also tend to be the most competitive. The two main bodies that handle innovation grants are Innovate UK and Horizon2020 (a Europe-wide initiative, so it might be less relevant in future).

If you have a highly innovative technology that needs funding to be fully developed and go to market, the best way to explore the often complex waters of innovation grants is through an advisor. Our partners at GrantTree offer comprehensive advice on what might be available to you and free consultations on eligibility. The caveat here is that for a technolgical advance to be eligible for innovation grant funding, there has to be innovation present in the core aspect of the technology, not just in the fact that the new product or service is an innovation in a specific market. Think “new blockchain algorithm with innovative applications” not “blockchain innovation in the cat food market” (using pre-existing technology). So, for the sake and sanity of the grant advisors, it’s best to only contact someone if your technology is the key innovation rather than just the business concept.

Innovate UK

Horizon2020

GrantTree Advisors

Regional growth funds

There are quite a few local growth initiatives run all across the UK. For companies looking for funding of less than one million, it is well worth contacting your local RGF program manager. They can tell you all about the eligibility criteria and any open calls that you can participate in.

UK Government Regional Growth Funds

SBRI grants

The Small Business Research Initiative (SBRI) runs a series of competitions that are set up with the purpose of allowing the UK public sector to have access to the most cutting edge technology. Essentially, an SBRI is a government contract with an innovative company for a solution, similar to a tender offer.

Information on SBRIs

InnovateUK SBRI Grants

Patent box

Under Patent Box, a company that owns a patent from either the UK or an EU based patent office can apply for a reduced level of Corporation Tax (10%). This is a significant tax break that also applies to companies that own certain medicinal or botanic innovation rights.

Patent Box Guidelines

Startup loans

Start-Up Loans are a government-backed financing scheme that aims to help entrepreneurs just starting out. The interest rate is 6% and companies can borrow up to £25,000. While it’s no multi-million pound Series A, it might be a useful addition to a company that’s just taking off without having to sell equity in the first instance. Applicants who are successful also have access to some mentoring options with successful entrepreneurs.

Start-up loans

We hope this guide is useful and you find lots and lots of (monetary) value in it. If you think we’ve missed a spot, feel free to berate us in the comments and we’ll complete it. Beyond just having an awesome guide, our idea is to have this be a work in progress, constantly updated and improved with new, useful information.

If you’re curious about R&D finance or government funding in general (or, to be honest, almost anything on this list) feel free to contact us at Fundsquire. We’re always happy to help and at least point you in the right direction.

Article originally published on fundsquire.co.uk on August 9th, 2019.