How to secure the right type of investment for your startup

Salvatore Minetti, CEO and founder, Prospex.ai

The startup sector in the UK is thriving. Last year alone, 589,000 new businesses were launched – 22% more than in 2012. In total, over the past five years approximately 3.5 million new companies were founded across the country.

Entrepreneurs thereby face a wealth of opportunities, particularly in light of the strong financial support readily available to help nurture and grow early stage businesses. And this vital capital can be found in many forms – from private sectors investment like debt finance and equity finance, to public sector initiatives like the Seed Enterprise Investment Scheme (SEIS).

With a plethora of options available to entrepreneurs looking to secure finance for their fledgling company, deciding how to raise investment and which form of finance is the best fit for their business can be a challenging task.

There are a number of key lessons that entrepreneurs should keep in mind when raising investment for their startup. As the CEO and Co-Founder of Prospex – a company that has just launched their second crowdfunding round on Syndicate Room– I have become well versed in the trials and tribulations of securing the capital needed to successful grow a business.

 Debt finance vs. Equity finance

Most private lending can be characterised as either equity or debt investment. While both can be effective avenues of growth capital, there are important differences that business owners need to be aware of.

With debt finance, investment comes in the form of loans which are repaid with interest over time. Unlike equity investment, debt investors do not get equity in the deal or hold a stake in your business. This finance option is typically best suited to more mature businesses with a healthy and consistent turnover that enables them to repay the upfront investment made by the individual, group or company.

Meanwhile, equity finance involves selling a stake in the business to investors, giving these investors – whether they are high-net-worths (HNWs), VCs investors or private equity firms – some control over your company and a share of the overall profits.

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.

The added benefits of mentorship and advice that often comes with equity investment should also not be overlooked when deciding which form of finance is right for your company. Holding a stake in your business, investors are often more willing to offer their expertise and industry connections– which can prove to be a major advantage for young companies during the early growth stages.

Taking advantage of government-backed initiatives

Government-backed schemes are also a promising option for entrepreneurs seeking investment for their startup. The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) are two alternative options that can give fledgling companies much-needed access to growth capital.

Since 1993, the EIS initiatives have contributed £1.8 billion worth of investment into 3,470 UK SMEs in 2016-17. Through this model, Investors are given tax breaks in return for backing scaling companies, encouraging private investment into early stage businesses and supporting entrepreneurship across the country.

 How much money should you raise?

Once you have decided which investment route is best suited for your business, the question remains – how much money do you actually need to raise?

There is an underlying pressure on entrepreneurs to secure as much money as possiblein order for their business to be taken seriously. However, more isn’t necessarily better. Instead, a more focused approach based on specified goals may in fact be more effective and encourage a business to grow to its potential.

Setting out clear targets before launching a funding campaign will establish exactly how much external investment is required to meet your business milestones. In a climate where investors are constantly on the lookout for innovative startups to support, there are massive opportunities for entrepreneurs looking to develop and grow a successful business. Taking the time to consider all the investment opportunities available and decide exactly how much money is needed to achieve your business goals istherefore crucial for overseeing a successful funding campaign that will fuel long-term growth.

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.