Investing in a new tech firm demands a solid strategy and thorough due diligence. By exploring different investment avenues, you can make informed decisions that support long-term success.
Venture capital and angel investors
Venture capital and angel investors play crucial roles in financing startups, especially during their early points of growth. Both types provide capital in exchange for equity, but they differ significantly in terms of the scale of investment, risk tolerance, involvement and what they look for in a startup.
Angel investors tend to be high-net-worth individuals who invest their personal funds. They usually invest in early-stage startups and get involved at the seed stage, when the business is still developing its product or gaining initial traction.
Meanwhile, venture capitalists are professional investors who manage pooled funds from institutions, corporations and wealthy individuals. They are more likely to get involved at later points, typically when a product-market fit has been demonstrated and is ready to scale. Many investors and emerging companies seek support from venture capitalist lawyers to ensure a smooth, legally sound process.
Crowdfunding
Equity crowdfunding allows private companies, often startups or early-stage businesses, to raise capital by selling shares to many individual investors online. In return, they receive a small equity stake, normally through regulated platforms. Seedrs and Crowdcube are two leading platforms in the UK.
Attracting interest through crowdfunding can serve as market validation. A successful campaign signals public interest in the product or service, making it easier to demonstrate potential to larger, institutional backers.
Government Grants and R&D Tax Credits
The UK government offers a variety of grants and incentives to aid tech innovation, especially for businesses focused on research and development (R&D). Two key initiatives include:
- Innovate UK grants: Innovate UK, part of UK Research and Innovation (UKRI), provides funding to support innovation across various sectors. Grants help projects ranging from early-stage to large-scale development and are usually awarded through specific competitions. These tend to target areas such as artificial intelligence, clean energy and mobility. Or, they can be for general innovation projects.
- R&D tax credits: R&D tax relief incentivises businesses to invest in innovative projects aimed at scientific or technological advancements. SMEs can deduct an additional 86% of qualifying R&D costs on top of the standard 100%, while loss-making companies can claim a payable credit. Larger businesses can benefit from the R&D Expenditure Credit (RDEC), which offers a tax credit on qualifying costs. As of April 2024, these schemes have merged into a single system.
Bootstrap financing
Bootstrapping involves using personal savings, business revenues and minimal external funding to launch and sustain a company.
This approach relies on self-funding and postponing outside investment. Entrepreneurs reinvest profits and typically operate with lean budgets to drive sustainable growth. While bootstrapping can be highly effective, it demands careful financial management and discipline.
