The majority of UK-based entrepreneurs are choosing to self-fund, or “bootstrap” their startups, research from The Company Warehouse, a UK-based company formation agent shows.
According to the company formation agent’s research among early-stage entrepreneurs, 82% of UK startups are self-funded. This is surprising, given the rise of numerous funding options available in the UK.
Host to leading peer-to-peer lending sites Zopa, Ratesetter and Funding Circle, the country’s fintech scene is thriving. UK-based crowdfunding companies such as Seedrs have also been making it increasingly possible for would-be entrepreneurs to source cash.
For the more conventionally minded, the UK government has been doing its’ utmost to provide traditional funding solutions. Backing schemes such as Startup Loans, which offers loans of up to £25,000, the government is keen to encourage entrepreneurship among its citizens.
In spite of all this, it would appear that the majority of UK startups prefer to finance their startups themselves. Until now, it has been difficult to say just how popular both alt and traditional sources of finance are among UK entrepreneurs. Research has investigated entrepreneur’s willingness to use bank loans, but there has been little, if any, research into the proportion willing to use alt finance. Similarly, studies have looked into the take-up of government grants, but these haven’t examined the popularity of specific UK government-backed schemes, such as Startup Loans.
Why aren’t UK startups using external funding?
The Company Warehouse’s findings therefore come as something of a surprise. According to their 2016 Startup Funding Report, awareness of alt and traditional finance sources isn’t the problem. Among the entrepreneurs the formation agent spoke to, recognition of external funding sources was high. However, only a very small minority actually resorted to these options.
Of all the funding options available to UK startups, the government’s Startup Loans scheme had the highest awareness, with 85% of entrepreneurs having heard of it. Given the amount of publicity the scheme has received in the UK, it’s not surprising that the government’s extensive marketing efforts managed to reach their target market. What may come as more of a shock is the extremely small percentage who chose to use the scheme: only 5% of entrepreneurs, according to The Company Warehouse’s research. Of these, 100% supplemented the loan with other sources, such as government grants, mortgage, or family investment. None chose to completely rely on Startup Loans.
After Startup Loans, crowdfunding had the second-highest level of awareness – 43% were familiar with the popular alt finance solution. Again, given the extensive media coverage that crowdfunding has received in the UK, relatively high awareness is to be expected. When it comes to actual take-up, however, we see a similar phenomenon as with Startup Loans: only 1% of UK startups chose to crowdfund their startups.
But what about peer-to-peer lending? According to The Company Warehouse’s report, the same rule applies. Slightly less entrepreneurs had heard of P2P – only 32%. That said, this is still not a small enough number to account for its miniscule take-up – only 1%.
So, why the distrust? Are UK entrepreneurs inherently suspicious of government-backed schemes? Do they distrust alternative finance?
The Company Warehouse’s report suggests that low usage of external funding does not necessarily stem from any especial aversion towards fintech, or government-backed schemes. Rather, these figures are as a result of UK entrepreneur’s positive preference for self-reliance. This was demonstrated not just in the statistics, but also when The Company Warehouse asked entrepreneurs what advice they would give to those looking to start up their own business: most encouraged would-be business owners to plan ahead as much as possible, keeping costs low, so as to minimize the need to borrow.
Can UK startups be persuaded to use alt finance?
Will the UK’s startups continue to bootstrap, instead of using external funding? On Tuesday 1st November, the UK government launched a scheme that aims to boost the number of startups using alt finance. The bank referral scheme will require many banks to refer candidates whose applications for funding have been unsuccessful, to alternative lenders. Will this increase the number of alt finance users? The Company Warehouse’s research indicates that entrepreneurs are making the choice to self-fund out of a preference for bootstrapping, not because they are unable to obtain funding.
We will be monitoring the UK’s startup scene to see whether its entrepreneurs will continue to bootstrap, in the coming years.