Unlocking the potential of tomorrow’s unicorns

There’s no doubt about it: today’s economy and sociopolitical outlook are impacting the ability of start-ups to fundraise. Early data during the pandemic showed a 50% drop in funding compared to the same weeks in 2019, and while there was significant uptick in venture capital in 2020, early stage companies still suffered.

According to Bloomberg, the number of total deals in 2020 decreased for the second year in a row, sinking to 6,022 - with the most acute pullback in seed funding rounds, followed by Series A.

Today, the outlook is a quadruple threat to startups - with inflation, labour shortages, tax and interest rate rises all on the horizon. However, there are opportunities for savvy entrepreneurs to think about finance differently, succeed and drive growth in the wider economy.

At Wiserfunding, we are focused on the credit risk of SMEs - and through this lens, I see things a bit differently. I believe every business big and small requires access to finance that is fair, affordable and sustainable.

There are indeed ways for entrepreneurs, startups and small businesses to gain a view of their business that supports long term growth - beyond short term capital injections.

Here, I’ll explain how we’ve tackled our own growth journey at Wiserfunding, and outline how lenders can level the playing field between small and large businesses when it comes to finance.

Journey towards entrepreneurship

The path to founding a startup is often more circuitous and less intentional than ‘how-to’ leadership guides from the 1990s portray. Surely, tenacious leaders can and do succeed but, more often, businesses thrive where the founders have both the vision and the technical know-how. It’s a vital part of building a successful startup.

My own journey started in academia, in finance rather than technology, where I met my mentor and eventual co-founder Professor Emeritus Ed Altman.

Working closely as an advisor to financial institutions that had invested billions of dollars in both lending to large corporations and modernising back-end technology stacks, I stumbled upon the inspiration for Wiserfunding almost serendipitously

I had been modelling credit risk with insights from Prof Altman’s internationally recognised Z-Score, advising lenders and assessing SME credit risk profiles.

Financing for small businesses is completely unique and trickier than large businesses that have assets to secure. Lending to startups is more complex. So we developed a better, more efficient way for startups to access the funding they needed to unlock growth.

Fast forward to 2022 and we’re in the next stage of our own growth journey, recently securing a £3m funding round led by growth investor BGF. And we’re learning more lessons about SME lending every day, now working with over 60 clients including Revolut.

Financing new businesses

Startup Magazine’s readers will be familiar with the sheer volume and significance of SMEs in the economy. In the UK, SMEs represent 99 per cent of all businesses and provide for millions of jobs across the country.

Not all startups are SMEs - and vice versa - some SMEs have been around for many years, and some startups go on to enjoy billion dollar market caps. Whether you have enterprise ambitions or are an SME in its early stages, the difficult truth is that most businesses fail at a rate estimated to be more than 90 per cent.

The good news is that there are lessons to be learned from the most successful that can be taken on board as advice for any startup in their own context. That’s based on a universal truth that businesses must have a viable path to profitability.

Finance is more than P&L

High street businesses know profit is key to survival and that debt can be perilous - both are often a day-to-day preoccupation. On the other hand, too often technology startups lose sight of the need for a roadmap to achieve profitability, blinded by the pursuit of growth and investors. Finding a balance between the two extremes is an obvious solution to common pitfalls in business strategies.

In our own way, that’s exactly what we did at Wiserfunding to build a category winner, solving real-world challenges and scaling the business from the start with an ambition to achieve long term, sustainable growth.

Quite often, we see entrepreneurs taking funding decisions without considering the consequences on their company credit profile. Directors’ loans, bank loans, invoice discounting, revenue-based lending, convertible loans or fresh equity all have different impacts on the company credit profile the same way our employment choices have an impact on our CV and, ultimately, on our ability to find new jobs and progress in our career. I believe more awareness and education is needed to help startups and SMEs to better understand the value of monitoring their credit risk profile.  

Credit risk is the key to financing small businesses, including temporary loans and equity to invest in growth. Entrepreneurs should be familiar with their credit profile, tracking factors like debt, costs of finance and insurance to understand how they are being viewed, thinking of credit as they would with their own personal credit score.

Dealing with uncertainty 

Today’s economic environment is impacting fundraising around the world. Small businesses and startups are more acutely exposed to the prevailing economic uncertainty, heavily indebted compared to large businesses in the wake of the pandemic. The same goes for the SME lenders who are exposed to the rising tide of insolvencies in the UK.

However, there are opportunities for savvy entrepreneurs to think about finance differently, succeed and drive growth in the wider economy.

Looking through the same credit risk lens I mentioned above, entrepreneurs gain access to a view of their business that supports long term growth. It’s a fresh perspective that enables today’s startups to continue investing in talent, technology and productivity. But every business big and small in time requires access to finance that is fair and affordable, for which fintechs like Wiserfunding provide lenders with solutions.

At the end of government-backed pandemic loans, lenders on the retreat from the small business arena should instead consider ways to level the playing field between finance for small and large businesses. There is untapped potential in SME lending and investing. If financed fairly, it has the ability to unlock millions of jobs and doors for tomorrow’s unicorns.