The early-stage investment market in the UK is witnessing significant growth from Angel Syndicates and SEIS (Seed Enterprise Investment Scheme) Funds, which are increasingly emerging as powerful and efficient alternatives for founders.
Before we dive into alternative funding for startups, we need to understand what an angel syndicate is, what SEIS funds are, and how they can act as great alternatives for early stage funding.
A new generation of investors and platforms
Raising early-stage seed capital from individual business angel investors is both challenging and time-consuming for founders and management teams. The process can often take several months with the risk of ‘deal creep’ or loss of interest from investors, resulting in serious setbacks for founders.
This is particularly significant for many first-time founders seeking capital to demonstrate proof of concept, develop a prototype, or establish an early MVP (Minimum Viable Product). Despite widespread liquidity or availability of funds in the seed stage marketplace, it remains a significant challenge to convert a first investor. Positively, as the start-up ecosystem in the UK matures and develops, more options to raise vital early-stage funding are emerging. A number of factors are driving this changing marketplace.
The removal of traditional barriers to investment is attracting new angel investors to the market. The growth of equity crowdfunding platforms, particularly Crowdcube and Seedrs, and the low costs of participation are attracting a new generation of ‘angels’ and democratising the market.
An increase in digital platforms has allowed for increased cooperation and collaboration between angel groups, coupled with greater visibility of investment opportunities (access to deal-flow). The result of this is a diversification of risk for individuals across investment portfolios and an increased willingness to invest.
The continued market intervention by the Government in the form of beneficial tax advantages (SEIS) and fund support through the work of the British Business Bank continues to stimulate the raising of capital and supports increasing sector specific focus.
This, along with corporate restructuring and the need to ‘outsource and accelerate’ innovation, is creating an environment for the development of new business models and alternate funding for startups.
Progressive funding options - their differences and how they work
New businesses have many different paths they can choose to go down when it comes to acquiring funding for startups or getting through the beginning stages of running a business. The two most popular sources for alternative funding for startups are Angel Syndicates and SEIS funds. But what are they, and how do they work?
What is an Angel Syndicate?
Angel Syndicates are a private group of accredited investors who look to invest in a project together. The syndicate can be formed by angels or investors. Most Angel Syndicates are led by the syndicate leader. A person who is typically an experienced investor with a large number of connections to help find and evaluate potential deals.
When you are a startup business, you may look for an Angel Syndicate, as they can fill the gap between the initial funds provided by friends and family and the institutional capital from venture capitalists. An Angel Syndicate can also be a great alternative to taking on debt early on in the business cycle. The funding can be used to fulfil op-ex needs or for an extension between formal rounds.
What are SEIS Funds?
The Seed Enterprise Investment Scheme (SEIS) was established in 2012 by the UK Government as an initiative to stimulate economic growth and encourage innovation by allowing private investors to buy stakes in smaller businesses. The scheme allowed smaller and younger businesses to secure the capital needed for expansion through private share purchases.
SEIS funds have many advantages for both businesses and investors alike. For businesses, SEIS helps raise critical funding that allows for growth. Startups can raise up to £250,000, allowing for a strong starting point. For investors, there are several incentives, such as income tax relief, of up to 50% on their investment. Capital gains tax exemption on profits made from the sale of shares if they have been held for at least three years.
Early-stage fundraising that benefits start-ups
Despite the differences, both Angel Syndicates and SEIS funds have distinct advantages that make them great options for alternative funding for startups.
Firstly, both provide access to larger capital raises and can help founders avoid the necessity, complexity, and cost of pitching, negotiating, and onboarding individual angels. This can have a significant positive effect on reducing investment timescales. Angel Syndicates and SEIS funds are agile and experienced entities that can and do make quick decisions.
Founders also have the opportunity to effectively and successfully pitch to a Lead Investor or Fund Investment Director. This can offer instant validation and support for the investment opportunity, providing instant access to all the angels in the syndicate (who can then choose to participate in the deal or not).
Both methods of funding provide a cleaner ‘Capital Table’. If you raise money from individual angels directly, you will have a large number of small, individual shareholders on your ‘cap-table’ (list of shareholders), which is an administrative burden for any start-up. Future decision-making can be complex as documents require the signatures of all the shareholders. Clearly, the longer the list of shareholders, the more complicated the process. Angle Syndicates and SEIS funds could potentially support the process of future fundraising. Certainly, larger venture capital funds that invest at later stages (Series A and beyond) generally prefer a cleaner ‘cap table’ with only a few shareholders who have meaningful ownership as opposed to many small investors.
When seeking investment, it can be hugely beneficial to partner with investors that add value beyond capital. While a start-up’s primary priority may be to secure the capital required, it is vitally important to work with the right kind of investors at an early stage.
Syndicates with high quality angels, or fund managers with extensive networks, can support founders with essential market knowledge and expertise, referrals for recruitment, and introductions to potential customers and partners. The real value of good investors is so much more than the investment. The combined power of knowledge and networks can be transformational and accelerate the growth trajectory for many start-ups, as access to pooled knowledge makes for reduced timescales both pre and post investment.
Raising future funds via individual angel investors can be a significant challenge and almost certainly extremely time consuming. Early-stage capital from Angel Syndicates and/or SEIS funds has the benefit of allowing for participation in future funding rounds with reduced complications. There is no future signalling risk for larger, later stage investors. Prospective Series A investors expect the Angel Syndicate or fund to participate. The issue of dilution of shareholding is both understood and accepted.
Traditional corporate finance or accounting firms offering fundraising support to start-ups typically charge between 3-5% of the investment amount raised. Alternatively, some angel networks and intermediaries (accelerators) take a 2 -3% equity stake as remuneration in respect of the capital raise.
Angel Syndicates and SEIS Funds have no placement fees or associated upfront costs. Both earn their remuneration from the participating investors as a carry (Profit-share) that the investment may generate in the future.
Choosing the right funding option and investor
It is only fair to highlight that, despite the obvious advantages detailed above, there are potential obstacles in the Angel Syndicate model. Specifically, all Angel Syndicates operate on the model that all the investors who are members of the Syndicate can choose to participate deal-by-deal. Unlike SEIS funds who can commit to a firm investment round amount via the Terms Sheet, Angel Syndicates will typically indicate only a range, based on the estimate of the Lead Investor. The final investment amount will only be known to the founders after the investment opportunity has been formally offered to all the investors in the Syndicate and they have indicated their willingness, or not, to participate.
While the Lead can give you an idea of the quality of angels behind a Syndicate and those likely to be interested in participation, there is no guarantee which of those angels will eventually end up investing in your company.
This, however, should not detract from the vast and substantial advantages of both methods of funding. The emergence, availability and growth of such funding options represents a considerable positive development in the UK early-stage investment landscape, providing greater access to finance to an increased number of founders and start-ups.
