6 Ways to Fund Your Tech Startup
Taking your tech idea from dream to reality will undoubtedly be one of the biggest adventures of your life. And, as with any adventure, there will be challenges to overcome. Chief among these may be generating enough funding to both get your startup off the ground and scale it appropriately.
The good news is there are several options available to UK founders, not counting taking out business loans or bootstrapping, so let’s discuss them in turn.
Equity financing means raising capital by selling shares in your startup to investors. This is the kind of funding that generates headlines in the industry press – anyone who reads sites like TechCrunch will be familiar with founders being feted like rock stars as they enjoy millions (very often tens of millions) in equity financing. Of course, many such deals are far more modest, but no less important to the founders who are lucky enough to land them.
One source of equity funding are angel investors. These are wealthy individuals – often successful tech entrepreneurs in their own right – who purchase stakes in companies using their own money. Angels often work closely with founders, bringing their experience as well as their cash to the table.
Equity financing can also come courtesy of venture capital (VC) firms. These are companies that, rather than investing their own money, have access to cash from large institutions such as insurance companies, pension funds, investment banks and endowments.
VC firms identify startups with high growth potential, and can make all the difference for companies which have already established themselves and are looking to scale up. Raising VC funds can certainly be a complex and protracted process, which is why it can help to leverage the experience and connections of a consultancy like Hampleton Partners, which advises on capital raising and has an established network of venture capitalists around the globe.
Seed Enterprise Investment Scheme
The government runs a few schemes intended to help companies attract capital investment. The one that’s relevant for new startups is the Seed Enterprise Investment Scheme, or SEIS.
The scheme incentivises the provision of funds by providing tax reliefs for individual investors who buy shares in your company. To be eligible, your company must not have gross assets beyond £200,000 and have fewer than 25 full-time employees at the time the shares are sold.
It’s possible to raise up to £150,000 through this scheme, and any money raised must be used within three years of the shares being issued. The full details on SEIS can be found on the UK government website.
A grant is an amount of money provided by the government, philanthropists, or publicly-funded schemes. The advantages of grants are that – unlike loans – they don’t need to be repaid and don’t accrue interest, and you don’t have to give away any shares in your startup.
A prominent source of grants is Innovate UK, which is part of UK Research and Innovation, a public body responsible for research and innovation funding. At any given point, Innovate UK will have a range of grant opportunities within specific sectors, and the current list can be found here.
There are also numerous grants allocated for specific regions within the UK. They will all have their own eligibility criteria, so it’s important to thoroughly research your options so you don’t waste your time applying for grants that won’t deem your business relevant to their objectives. You can browse an up-to-date list of public bodies offering funding and other forms of support on the UK government website.
R&D tax relief
If your startup is spending money on scientific and technological innovations, it may be eligible for R&D corporation tax relief – a government initiative intended to reward forward-thinking entrepreneurs.
In order to claim the relief, which will provide you with more funds to re-invest into your business, you’ll need to demonstrate how the work done by your company is creating “an advance in the overall field, not just for your business”, and is working to overcome previous uncertainty in the field using research, testing and analysis. If you qualify, you may be able to claim for the costs of fuel, materials, power, cloud computing licenses, software platforms, and the salaries of staff working on R&D projects.
Full details on the eligibility criteria and how to claim the tax relief are on the UK government site.
The Patent Box scheme aims to incentivise businesses to commercialise their intellectual property (IP) within the UK. It does this by reducing the corporation tax on profits related to the qualifying IP to 10%.
Your company can qualify for Patent Box if you own (or have exclusively licensed-in) patents which have been granted by the UK Intellectual Property Office, the European Patent Office, or certain countries in the European Economic Area. Your company must also have significantly contributed to the creation of the patented invention (or a product which incorporates the invention).
The details of Patent Box, and how to apply, can be found on the UK government site.
Crowdfunding has become a key way that allows many tech startups get off the ground. There are two main categories: equity crowdfunding and rewards-based crowdfunding.
The latter, exemplified by the Kickstarter online platform, is the type that’s synonymous with the very concept of crowdfunding in many people’s minds. The main advantage for founders is that you don’t relinquish shares in your company in exchange for financial backing. Instead, you provide products or services related to your business. Say you’re getting donations for your VR firm through rewards-based crowdfunding. In this example, you might give contributors your headsets at heavily discounted prices.
By contrast, equity crowdfunding platforms like Seedrs follow a more traditional model whereby contributors are given shares rather than rewards.
One of the big benefits of crowdfunding, whichever model you choose, is that it can put your brand out there in the public eye, potentially generating word-of-mouth interest as well as cash.