UK startup funding can be seen as complex and difficult to navigate as there are a range of funding options available depending on the size, sector, location and strategy of a business.

This guide overviews several funding options a UK startup could consider. Navigating these options can take time and, in some cases, require a specialist advisor. It is an area that a finance director can add significant value to a business, freeing up the founders to focus on people, strategy and execution.

If you hope this article will tell you what type of funding is best for your business, you will be disappointed. Every business is different with a few funding options only available at certain times in the growth journey. This article is intended as a guide to help educate a UK early-stage company on what funding options to consider from equity to debt to grants.

Overview🔗

There are numerous guides and articles that provide a good overview of various funding options. Some are set out below:

A no-nonsense guide to UK startup financing options - Maddyness UK

Startup Funding UK: The Ultimate Guide - MOHARA Insights

Startup funding: 10 realistic ways to raise money for your business | money.co.uk

Guide to startup funding in the UK - EmpowerRD

Accelerators and funding programmes can be a valuable source of information on funding options, especially at the very early stage, and are therefore worth considering. One example is the government funded Eagle Lab programme run by Barclays. The programme covers equity funding, grant funding, crowdfunding and alternative funding.

Eagle Labs Funding Readiness powered by Capital Enterprise | Barclays Eagle Labs

There will be regional based networks to support and signpost businesses to funding options that are government funded schemes. For example, in Manchester there is the Business Growth Hub, which is part of the Manchester council. At the very early stage, these schemes can be a good source of free advice and support.

One of the best sources of curated content on early-stage fundraising is from Mountside Ventures. They are an advisor firm who specialise in helping early-stage businesses raise debt and equity. Their curated material covers a range of topics from accelerators to funding providers.

https://www.mountsideventures.com/resources

Equity🔗

As a startup you need to understand which equity funders are right for your business. Approaching a Venture Capital (‘VC’) firm for £200k when their average cheque size is £2m is a waste of your time and damages credibility.

Generally for a raise below £500k, a startup should consider angel funding groups, regional funds or very early stage VCs (typically SEIS funds).

Angel funding🔗

Angel funding can be challenging to navigate. Whilst some angels like the limelight, many prefer to invest behind the scenes. Many angels like to invest in groups, leveraging the insights of others to help their diligence/risk assessment. This can be beneficial because if you secure an angel, their usual co-investors may follow.

One of the best sources of angel funding groups in the UK is from Mountside Ventures- https://www.mountsideventures.com/resources

It is also worth looking at whether the UKBAA could help you with an angel approach. They are the UK trade body for angel investors and run several events around fund raising - Home - UK Business Angels Association

If you can attract more than two or three angels, a funding route worth considering is the angel co fund which invests alongside angels - Co-Investment & Angel Investment | Angel Co Fund

Regional funds🔗

There are several regional-based funds, both for debt and equity, across the UK that are focused on supporting early-stage businesses within their specific regions. As an early-stage business, you should identify what regional funds are active in your area and whether they are a relevant source of capital.

The British Business Bank (‘BBB’) has allocated over a billion in capital to fund managers throughout the UK to invest in their regions. Praetura Ventures manages the BBB’s £100m Northern Powerhouse Investment Fund II mandate for the North West of England. There are also similar funds across the UK; for example, Foresight manages the BBB’s equity fund for Wales.

There are also regional funding providers external to the BBB such as the Development Bank of Wales, which supports businesses based in Wales. In Manchester, we have the Greater Manchester Combined Authority who invest in Manchester-based businesses to drive economic activity. Liverpool also has a dedicated fund and Scotland has funders like the Scottish Investment Bank.

Elsewhere, London has dedicated local funders such as FSE who provide debt funding to London-based businesses. They were established by the London Mayor to support growth in the capital.

We are yet to come across a complete list of all the regional funding support available. The best approach to understanding what is available in your region is to speak to local fundraising advisors or government-backed support hubs focused on helping companies to navigate their fundraising options.

Venture Capital🔗

Moving towards cheque sizes of £1 million plus will mean venture capital is a funding option. There are hundreds of venture capital firms with capital to deploy into UK-based businesses both UK-based and overseas.

A typical starting point would be to look at EIS and VCT Funds that raise capital from investors and need to deploy this capital within a set period based on UK tax rules. For EIS Funds, they look to deploy the capital they have raised in a tax year by April 5th each year. As a result these funds often deploy more capital in Q1 of each year, meaning the best time to approach them is in September/October while aiming for a funding close in the following February/March.

Beyond EIS and VCT Funds, there are traditional venture capital funds that have secured capital with a targeted deployment period of c.5 years. A number of these funds in the UK have been supported in their fundraise by the BBB’s ECF or Patient Capital programmes. A useful index of BBB partnered funds is via their website - Our partners | British Business Bank

There are several published lists of VCs available on the web. The challenge every early-stage funder will face is navigating the volume of VCs to narrow the list to those that have capital to deploy, like the sector and can provide the right cheque size. This can be all-consuming and is where a fundraising advisor can really provide significant value. If you have a VC on your cap table already, they will be able to help. For example, at Praetura Ventures, we maintain our own list of VCs to support our portfolio businesses in this area.

Corporate Venture Capital (‘CVC’)🔗

CVCs are dedicated investor arms of large corporates who look to invest in early-stage businesses that are bringing innovation to their sector. Some will invest purely for returns but many invest as it provides them with an insight into new technology in their sector, which can help them achieve their corporate objectives longer term.

An early-stage business should understand the objectives of the CVC and the value that they can bring. A CVC can provide great sector insights or a key route to the market but this can come with additional requirements, such as around ESG. This is driven by the large corporates' ESG reporting and policies. If a founder is planning to approach a CVC in the future, it would be worth starting to update policies and procedures in areas such as ESG.

Whilst investment from a CVC can be highly positive, founders need to be mindful that the CVC’s objectives can change over time with a new corporate CEO and/or strategy. A change in the CVC’s strategy can be disruptive, as it could result in the CVC becoming a silent investor or at worst requiring an exit from the business.

US based funders🔗

US funding always comes up in conversation, given the significant funding capacity in the US compared to the UK and Europe.

It is important to understand that the US funding market is different to the UK and companies need to understand these differences such as:

• Funding round sizes are larger both at the seed stage and series A plus
• Approaching US funders is different to the UK
• Initial US market traction is expected
• A team is based in the US, typically a C-suite or ideally founder

A good source of advice and material on raising US funds is from Wilson Sonsini, who has offices in the UK and the US specialising in helping UK businesses launch and fundraise in the US.

U.S. Expansion Library and Resources | Wilson Sonsini

If you are looking to engage a UK corporate finance advisor to support your fundraise and you want to target US funds, do vet the advisor’s credentials and approach to this area. There are US regulations in place around approaching US businesses for funding which can limit how some advisors approach US based funders.

Government Grants🔗

Similar to equity funding, grant funding can be difficult to navigate and secure. Within the UK there are varying levels of government grants available focused on innovation or specific sectors.

UK Research and Innovation (‘UKRI’) is a key provider of grants in the UK. Its innovation agency is Innovate UK, the name most people have heard associated with UK grants. Their website is a source of upcoming grants and details the application process: Innovate UK – UKRI.

As funding liquidity has tightened, competition for grant funding has increased. Whilst a company can submit a grant application themselves, unless they have experience doing them, the chances of success are increased with the use of an advisor. There are several specialist grant advisors in the UK who can identify relevant grants for your business and help with the application for a fee. These include advisors like Grantify, Grantree and PNO Consultants.

Whilst the UK left the EU in January 2020, companies in the UK can still access EU grants as well as worldwide grants. Applying for these grants may require EU partner companies. Navigating and accessing these grants is harder and will typically require specialist advisors who can help companies navigate both UK, EU and worldwide grants. There are advisors in this area such as Argentum, but the fee will be larger than those charged by advisors purely focused on UK grants.

Debt funding🔗

Bank overdrafts, credit cards and small loans can be available from a company’s bank. They are often short-term in nature and used to manage working capital. In reality, at the early stage, growth debt funding options are limited – especially for businesses with under £3m of annual turnover.

For businesses with c.£500k of revenue, which is recurring in nature, revenue-based debt options could be available. These funders, such as Capchase or Uncapped, lend a percentage of revenue on a revolving basis.

Whilst venture debt is talked about a lot, UK venture debt loans are £2m upwards. To be able to service this kind of debt level, a business will typically need £3-4m of annual revenues and good growth rates. There are upwards of 10 providers in the UK as well as overseas debt funds who will fund UK businesses. In general these providers will want to see:

1. Annual revenue growth of 20-30% plus
2. Cash runway of 6-9 months
3. Breakeven within 12-18 months.

Whilst venture debt is a great source of non-dilutive capital for the right business, it can be expensive and restrictive if growth plans are not achieved. A company board should therefore consider venture debt carefully against other funding options such as equity.

Whilst venture debt may be appropriate for many businesses, if a company has assets (such as intellectual property, inventory receivables etc.) a funding option could be asset finance or invoice discounting. There are a range of specialist invoice and asset finance businesses including our sister company Praetura Debt.

R&D tax credits can also be utilised as an asset to secure short-term funding via specialist funders such as Empowered or Nighthawk. Some of these funders have also started to look at funding R&D claims before the end of the financial year to which they relate.