Startup success: the key to securing second phase funding

Article by James Caan of The Guardian on how startups can succeed as they enter their next phase of growth and development.

 There are several options for getting a cash injection to boost the second phase development of your business. Photograph: Alamy

There are several options for getting a cash injection to boost the second phase development of your business. Photograph: Alamy

In business, it is my belief that you must always keep moving. You can't grow a business if you stop investing in it. Today, there are many avenues a startup can take to secure further funding. From angel investments to crowdfunding and traditional high street banks, what road to growth is right for the success of a startup?

The most natural place to begin is to understand the importance of investment. An initial injection of capital, which is what we offer through the Start Up Loans scheme, is critical to the life of a startup business. You may need this capital to set up your business initially, or to prove your concept and the market for it. You may not need any additional funding if your business is starting on a smaller scale, or if it is a mainly service-led company.

Otherwise for real growth, further funding is imperative – what we refer to here at Start Up Loans as "second phase funding". The good news is, there is second phase funding on hand for people looking to take their business to the next level today, in an era of entrepreneurial renaissance.

Traditionally, the first port of call for new businesses looking for second phase funding is high street banks. The trouble is, it is often difficult to secure investment from banks. It can come attached with caveats. These include minimum capital investment options that a bank would want to give, which may not be suited for startups, and secured lending requirements, meaning an individual would need to have assets to provide as collateral.

However, with the Funding For Lending scheme, banks are encouraged to provide loans to SMEs by the government. The Bank of England and Treasury scheme provides funding to the banks, supplying lower rates and higher funds to banks who lend to SMEs. High street bank lending is particularly suited for someone looking to capture a large amount of second stage funding, with the assets deemed suitable as insurance.

Other banks are pioneering the way to secure further funding. Santander are working with The Start Up Loans Company to help businesses who have been operating for at least six months access loans of up to £25,000 to take their business to the next level. Santander are looking at each loan on a case-by-case basis and by relaxing their lending criteria, such as automated credit checking, are able to provide second stage funding for businesses that need it. We believe this step is crucial in making startup growth funds more readily available for new businesses, and bringing high street lending back to the startup sphere.

On this week's episode of The Business Class, I spoke to the costume brand Morphsuits. They themselves received second stage funding from the Business Growth Fund, and this has been a huge boost to them. They used this funding to access the children's market, with the sector worth four times as much as the adult one. Their turnover is increasing year-on-year and they are a great example of how a second injection of funding can take a business on to new heights.

Another option for accessing further investment is crowdfunding. Start Up Loans partner Crowdcube help startups by letting people invest via an equity-based crowdfunding platform, and Funding Circle similarly allow businesses to find low-cost debt-based loans, while helping investors get better returns. Start Up Loan recipient Emma Watkinson raised £180,000 in investment capital for her luxury retail company SilkFred through CrowdCube. Again, this is a funding round that has elevated her to new capabilities.

Angel investment is also an equity stakeholder investment route for additional funding. As a former dragon on Dragon's Den, I invested in businesses I believed were brilliant, and this was always personal. Angel investment is great for people looking to have a more individual investment experience, however, this kind of capital is more difficult to raise. Angel groups and networks are a great way for investors to pool their resources and share research and ideas, almost as a higher-octane crowdfunding model.

Making the decision to take the next step into a second round of funding is by no means easy. Review your business, and evaluate the necessity for additional capital, because it doesn't come without risk and compromise. This can be daunting, however, sometimes you have to invest to make returns. Ultimately, don't be scared to invest in yourself, because it's the greatest investment you'll ever make.

James Caan is chairman of the Start-Up Loans Company.