Article submitted by Salvatore Minetti, CEO and Co-Founder, Prospex
The UK is globally renowned for its innovation and entrepreneurialism, with the sheer number of startups alone reflecting the country’s bustling collective of entrepreneurs. Last year alone, 589,000 new businesses were launched across the county. Meanwhile, over the past 5 years, an impressive 3.5 million companies have been founded in total.
This spike in business birth-rates may be attributed to a number of contributing factors, ranging from accelerator and incubator programmes to targeted Government initiatives to support early-stage firms. The rise of alternative finance has also played a significant role, offering startups new avenues to capital to support their long-term expansion. Most prominent of these alternative finance sources is debt and equity crowdfunding.
For many entrepreneurs, launching a funding campaign for their business can be a daunting and overwhelming experience. As the CEO and Co-Founder of Prospex.ai – a company who has just launched a crowdfunding round on Syndicate Room – there are a number of important lessons startups need to keep in mind when launching a fundraising round.
Equity or debt finance?
One of the key decisions to make before launching a crowdfunding round is determining what type of finance your company is most suited towards. Most private funding options can be characterised as either equity or debt investment – and while both can deliver promising returns, one form of finance is generally better suited to a business.
Debt financing is a popular option for scaling SMEs and reflects the traditional loan model whereby investor capital is injected into a business on the basis that the loan will be paid back with interest. Within the alternative finance space, the most common form of debt finance is peer-to-peer lending or debt crowdfunding.
Some entrepreneurs may opt for debt investments as it enables them to raise the necessary capital without yielding a share of their business. However, a lack of stable, sizeable revenues can prevent fledgling companies from acquiring this form of investment. Meanwhile, equity finance involves selling a stake in the business to investors. This has many advantages, including the potential on boarding of investors who are themselves experienced business leaders and bring with them a wealth of skills and connections.
Both equity and debt finance are viable options for entrepreneurs looking to scale their business and support its long-term growth. Careful consideration of both options if therefore necessary to decide which would be the most advantageous for each individual company.
Have a realistic and attainable target in mind
In today’s environment, there seems to be an underlying pressure on entrepreneurs to secure as much money as possible in order for their business to be taken seriously. This is the entirely wrong approach to take. Instead, entrepreneurs need to be realistic when it comes to setting their fundraising goals. Doing so will allow them to establish exactly how much external investment is needed and how it will lead to their long-term business growth.
In reality, both missing and overshooting funding targets can be counterproductive to a young company. That’s why it is best to be clear on how much funding is needed for the business to grow instead of trying to raise as much capital as possible.
Be clear on how the funding will be used
Setting out and following quantifiable business achievements – whether in relation to product development or team expansion – can help entrepreneurs determine how much investment they need.
Funding, in whatever form it takes, must therefore be informed as part of a development strategy which pinpoints exactly when investment will be needed, the volume of capital required and what it will be used for. Without this foundation, business owners can fall into the trap of simply launching a funding round to raise as much investment as possible with no clear strategy in place.
There is a risk that entrepreneurs could raise more finance than they are able to manage, leading to hasty, expensive and inefficient allocation of resources. Being disciplined with goals and targets from the outset will keep business spending on track and ensures that business owners are aware of how much capital they need at each stage of expansion.
Being organised and disciplined throughout the crowdfunding campaign can make a massive difference in the outcome and is crucial for overseeing sustainable business growth. Moreover, this is particularly important for investors, who often have a vested interest in the business and are keen to see the company reach specified targets at a sustainable rate.
Launching a fundraising campaign is undeniably a daunting prospect. However, with a clear funding strategy in place – including a good understanding of what type of funding is best suited to the business and how the money will ultimately be spent – small business owners can be confident that their efforts will pay off through a successful campaign. And with strong investor sentiment geared towards supporting innovative new startups, there is a wealth of opportunities for UK entrepreneurs looking to launch and grow their own startup.
Salvatore Minetti is the CEO/Founder of LOMi Artificial Intelligence. Prospex.ai, Sales Leads Intelligently, is their first product. He is also a Portfolio Non-Executive Director for numerous technology companies.