Alternative funding for growth
Read time: 6 mins Added: 23/05/2023
Whether you run a fledgling start-up or a small business with big plans, raising investment is vital to your growth and success. It can help you hire new people, move to better offices, buy new machinery or launch new products and services.
Fortunately, these days there are more options than ever for getting business funding. In this guide, we’ll look at three of them:
- Business angels
- Venture capitalists
Business angels look to invest in businesses either by themselves or in a syndicate. As well as providing funding, they also offer experienced guidance to start-ups and growing businesses.
They usually have a keen interest in commerce and want to support innovative start-ups. Obviously, they want a return on their investment, but they are also motivated by seeing the business get going and thrive.
The level of involvement can vary from active board membership to passive support, depending on the individual.
Since they're investing their own money, the amounts are not usually game-changing – typically between £10,000 and £50,000, with the average Business Angel investing a median of £25,000 according to the UKBAA1. It can be substantially more if they work in a syndicate.
Rather than using their own money, VCs invest in start-ups by raising funds from large financial institutions, such as pension funds.
Also, unlike angel investors, VCs are all about business. If they see an idea they like, they will want to get involved and will look for a high rate of return.
However, their knowledge and experience can provide valuable support to the businesses they invest in.
The upside is that they can invest significant sums. Where angel investors can offer tens of thousands, VCs can put millions into the right idea.
However, they are more risk-averse and less attracted to start-ups. They will also take longer when it comes to evaluating and signing off on any investment funding, and they’ll expect an equity share of your business in return.
Crowdfunding reverses the traditional model of investment by asking hundreds or thousands of people to contribute smaller amounts. It is used to fund a wide range of start-ups, artistic projects and community ventures.
In return, investors can benefit in the following ways:
- They can have equity from share growth if the business is successful.
- They could get interest on their investment if it’s a peer-to-peer lending scheme.
There are also valuable extras. The rock band Marillion was an early pioneer of crowdfunding and offered band access, merchandise discounts and exclusive updates.
The sums can be large too. Crowdcube, a UK-based crowdfunding company starts at £150,000 and its average raise is £670,000. They famously raised £10 million to support Brewdog's expansion2.
There are pros and cons to having large numbers of investors. It’s easier to raise money because there are fewer obstacles for start-ups and the process takes months rather than years. But it's complex and you may wish to seek financial advice before proceeding.
It's also a very public way to raise funds. So, if your business is built on a secret, innovative idea, this is not the funding avenue for you.
Combining business angels, VCs and crowdfunding
You don’t always have to choose between these options. Indeed, investment by VCs can send a positive message of endorsement to prospective crowdfunders.
Conversely, a successful crowdfunding campaign can attract interest from angel or VC investors.
There are other reasons to mix funding sources. Your VC may only fund you up to a certain point or on the condition that you find additional funds elsewhere. If that’s the case, crowdfunding can fill the gap.
These different options can be complementary and provide far more flexible fundraising. It’s also helpful to have alternative sources of investment advice and support.
You could also consider peer-to-peer lending and peer-to-business lending. The principle is simple. Third parties will front the cash through a fund or other investment vehicle in exchange for a return (though not necessarily equity).
Lloyds Bank can also offer financial support to start-ups and early-stage businesses looking to scale up. Find out more about whether you are eligible for a business loan or overdraft without affecting your credit rating here.
You’ll also find more information about financing a start-up here.
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