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Some of the most successful companies over the past decade are in the technology or digital sector. The global pandemic, despite causing havoc to every aspect of our life, has accelerated this trend, bringing even the staunchest technophobes online. It’s hard to believe all those people will forget the convenience of ecommerce and go back to the status quo now lockdown restrictions across the globe are easing.
So the opportunity is huge–and it’s here to stay–for startups in the digital space, particularly companies in the MarTech sector, in many ways the engine that powers the digital revolution.
"As a rule of thumb, the higher you go on the funding ladder, so to speak, the more onerous the conditions."
But despite this unusually propitious backdrop, getting a company off the ground is no easy feat. Even when the stars are aligned, you have the right idea at the right time–and the right people to execute it–there is still the challenge of getting sufficient funds.
Indeed, inability to secure funds is regularly cited amongst the main reasons why startups fail.
The good news is that the UK has one the best support ecosystem for startups in the world. One crucial part of that ecosystem is the government’s Venture Capital Schemes, in particular the Enterprise Investment Scheme, EIS in short.
Launched in 1994, the EIS has provided around £24 billion of funding to nearly 33,000 young companies. Perhaps unsurprisingly, in the last year the sector that received most investment by some length was “Information and Communication” (the SIC sector that encompasses tech and digital companies), which received around a third of all the investment.
So, how do these companies do it?
The principle is simple: the EIS is intended to help young and entrepreneurial companies raise money from private investors. It’s a good deal for the investors–who receive very valuable tax relief on their investment–and a good deal for companies that can get access to the funding they need.
If that sounds appealing (it should: many a great companies have received EIS funding – Cazoo anyone?)–then there are two questions founders need to answer. First: will my company qualify for EIS? And, second: how will I go about raising the money in practice?
Whether or not your company qualifies for EIS should be straightforward to check. There are, obviously, some fairly specific rules around this–but a startup in the MarTech sector is likely to qualify. The www.gov.uk website gives all the details–the main criteria are that the company needs to have less than £15 million in gross assets and fewer than 250 full-time employees. If so, over the seven years from its first commercial sale, you should be able to raise up to £5 million a year (up to £12 million in a company’s lifetime) under EIS.
So, how do you go about raising that money in practice?
After investing your own money, for many companies, the next port of call is to turn to family and friends (they should be able to benefit from the tax reliefs associated with EIS), then possibly to an angel investor. Angel investors tend to have specific areas of interest–many are entrepreneurs themselves. For instance, Alex Chester man–co-founder of Love Film and founder of Zoopla and now Cazoo–is also one of the UK's most active angel investors having backed dozens of early-stage digital startups.
If more funding is needed, there are other options–from crowd funding sites to more selective investment platforms such as Wealth Club, all the way to EIS funds, VCTs or private equity houses.
As a rule of thumb, the higher you go on the funding ladder, so to speak, the more onerous the conditions. Whilst friends and family are unlikely to be wanting a saying into how you run your business, a fund manager or a professional investor will provide expertise but will also want some control (other than its shareholding), typically a seat on the board.
Is it worth it? If you look at what are arguably the most successful private companies in the country–the ‘unicorns’ that are now worth over $1 billion–the answer seems to be yes.
Data from last year indicates the making of a unicorn took an average of seven years, 4.3 founding rounds and £111 million investment.