New darlings of the investment world

Tax changes and developing investment channels have focused the investor spotlight on startups, so much so the moneymen are ploughing more cash than ever into new ventures


Circumstances have never been better for people investing in UK startups. Soaring numbers of new businesses means there is greater choice than ever before, while new investment platforms and helpful tax treatments make the whole the process more profitable and less risky than it was a few short years ago.

The Seed Enterprise Investment Scheme (SEIS) and its big brother the Enterprise Investment Scheme (EIS) are two newish examples. There are venture capital trusts, social investment tax relief and a host of other goodies designed to make new businesses a better bet.

But that’s not all. The government-backed Start Up Loans programme allows new businesses to access small loans at low rates with generous payment terms up to five years. Private investors can get in on the act through crowdfunding websites.

Historically, startups in need of money went to “friends, family and fools”, or possibly a bank, but never to someone offering cash for equity. The reason – if it isn’t too obvious – is because the value of most startups is very low.

But today, as long as a startup can convince people it will be enormously successful in future, based on the idea, management credentials, support and so on, it can get the dough it needs without diluting its stock.

Cambridge University figures show investment-based crowdfunding platforms raised £84 million last year, compared with £28 million during the previous 12 months.

Institutional investors look favourably on crowdfunding as a great source of early market validation

Peer-to-peer lending or crowdlending is another burgeoning avenue of funding for startups. Its popularity is soaring, with £1.3 billion lent in 2014 compared with £480 million the year before, according to statistics from innovation charity Nesta.

“This is likely to continue to explode over the next few years,” says Andrew Davies, co-founder of marketing software firm Idio, which has raised seed and Series A funding totalling nearly £6 million.

“In fact, institutional investors look favourably on crowdfunding as a great source of early market validation. If you can raise money through crowdsourcing platforms, it demonstrates a certain level of market demand,” he says.

Startups are suited to crowdfunding because there’s only one pitch to write, instead of tailored pitches for multiple investors, and, if successful, businesses can forever more point to a crowdfunding round as evidence of the business’ validity in its market.

The crowd is an evermore popular route to drumming up returns for new businesses, but lone wolves are waking up to startups and are also speculating liberally.

Lending through the crowd is seen as an investment that complement people’s pensions and ISAs, whereas businesses angels and venture capitalists, who take on giant lumps of risk on their own, are out to make big returns quickly.

“The environment for private investors today presents more opportunities than ever before,” says Jonathan Snade, a specialist at law firm Thomas Eggar in advising growth businesses on funding options.

“A combination of numerous factors has led to this development – tax incentive schemes, the desire of private individuals to diversify their investment portfolios, savings accounts and property assets, an increase in early-stage businesses, a rise in entrepreneurship, and the explosion of crowdfunding platforms.”

Ian Thomas, managing director at Turquoise, an investment bank focusing on cleantech, adds: “Business angel investment and crowdfunding are very active at present, especially in the startup arena. Venture capital is also expanding in many sectors, particularly internet, digital and financial technology.”

We now have investors who truly understand the economics and potential of startups in the market

What unifies investors is the desire to find viable businesses with ambitious plans and plenty of scope to grow. Startups should refine their idea, assemble a reliable team and invest in marketing materials.

Businesses that can put together an attractive package for investors, mixing security and copious opportunities for profit, will not find themselves short of demand. It’s a sellers’ market far detracted from the scepticism of the dotcom bust years.

“The main difference now is the increased awareness and experience of everyone – entrepreneurs and investors alike,” says Ben Grech, co-founder of UniPlaces, a two-year-old startup which has already earned an investment of around £1.5 million from Octopus Ventures.

“Not only has the vast amount of technological advancements dramatically reduced the costs of launching a new product, we now have investors who truly understand the economics and potential of startups in the market,” he says.

“Some recent IPOs [stock market initial public offerings] of UK and wider-EU companies have also paved the way for a more receptive funding market. I think we are over the ‘dotcom’ phase. The companies around nowadays are applying technology to disrupt markets in new ways – many using it to facilitate the offline world.”

Climate-KIC UK provides an acceleration programme turning startups into investible businesses and of the six startups that have completed the organisation’s programme, five have received funding of £1 million or more.

Andrew Burford, Climate-KIC UK’s head of entrepreneurship, points to a variety of funding options for startups, sometimes from unusual sources. “We are seeing a number of social impact funds, British Gas has one, for example. These are very useful as part of the overall investment scene,” he says, describing the various alternative sources of investment he has come across.

“We are seeing reasonably active family offices, for instance high-net-worth investors from families such as the Rothschilds, for example. These aren’t run like a venture capital business and behave differently to angel investors. They might invest more ethically, for example, and will pick investments not just for the financial return, but also for the social value.”

But remarkably, given all this, the UK still has some way to go before it can call itself a world-leading home for investors. Dan Wagner, chief executive of Powa Technologies, says he looked across the Atlantic to fund his business.

“I believe the UK investment environment has improved tremendously, but still has a long way to go to catch up with the US,” he says. “Powa Technologies was valued at £1.78 billion last year after a series of investments, including a $96.7-million Series A round, the largest ever secured by a UK tech startup – but all the money came from the US.”

CASE STUDY

THE STAG’S HEAD

THE STAG’S HEAD

  • A traditional public house and restaurant with accommodation.
  • Funded by Liquid Finance in November 2013 and August 2014.
  • £25,000 funding with an approximate six months recoup time.
  • Funding used to ease transition between employment of chefs and to refresh signage and areas of the building, including the bar, kitchen and some bedrooms.
  • Turnover improving following deficit attributed to an underperforming chef.

BACKGROUND

The Stag’s Head in Maidwell, Northamptonshire, is a traditional pub in a rural setting. The current licensee, Robert Willoughby, has been in charge for the past 14 years. The business employs five full-time staff with an extra nine part-time and has a fluctuating turnover of around £420,000 a year.

Like all pubs, there are cycles in the business with good and bad years. However, it faced a specific challenge with a drop in sales in its most profitable area – the restaurant.

FUNDING REQUIREMENT

At The Stag’s Head, the chef is the highest paid employee so when food sales struggled, due to the chef underperforming, Mr Willoughby had to replace him. Despite taking some time to find a new chef, a business cash advance from alternative lender Liquid Finance provided what the pub needed to help it get through this challenging period.

Mr Willoughby looked at getting a bank loan, but decided it would not suit his needs. Instead he opted for a business cash advance.

“I really like the concept of the Liquid Finance cash advance and it suited my needs very well,” he says. “You get a cash lump sum to help your business grow and then you pay it back through a percentage of your card takings. They don’t take too big a bite, if you only process £50 through your card machine, then they only take a percentage of the total.”

HOW FUNDING WORKS

Liquid Finance uses the company’s card payment history to calculate an advance. Liquid finance applied a factor rate “fee” to the advance and purchases at an agreed daily percentage of the business’s future card receivables until the advance, plus fee, is repaid.

Pricing is bespoke to match the needs of the business. Funding is provided within as little as five days from application to cash in the bank and daily batch settlements are automated.

“Banks tend to look at things differently and don’t always see the positives in a business; they assess risk differently. A Liquid Finance cash advance is more concentrated and should be used to sort out a specific opportunity or threat,” says Mr Willoughby.

RESULT

“It helped me think outside the box and to manage money in advance,” Mr Willoughby concludes. As a result of the funding, turnover at The Stag’s Head is improving and important facilities have been upgraded.