Rabbits in headlights – business’ investment blind spot

More than half (55%) of businesses in the UK with turnover of more than £1m are actively looking for external finance, according to the new Dream Bigger: Funding ambition* report from Smith & Williamson, financial and professional services firm.

Business founders cite ‘building infrastructure’, ‘strengthening management’ and ‘financing R&D’ as the primary motivators for seeking investment in their business.

However, despite this hunger for finance, the failure rate remains high. The report established seven in ten businesses (70%) were unable to secure finance at the first attempt, 39% failed more than three times and 9% have made five or more unsuccessful attempts.

A significant factor behind these failure rates could be the considerable knowledge gap on how to raise external funding effectively.

In most cases, the more institutional the investor and the more formal the process, the less confident businesses are and the majority of firms are unsure how to access private equity (70%) and venture capital (68%). Meanwhile, despite the rise of peer-to-peer lending platforms in recent years, 83% of businesses still aren’t confident in accessing them.

The most common route for raising external finance successfully is equity investment from family or friends (52%) which, while cheap and easy, comes with clear limitations. These include the actual amount of funding only usually being suited to early stage businesses, and the potential impact on personal relationships if the business fails.

Fundraising can be all-consuming for businesses and the majority of those which have raised external finance admit wasting both time and resources by pursuing the wrong type of investor (55%). Other challenges include a drop-off in business performance (14%), being underprepared for investment meetings (12%) and giving away too much equity (11%).

John Morris, partner at Smith & Williamson, said: “It is undeniably a good thing that so many businesses want to raise external finance because it indicates they have ambitious plans for future growth and is a barometer for a healthy economic outlook. Nonetheless, there’s no denying that seeking funding is incredibly time-consuming and failed attempts are costly.

“To have the best possible chance of success, it’s important firms bridge the current knowledge gap around the processes of raising finance. For example, one business may be much better suited to a VC, while another should be approaching angel investors or a peer-to-peer or crowd funding platform. Staying attuned to these different routes and their relative strengths and weaknesses is critical.

“The fact that more than half of the businesses that have raised finance admit to having wasted valuable time and resources by approaching the wrong type of investor is concerning. These mistakes can be avoided by seeking specialist guidance from the outset, which can also improve the prospects of a firm securing the funding it needs, thereby reducing the failure rates we’re currently seeing.”