By Salvatore Minetti, CEO and Co-Founder, Prospex.ai
The UK boasts some of the world’s most ambitious and innovative startups, leading disruptive trends across a variety of different industries. The numbers are impressive – 589,000 new businesses were created in 2017, and 3.5 million companies in total have been launched in the past five years.
With a rich history of entrepreneurialism and strong investor sentiment to match, startups have never been better placed to achieve their full growth potential. This is particularly true in light of the different alternative finance avenues currently available to entrepreneurs. Crowdfunding, for instance, has become a popular form of finance for entrepreneurs seeking to fund their businesses.
For many business founders, launching a funding campaign can seem like a daunting and overwhelming experience. The expansive range of different funding models means that businesses need to be clear on exactly what type of funding is best suited to their priorities. As the CEO and Co-Founder of Prospex.ai– a company who has just launched a crowdfunding round on Syndicate Room– there are three important lessons startups need to keep in mind when deciding which form of alternative finance is right for their business.
Is the business better suited to debt or equity finance?
The question that almost immediately confronts a business looking to crowdfunding is whether they are more suited to debt or equity finance.
Debt-based crowdfunding, or peer-to-peer lending, is similar to a traditional bank loan, whereby the company accepts finance from an investor – be it an individual, group or company – in return for agreeing to repay the total sum with interest over time.
This form of financing is a popular option amongst entrepreneurs, as it is considered relatively straightforward, low-risk, and allows the founders and existing shareholders to maintain full control of their business. However, the loan repayment can take a toll on young companies that do not yet have a healthy turnover. Debt financing is typically suited to more established companies who are able to pay back a loan to a group of investors with interest following the initial receipt of debt investment.
Equity financing, on the other hand, involves multiple people investing in the company and receiving equity in the business in return. Unlike debt financing, investors receive a share of the business in return for their investment. Equity finance can be sourced from seasoned angel investors, venture capitalists and equity crowdfunding platforms.
Raising capital through equity financing means that entrepreneurs are able to access individual investors who can provide advice, support and mentorship. As investors in the business, they have a vested interest in seeing it succeed, and can bring to the table a wealth of skills and invaluable industry connections.
Know how much you need to raise
Despite the common misconception that entrepreneurs should aim to raise as much capital as possible, raising too much money can be just as harmful as raising too little. Instead, entrepreneurs embarking on a crowdfunding round need to be realistic when setting their fundraising goals and have clear targets in mind before they publicly announce their raise.
Doing so allows them to determine exactly how much external investment is needed, and how it will contribute to their long-term business growth. In other words, having a clear idea of how much money the company aims to raise will help them focused on their long-term goals.
Develop a clear strategy
On a similar note, it is important to have a clear business plan in place and know your company’s financials inside out before launching a crowdfunding campaign. 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. Set out and follow quantifiable business achievements – whether in relation to product development or team expansion – to determine how much capital you need to reach these business milestones.
Doing so will also give you an indication of when investment is needed and will determine from the outset exactly what the capital raised will used for. Ultimately, being organised and disciplined throughout the crowdfunding campaign can make a massive difference in the outcome and is crucial for overseeing sustainable business growth.
Launching a crowdfunding round is incredibly daunting for the unintiatied, however taking the time to devise a clear strategy and determine the best form of finance to scale your business is key to overseeing a successful campaign. And with strong investor sentiment and a wealth of opportunities for startups across the UK, there is an abundance of support for entrepreneurs looking to grow their business.