Essential Tips for Fundraising Success in the UK

In this episode of our Growth Spotlight series, we delve into the intricacies of fundraising for startups in the UK. Raising capital is a key yet challenging aspect of building a successful business, and understanding the various funding options available can make a significant difference in your startup’s trajectory. 

We spoke with Sam Simpson, CEO of FounderCatalyst, to provide expert guidance on this topic. With a proven track record of scaling businesses and making numerous angel investments, Sam offers invaluable insights into the UK’s funding landscape.

Understanding the UK Funding Landscape

The UK presents a diverse array of funding options, each catering to different business needs and stages of growth. For many startups, understanding these options is essential to making informed decisions about how to finance their ventures. In our discussion, Sam breaks down the primary types of funding available to startups in the UK—debt, grants, and equity—and explains their implications for early-stage companies.

Burak: How can you explain your understanding of the funding landscape in the UK, particularly highlighting the key funding sources available for startups like EIS/SEIS?

Sam:

To set the stage, Sam discussed the three main types of funding available: debt, grants, and equity. Each comes with its own set of benefits and challenges:

• Debt Solutions: Borrowing money that must be repaid with interest. While it offers straightforward access to capital, it carries significant risks, especially if personal guarantees are involved. For early-stage startups, this can mean risking personal assets, making debt a less attractive option.
• Grants: Non-repayable funds often provided by government bodies or organisations like Innovate UK. Though appealing as "free money," grants come with highly competitive application processes and low success rates, making them a challenging route.
• Equity: Involves selling shares in exchange for capital. Unlike debt, there’s no repayment obligation, which means giving up some ownership and control. Equity funding is a popular route in the UK due to schemes like SEIS and EIS, which offer tax incentives to investors.

SEIS and EIS: The Backbone of UK Startup Investment

Understanding the role of the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) is fundamental to navigating the equity funding landscape in the UK. These schemes are designed to incentivise startup investment by offering significant tax relief to investors. During the discussion, Sam highlighted how these schemes are integral to attracting investors in the UK.

Burak: Why do investors love SEIS/EIS? Which investors can or can’t make use of SEIS/EIS?

Sam:

Sam emphasises that SEIS is so pivotal that without it, a startup might be considered "almost uninvestable" to many UK angel investors. This is because:

SEIS (Seed Enterprise Investment Scheme): 

They are designed for very early-stage companies within their first three years of trading. It allows startups to raise up to £250,000 and offers investors a 50% tax relief on their investments. Additionally, any profits made from these investments are exempt from capital gains tax, making it a vital tool for startups seeking initial seed funding.

EIS (Enterprise Investment Scheme): 

Tailored for companies that have moved beyond the early stages but are still relatively young. EIS allows for raising to £12 million, offering investors a 30% tax relief on investments up to £1 million per tax year. For companies requiring larger capital injections, this scheme can be particularly advantageous.

These schemes not only reduce the perceived risk for investors but also provide startups with a powerful tool to enhance their appeal in a competitive market.

Steps for Startups Preparing to Fundraise in the UK

When preparing to fundraise, especially under the SEIS/EIS schemes in the UK, understanding the steps involved can make a significant difference. During the conversation, Burak and Sam discussed the key actions startups should take to effectively prepare for fundraising.

Burak: What are the first steps a startup should take when preparing to fundraise (or SEIS/EIS) in the UK? Also, could you outline any specific steps or considerations for non-UK startups looking to leverage these schemes?

Sam:

Sam emphasised that preparation is crucial for any startup aiming to raise funds. The process begins with creating a solid pitch deck that follows a standard flow—covering aspects such as the problem, solution, market size, competition, the team, and the financial ask. This helps in communicating the business potential to investors.

For UK fundraising, especially under SEIS/EIS schemes, Sam outlines five critical elements every startup should prepare:

1. Pitch Deck: Ensure your pitch deck is concise and follows a standard format to make it easy for investors to understand your business and its value proposition.
2. Financial Forecast: A minimum of three years of financial projections is expected, including revenue, costs, overhead, and cash flow. For SEIS/EIS applications, having a longer forecast might be necessary if your business shows a delayed path to profitability.
3. SEIS/EIS Advance Assurance: Before approaching investors, startups must obtain SEIS/EIS Advance Assurance from HMRC. This proves to investors that they will qualify for tax relief under these schemes.
4. Term Sheet: A concise, 3-4 page document that outlines the investment terms, including valuation, rights, protections, and the cap table. This simplifies the investment decision for potential backers.
5. Valuation Justification: In the current fundraising environment, investors increasingly expect startups to justify their valuation. Sam suggests using methods like comparables, scorecards, or the Berkus method to support your valuation.

For non-UK startups, Sam explained that they can also make use of SEIS/EIS schemes without the need to reincorporate as a UK company. However, there are specific conditions to meet. The company must cross-register with Companies House in the UK, which is a straightforward process. More importantly, they need to establish a "permanent establishment" in the UK. This could be an office, a warehouse, a manufacturing facility, or an agent who has the authority to act on behalf of the company. A UK-based director or manager who makes decisions for the company can also fulfil this requirement.

Common Mistakes to Avoid During Fundraising

Despite the wealth of opportunities, many startups make mistakes during the fundraising process that can jeopardise their chances of success. Sam highlighted several common pitfalls that founders should avoid to enhance their fundraising success.

Burak: What are common mistakes startups make during the SEIS/EIS process?

Sam:

Sam identifies two major mistakes:

1. Insufficient Preparation: 

Many founders approach investors without a deep understanding of their financials, market size, or growth potential. Investors look for evidence of a solid business model, traction, and a clear path to profitability. Without these elements, it’s challenging to convince investors of your startup’s value.

2. Being Too Rigid or Desperate: 

It’s important to approach discussions with flexibility and a clear understanding of your own needs and limits. Being overly eager or inflexible can deter potential investors and undermine the negotiation process. Instead, focus on building a strong case for your business and maintaining open, honest communication with potential backers.

Advice for Successful Fundraising

To wrap up our insightful discussion, Sam provided some final advice for founders navigating the fundraising landscape. He stressed the importance of knowing your numbers inside out. Investors are highly analytical and will scrutinise your financial projections, market analysis, and business model. Being able to clearly and confidently discuss these elements can make a significant difference in how you are perceived.

Burak:  What advice would you give to founders for finding investors and building strong relationships with them?

Sam:

Sam also recommended prioritising the right fit over just securing funds. It’s tempting to accept any investment offer, but finding investors who share your vision and can contribute strategically is more valuable in the long run. These investors will not only provide capital but also support your startup’s growth and help navigate challenges.

Lastly, he advised being patient and persistent. Fundraising is often a lengthy and arduous process. Rejections and setbacks are part of the journey, but maintaining resilience and continuing to refine your pitch and strategy will ultimately lead to success.

By applying these strategies and insights, startups can enhance their approach to fundraising and improve their chances of securing the necessary capital to fuel their growth and achieve their goals.

For more insightful discussions and expert advice, stay tuned to our Growth Spotlight series!