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For more mature businesses : venture debt funding

Venture debt funding is favoured by later-stage businesses that have raised ( or are raising ) a significant amount of equity funding from venture capital or corporate venture capital investors . Founders often use it to supplement their equity fundraising . It ’ s used less often in the UK than the US , and its popularity has waned slightly since the collapse of Silicon Valley Bank – a major provider of primary venture debt for tech businesses .

Venture debt funding is worth considering if you ’ re a slightly more mature fast-growth tech business that has raised or is raising a Series A or later funding round . Typically , venture debt providers will lend up to 20 % to 30 % of the total equity funding raised by a business .

What makes venture debt funding attractive to many founders is that it ’ s non-diluting . Having said this , it often involves an ‘ equity kicker ’, where businesses grant a warrant to lenders , enabling them to acquire shares at a low price . Venture debt can also be expensive , with high interest rates and short maturity dates between one and three years .

Crucial for early-stage investors : tax-advantaged investment schemes

Securing tax relief is a top priority for many UK investors in start-ups and early-stage businesses . If you want to access this group of investors , it ’ s vital to understand the country ’ s tax-advantaged investment schemes and position your business accordingly .

The UK Government ’ s Seed Enterprise Investment Scheme ( SEIS ) has successfully encouraged investors to finance earlystage , high-risk ventures , enabling fledgling businesses to raise their pre-seed or seed rounds . Let ’ s look at the latest figures from HMRC . The number of businesses raising investment under SEIS appears to be growing – 2,270 raising £ 205 million in 2022 ,

compared to 2,105 raising £ 176 million the previous year . Interestingly , the scheme has recently been extended and expanded to allow start-ups to raise money over a longer period , making it even more attractive !

SEIS sits alongside other UK tax-advantaged investment schemes , such as the Enterprise Investment Scheme ( EIS ) – a sister scheme to SEIS for later-stage investment opportunities . The Venture Capital Trusts Scheme ( VCT ) is also available .

Meeting the criteria and conditions necessary to secure relief through these schemes can be tricky . It ’ s crucial to consult an experienced advisor , as each regime has numerous bear traps . It ’ s very easy to fall into one , resulting in tax relief not being available to investors on any of their current or future investments in your business – a surefire way to alienate them before your relationship has even gotten off the ground ! In the case of VCT , the stakes are even higher , resulting in the potential loss of tax relief for the VCT fund manager over their whole VCT portfolio – a disastrous and costly mistake .

The outlook for start-up financing

While investment activity in the UK declined in H1 2023 and valuation discussions remain challenging , funding for early-stage businesses is holding up reasonably well . There ’ s a lot of ‘ dry powder ’ in the system in the form of money raised by investment funds in the last one or two years . In most cases , they are obliged to invest this within a certain timeframe ( typically five to 10 years ). So , opportunities are out there for UK DeepTech , GreenTech and life science businesses with strong management teams focused on capital efficiency and long-term value creation . �

WHILE INVESTMENT ACTIVITY IN THE UK DECLINED IN H1 2023 AND VALUATION DISCUSSIONS REMAIN CHALLENGING , FUNDING FOR EARLY-STAGE BUSINESSES IS HOLDING UP REASONABLY WELL .