5 Startup Funding Challenges in the UK

As a new or prospective founder, securing funding is one of your first challenges. Most entrepreneurs require funding to bring their business ideas to life. The challenge of securing adequate financing is often the only barrier that stands in the way of starting and scaling a startup. However, the UK startup space can be highly competitive, with many innovative business owners simultaneously seeking funds from similar channels. As such, this saturation can complicate the early stages of starting your new business. This article will explain several common funding challenges UK founders face and how you might overcome them. 

1. Complexities in Accessing Funding

There are several complexities founders face when trying to access funding. The biggest challenges founders may come across include:

• difficulties in finding willing investors in a competitive startup environment; 
• the administrative burden of applications and funding preparation; and
• legal complexities. 

You must find time for the administrative and research effort to secure appropriate financing. This initial stage might be time-consuming, but it is unlikely you can easily bypass it. To find willing investors, increase your network, research potential funders and prepare as best you can. 

You can overcome legal complexities by seeking legal advice. Such complexities include difficulties in understanding repayment or investment terms and selecting the most suitable business structure. A lawyer can review relevant agreements, advise you on your startup’s structure and help you identify and mitigate risk. 

2. Availability of Venture Capital 

In recent times, especially over the past year, there has been much less venture capital funding available for startups. Where there is less capital available, securing financing becomes increasingly competitive. 

A potential way to overcome this challenge is to consider alternative funding sources. Alternative sources include:

• startup grants; 
• bank loans; 
• crowdfunding; and
• business incubators. 

You should ensure that your funding sources align with your business’s needs and goals. To do this, consider your short and long-term objectives carefully and assess how to mitigate financial risks. 

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3. Your Ownership Structure

Your startup’s business structure can impact the types of funding you can access. For example, a bank might be less inclined to offer a loan if your ownership structure is overly complex. Depending on your startup’s ownership and objectives, a lawyer can advise you on the most appropriate structure for your business.

4. The London-Centricity 

Startup funding in the UK is often criticised as being ‘London-centric’, meaning much of the funding tends to go to London-based startups. Many venture capital firms call the capital their home. Due to this concentration, founders in other regions might struggle more than London-based startups to secure funds. 

Funders’ focus on London can dishearten founders elsewhere in this competitive space. However, this does not mean finding funding outside of London is impossible. Many successful small businesses began (and remain) outside the capital and have significantly grown since they began operating. 

This challenge means you might consider alternative funding sources beyond private equity. Expanding your network and speaking to others in your position and further in their startup’s lifespan can also help. 

5. The Due Diligence Stage

Due diligence poses a potential challenge to founders. Suppose you successfully pitch your startup to potential investors. One of their next steps is to conduct thorough due diligence on your startup to protect their interests by ensuring your business will be a sound investment. This stage involves careful research into your business. They will consider aspects such as its financial background, the market viability of your business concept, and its operational structure. This process is thorough and potentially takes several months. 

To overcome this challenge and prepare for investors to conduct due diligence, you should:

• keep thorough records and accounts; 
• ensure you only make claims that you can evidence when pitching;
• be as transparent as possible; and
• collaborate with the investors as they undertake this process. 

Key Takeaways

In the UK, founders face several key challenges when trying to secure investment. These challenges include difficulties navigating the funding process, venture capital availability, and the London-centric nature of startup finance. To overcome these challenges, be prepared to spend time developing your network, applying for different opportunities, and potentially considering alternative sources. 

There are also potential legal complexities in securing funding, including around:

• selecting the most appropriate business structure; 
• choosing suitable forms of financing; and 
• identifying and mitigating risks. 

Securing legal advice can be a great idea to alleviate these particular difficulties and simplify your funding process. 

Finally, individuals and organisations that provide funding want to ensure minimal risk to their investment. As such, they will conduct due diligence on your startup. To ensure your startup can successfully navigate this process, keep comprehensive records and be transparent and open to collaboration. 

If you would like legal advice about funding your startup business, our experienced startup lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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