The number of options available to fund a new idea off the ground can seem relatively limited, but there are a growing number of sources of funding available to the modern startup, and R&D tax credits should most definitely be considered amongst them. We explore a few of the lesser known sources of startup funding in more detail below.
Bootstrapping by credit card
Certainly not an option for the risk averse, however a whole host of well-known companies were, in the early days, funded through credit card debt. Airbnb, Google and Harmonix, the company behind Guitar Hero, all made use of credit card seed capital to fund their enterprises.
As many as thirty-one percent of US startups admit to have used their credit cards to fund capital requirements and a smaller subset admit to having used their credit cards to meet payroll. This compares with fewer than 1 percent of US companies that have raised capital through VCs. The risks are obvious, but credit cards do offer the added advantage of not having to relinquish equity.
Grants and EU Funding
Whilst grants can seem difficult to apply for they can potentially offer the required seed capital required, or even complete financing through to commercialization. Funding programs such as the ‘SME Instrument’ part of Horizon 2020 are designed to enable micro, small and medium sized enterprises access to up to 3 million euros in EU funding.
The SME Instrument differs from EU Framework Programs of the past, in that it doesn’t require applicants to form a consortium, and it allows for subcontracting, so SME’s tackling big problems don’t require all of the skills in-house. The grant application must fit within a certain topic, and there are a huge range that cover SaaS models. Network Polygraph, Ultrahaptics and FinTech startup PayPlug are amongst the companies that have been successful securing tier-one and tier-two funding under the SME Instrument to date.
There are a plethora of crowdfunding platforms available that enable a project or venture to seek funding. The added bonus with conwdfunding a B2B SaaS business is that if offers the potential to generate buzz around the product, and potentially attract beta users. Providers like Fundable, Seedrs, CrowdCube, CrowdFunder and AngelList all target the market for enterprise SaaS products
Crowdfunding could seem like the perfect solution, particularly where the founders have a great idea without a network of friends and family to provide seed investment. As many first-time equity crowdfunders will learn, a raft of contacts who are ready to invest as much as 30% of the goal on day one is often a prerequisite before many of the crowdfunding platforms will carry your project. Despite a small handful of notable successes, the likely reason that many platforms ask for a certain amount of ‘pre-raised’ funds is that the majority of software startup crowdfunding efforts fail, as non-tangible products can frequently be poorly received.
Peer-to-Peer / Peer-to-business lending
Zopa was the pioneer in this field but there are now approaching one hundred peer-to-peer or peer-to-business borrowing services active in the UK. Marketplace lending platforms offer an alternative to traditional bank finance; lenders can expect a higher rate of return on their investment than traditional bank deposits. Borrowers are able to receive loans based on their respective credit profile, often at more favourable interest rates than they could receive from their bank. From the lenders perspective their investment is not covered by the Financial Services Compensation scheme, so the capital is at risk, but from the borrowers perspective the drawbacks are relatively few and far between.
There are an ever growing number of Angel Networks connecting entrepreneurs with Angel Investors and with many Angels making their money in software development these networks can often be a natural home to SaaS startups. Investors will likely be well-versed with talk of Customer lifetime value (CLTV) and Customer acquisition costs (CAC) – data which likely won’t be available during the early stages of a startups existence. Angels will often focus on conversion rates, engagement and retention of early users, user enthusiasm and the strength of the core team as well as factors such as the product, size of the market and the level of competition.
R&D Tax Credits
Once a development project has started and costs have begun to be incurred then R&D tax credits can be an invaluable way of lengthening runway. Startups with a high burn-rate can sometimes look to shorten their first accounting period in order to bring forward the opportunity to recover the R&D relief from the initial seed investment round. Spending of £500k on qualifying R&D salaries could generate a repayment of over £160k once the R&D claim is processed by HMRC, with most payments issued within 28 days of submission. Some banks may be prepared to lend against the anticipated R&D tax benefit prior to the end of the accounting period. Loss-making startups are typically able to generate a greater benefit than profitable companies.
Post produced in partnership with Simon Brown and Adam Kotas at ForrestBrown.