Access to funding is one of the most common challenges reported by entrepreneurs. Yet even when funding options are available, there are several other factors that deter entrepreneurs from seeking outside investment, according to a recent study published by NESTA and Startup Europe Partnership. The report argues that decision makers need to take these additional factors into account when designing policies to help more companies reach scale.
The study, titled “Motivations to Scale: How European Entrepreneurs Think about Growth and Finance,” focuses on the motivations of entrepreneurs when thinking about growth and finance. The study is based on interviews and roundtables with 64 European entrepreneurs, combined with an extensive review of various European data sources.
Various studies cited in this report show that 60 to 80 percent of European entrepreneurs choose to use personal funds rather than external funding, even though external funding is strongly tied to growth. This also applies to high-growth companies. About 40 percent of European gazelles—a subset of high-growth companies typically with a 20 percent growth rate in sales per year—chose not to raise external funding because they had sufficient internal resources.
The report identifies some key reasons why so few founders seek external finance.
- Lack of awareness of finance options
Data from Startup Genome shows that among founders surveyed in nine European ecosystems, only about half were aware of third-party financial support (e.g. loans, insurance or grants) when they started their business. This was true among scaleups as well, as revealed by an extensive review of various European data sources. For example, the ScaleUp Institute reported that 17 percent of surveyed United Kingdom scaleup founders said they “did not know anything” about equity finance.
- Difficulties accessing available finance
Among European gazelles who were seeking external finance to fund their growth ambitions, only 4 percent considered the availability of finance as an obstacle. Instead, the most common obstacles reported were a lack of collateral and guarantees, and the cost of accessing finance.
Confidence can also be a major factor. While 67 percent of European gazelles reported that they were confident pitching their companies to banks, only 36 percent felt confident in pitching to venture capitalists or equity investors.
- Limited readiness to put in time and effort
Raising capital is a time-consuming process that requires a significant amount of effort. The study revealed that founders will often choose a particular finance route, not because it is the best available option, but because it is the easiest one. One study analyzed in the report found that among founders of small and medium-sized enterprises (SMEs) in the United Kingdom seeking finance for expanding their business, 62 percent spend less than an hour exploring their options. The same study found that 71 percent of SME founders seeking finance only approach one provider without considering different offers.
- Unwillingness to give up control
The main reason entrepreneurs avoid equity financing is that it can lead to dilution of the ownership of the company. For examples, among scaleups in the United Kingdom that do not use finance or wish to access more, 29 percent fear a loss of control.
The full report can be accessed here.
Contributed by Jiawen (Julie) Zhang