Do Real-World Startups Use Alt Finance?


As part of our 2016 Startup Funding Report, we asked a cross-section of early-stage entrepreneurs about their awareness and use of alt finance sources. We found that although 43% of the entrepreneurs we spoke to were aware of crowdfunding only 1.3% used it to fund their business. Other alt finance methods such as peer to peer lending had similarly low uptakes among the startups we spoke to.

 

The Rise of Alt Finance

Alternative finance sources such as crowdfunding and peer-to-peer lending have become a high profile part of ‘startup’ culture in the last few years. With traditional lending from banks becoming ever harder to acquire since the 2008 financial crisis alt finance has been hailed as a solution to startup funding issues. As well as being embraced by the media and entrepreneurs alt finance has also been backed by the government investing millions in startups and small businesses through alt finance platforms.

Lots of people are using alt finance. Earlier this year, the US based crowdfunding website Kickstarter celebrated their 100,000th successful project while UK based equity investment platform Seedrs, have handled investments of more than £150 million since its launch in 2012. However, not all of the projects funded by these sites are startups. Many are existing businesses looking to fund expansion and new product lines, or in the case of Kickstarter they may be art projects or films. Very little research exists on how startups are using alt finance and what part it plays in their funding mix. As part of our 2016 Startup Funding report we wanted to find out both the alt finance options that startups knew about and the ones they were using.

 

Alt Finance Awareness

As part of our startup funding research we wanted to know what funding sources early stage startups were aware of. The startups we spoke to had all either done a company formation or business registration within the last 18 months and they come from a wide cross-section of industries. Awareness of alt finance as a potential funding source was not universal with 30% to 40% of the startups we spoke to were aware of popular alt finance options such as crowdfunding and peer to peer lending.

Which of these sources of finance are you aware of?
Crowdfunding 42.2%
Peer to Peer Lending 32.3%
Angel Investors 29.5%
Venture Capital 32.3%
Invoice Factoring 35.2%
Government Grants 49.2%
Startup Loans 84.5%

With less than half of early stage startups aware of popular alt finance options there are is a case to say that more needs to be done to raise awareness. The government’s startup loans scheme which has been heavily advertised in recent years outperformed all of the alt finance options despite being around for a similar period of time.

Alt Finance Usage

As well as asking about what alt finance options startups were aware of we also wanted to know what they used. We found that even though a reasonable number of startups were aware of alt finance options hardly any of the businesses we surveyed were using them. Startups reporting that they had used either crowdfunding or peer to peer lending were both at 1.3%.

This suggests that alt finance remains a niche funding option for startups and has not yet become a mainstream way of raising startup capital. So, despite the hype around alt finance, and the government investment it is not a panacea for a lack of startup funding.

 

Bootstrapping – the preferred method for most entrepreneurs

One reason for the low take-up of alt finance options is a general avoidance of taking outside funding by many new businesses. The vast majority of startups in our survey were self-funding their business and this seemed to be a conscious choice. As part of our research we asked startups what advice they would offer to other entrepreneurs about startup funding. Time and again the answers that came back mentioned budgeting, self-funding and avoiding taking loans.

These results signal that bootstrapping is the preferred method for early stage startups and the method they would recommend to others. So the low uptake of alt finance may not reflect on the industry itself but more on entrepreneurs shunning funding generally wherever they can.

 

About The Company Warehouse

The Company Warehouse are a leading UK company formation agent. We have been working with startup businesses since 2003 and speak to thousands of new startups each year. We provide them with free consultancy as well as company formation services, accountancy support and help with branding, websites and digital marketing.

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