Less than 5 % of university graduates launch their own business after graduating from university, according to the latest data from HESA (the Higher Education Statistics Agency). This isn’t surprising given many graduates are keen to secure a stable income after their university years, rather than ‘go it alone’.
But start ups have a vital part to play when it comes to contributing to the U.K. economy and it’s widely recognized that much of U.K. economic growth will come from disruptive start ups, rather than larger organizations. Indeed, a Virgin start up report, ‘The Start-up Low Down’, tells us that they contribute £196 billion to the U.K. economy every year.
Start ups are key to economic growth but they’re being held back
Despite the enormous contribution start ups make to the U.K. economy and its overall prosperity, there are numerous obstacles holding back our budding entrepreneurs, especially suitable ways of financing their businesses. Traditional financing routes are often not a viable option – entrepreneurs are unlikely to secure an equity investment from a traditional venture capitalist (VC) before the idea is de-risked significantly. Loans for companies with little collateral and cash flow are also not an option.
There are alternative funding models available for those looking to set up a business as they cross-over from the academic to the commercial world post-university, but people are not always aware of them.
Tapping into on-campus funding
Campus Capital, the U.K.’s first on-campus VC fund, enables students to present their early stage ideas to their peers for equity investment and operates in several universities across the UK. Individual ‘Business Angels’ – often alumni who have created and sold on businesses themselves and are keen on investing in the next generation from their alma mater – may also invest for equity.
When it comes to loan funding, traditionally, funding is normally associated with the “5 Cs of credit” – a framework used by many traditional lenders to evaluate potential borrowers – of which start ups rarely fulfil the criteria. These include the character of the borrower, predicted capacity of the business to pay back the instalments, capital invested by the borrower, collateral available in case of default and conditions of the industry and economy. However, with government backed start up loans, collateral is not required as they are underwritten by the government, so the lender will be repaid should the business fail. With an attractive interest rate of 6% to borrow up to £25,000, approximately 60,000 people had taken this up as of 2019.
Crowdfunding and the rise of social enterprise
Alternative funding, such as crowdfunding, is also proving a popular go-to funding mechanism. The motivation for investing today has evolved significantly – ‘thank you’ was the most common reward for ‘crowdfunders’ in 2018 and the rise of social enterprise has a huge part to play in this, with investors looking beyond financial rewards and really looking to get under the skin of the business and understand what else it has to offer. This works well with entrepreneurs offering early adopters a prototype or gig tickets, for example. You are appealing as much to people’s philanthropic nature – and the desire to be part of something – than promising a guaranteed financial return. Some crowdfunding platforms are designed just for students and encourage alumni to invest, generally asking for around £1,500 – £5,000 with a reasonable success rate.