One of the biggest challenges for any potential entrepreneur starting a business is access to finance. Research from studies such as the Global Entrepreneurship Monitor has shown that in most cases the main financier of the company is the founder, followed by his family or friends. Thanks to the introduction of tax incentives such as the Enterprise Investment Scheme (EIS), funding for start-ups from business angels — high net worth individuals who directly fund new early-stage companies — has also increased. Finally, and less common, is the provision of formal venture capital, typically to new ventures in technology-intensive or knowledge-based industries that have the potential for a significant return on investment.
Sources of financing for start-ups
The Ambitious UK Start-Ups Report, sponsored by Starling Bank, is based on data from 1,219 applicants for 2023 UK Startup Awards which recognizes the best new companies in the UK. This research uncovers several key statistics and trends within the UK start-up community in relation to the funding landscape of their businesses.
The study shows that 85% of new businesses rely on the founder’s personal capital as an initial source of funding, allowing entrepreneurs to maintain full control and ownership of their business and avoid debt. By relying on sales rather than external funding for revenue, bootstrapping companies are more customer-focused and have more freedom to develop without outside interference. However, an over-reliance on the founder’s personal funds due to a lack of long-term financial resources can also limit growth, and it is not surprising that access to finance is seen as the biggest challenge in supporting new ventures in the next 12 months, especially since Financial institutions view startups as high-risk ventures without a proven track record or market presence. In fact, only 13% of founders had taken out a bank loan to finance their business, mirroring other recent research into the proportion of SMEs using debt financing in the UK.
Another important source of funding was family and friends (20%). However, a large study of founders showed that while seeking financial support from this source can be a convenient and accessible way to fund a startup, it often involves significant compromises and potential complications. Therefore, founders should carefully consider the impact of taking money from close relationships, as this can strain personal ties, lead to conflict, and impact the founder’s control over the company.
The influence of business angels is also significant, with almost one in five (19%) companies seeking their support, highlighting the growing importance of these informal sources of investment. Of these determined and ambitious startups, 10% successfully secured equity funding from venture capital firms, demonstrating their ability to attract external funding. Previous studies have shown that angel and venture capital is concentrated in regions such as London, the South East of England and the East of England. A similar finding is confirmed in this study, with 65% of angel and venture capital funding going to start-ups in wealthier areas of the UK.
Likewise, two-thirds of this type of funding is intended for start-ups developing new technologies (agritech, AI, fintech, high-value manufacturing, life sciences, medical technology, mobile applications or platforms and new product development), which is not surprising given the Many venture capital funds and angel groups focus on knowledge-based companies. In contrast, 74% of self-funded entrepreneurs are based in non-tech sectors.
These founders are looking to the future and planning to secure further investments for their companies. However, the path ahead is not without challenges and complexities, as the current trends in this study demonstrate. Given the heavy reliance on startup funds, 66% of startups will seek investment in their business in the next 12 months, while 81% of those based in new industries will seek additional funding.
In contrast, only 13% used traditional business or bank loans, suggesting that this funding may have limited availability from UK banks or may simply be less attractive to founders seeking flexible or alternative funding options.
SEIS and EIS investment programs
More and more companies are starting to use tax incentives through the UK Government’s Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) to raise finance. Recent data from HMRC shows record investment has been made in both schemes. For example, 4,480 companies raised a total of £2.3 billion in funding under the EIS scheme in 2021–22.
The report shows that 23% of start-ups applying for the UK StartUp Awards have chosen to use SEIS and EIS, showing that they serve as a source of important financial support for new businesses. Those taking advantage of these incentives tend to be startups with older founders (58%), all-male teams (57%), located in wealthier areas (60%), or operating in new industries (61%). While this may reflect the focus of the program itself, there could and should be better training of other groups, including female founders, who have yet to take full advantage of this initiative to make investments in their new companies.
In summary, the funding landscape for new businesses in the UK shows a strong reliance on founders’ personal funds. This trend highlights the importance of self-financing in maintaining control and avoiding debt, but also points to possible limitations to growth due to limited financial resources. The report also highlights the important role of family, friends and business angels, all of whom contribute to the diverse startup funding ecosystem. The lower take-up of bank loans reflects a cautious approach to debt financing and a move towards more flexible financing options. In addition, the increasing use of government incentives such as SEIS and EIS indicates a growing awareness among entrepreneurs to use such programs for financial support, although there remains a need for broader education and access to these resources for different population groups. As new companies embark on their entrepreneurial journey, the findings suggest a future where a balanced mix of self-financing, informal investment and government incentives will continue to shape the business landscape, with growing demand for alternative financing options to support diverse and ambitious people. up community in the UK.
