Fundraising Challenges: the Startups and Small Business Perspective

"No matter how brilliant an idea is, the odds are stacked against startups and small businesses for funding before they even apply”.

A Failed Market

In a typical year, circa 80% grant applications by startups and small businesses (SSB), fail. With investment, 90%. For venture capital firms seeking Unicorns, it 99%.

Because of media hype around the relatively few SSBs that successfully obtain funding, the huge majority (over 80%) that fail, get “forgotten”. Along with the countless others that don’t apply because of the hassle involved dealing with complex, outdated and time-consuming application processes. 

Between 50,000 and 100,000 businesses apply for grants in the UK annually including innovation, sector-specific, regional, and startup grants. If we assume an average of 75,000 applicants with 20% being successful, it means around 60,000 aren’t.

On investment, the BVCA says there were around 1,500 equity deals in 2023 worth around £20 billion. I have been unable to obtain figures for the number of applicants, but if we assume 10% were successful, circa 14,000 applicants, weren't.

A Fundraising Maze

There is a great deal of support provided to entrepreneurs. For example, over 2,000 Growth Hubs, Enterprises Agencies, Venture Capital firms, Grant providers, Accelerators, Incubators, Venture Studios, Pitch event organisers and Grant writers. Plus 000s of Consultants and a wealth of information on the internet.

However, this diversity creates confusion for most as to which are the best for their particular needs. There is no industry-wide review system to help.

And when to comes to actual fundraising, it’s a real rollercoaster ride - exhilarating highs and gut-wrenching lows. Navigating through 000s of funding options, competitions and courses etc. There are also differing application processes and legal considerations fraught with difficulty with a great deal of uncertainty and long waiting times along the way. In turn, this leads to most SSBs feeling so overwhelmed by the whole process that they don't apply.

Related to this, there is no overall database of grants, investment or loans available and finding the right opportunities are hard to find and extremely time-consuming. Some funders provide alerts of relevance for clients and prospects but most SSBs need to search on the internet/look at individual websites to find what they need.

Common pains and barriers to starting the fundraise process include:

• Limited knowledge of where to look

• Not knowing who the different providers are and which are relevant to them

• Not knowing if their business or project is eligible or within scope

• Not having the time, knowledge or resources to search let alone write an application

• Not knowing what their chances of success are

• Not knowing the application process and legal aspects involved

• Not knowing what post award administration is involved.

Inadequate Education

Whilst there is a huge amount of information on setting up a business, SSBs need more support in understanding an increasingly complex early stage funding process. A new survey from Angel Investment Network (AIN), the world’s largest online angel investment platform reveals that less than half of respondents (44%) said they had a good understanding of the fundraising process when dealing with investors. Less than 1 in 7 (15%) described this as very good.

The survey results underscore the importance of fundraising education for SSBs as three quarters (74%) of respondents said raising investment was one of their top challenges in the next year.

Limited Help on Writing Applications

Grant providers, venture capital firms and angel investors in particular are inundated with 000s of badly written, incomplete, vague or overly technical applications, making it challenging to review. Most applications are unfundable, failing to include evidence of market need / demand for their particular project/product/service, that they have a team capable of delivering and/or provide overly optimistic income projections and overstated expenses. Over 10% don’t meet funders eligibility criteria. This evidences that SSBs need more help on assessing/improving their fundability, before they apply.

Investment: On average, only 1% to 3% VC applications are successful and this percentage can vary depending on factors like the industry, the stage of the business and stringent criteria investors use to select those for funding.

Grants: the percentage of successful applicants is generally higher than those who receive investment, but on average is still less than 20%. For example, the success rate with UKRI, the main provider of Government grants, typically ranges from 10% to 15%. However, some of the more competitive funding calls, especially those with a high number of applicants have success rates below this. For example, the Innovate UK Smart Grant has a circa 5% success rate. And, the EIC Accelerator programme an even lower 2-3% success rate.

Loans: The percentage of applicants who receive loans is generally higher than the percentage who receive investment or grants. On average, about 50% to 70% of loan applications might be approved, depending on the type of loan, the applicant's creditworthiness, business plan, and the lender's criteria. However, most startups can't get a loan as they cannot evidence ability to repay.

No Fundability Rating System

Most businesses can’t assess for themselves if their organisation is fundable. And, unlike for loans , credit bureaux such as Dun & Bradstreet and Experian do not provide fundability reports for grants or investment. When it comes to ratings, SSBs cannot afford or justify paying £000s to rating agencies such as Standards & Poors or Moodys. In any event, the latter do not service the SSB market.

No Screening Process Most grant providers and investors don't have a comprehensive screening process to pre-emptively "weed out" applicants before they apply.

No Standardised Application Process

Apart from a few collaborative funders, most grant providers and investors have a different application process, with different information requested and differing terms. Invariably, there are many questions to be answered, forms and financial spreadsheets to be completed as well as an extensive narrative and detailed documentation submitted such as pitch decks, business plans, financial projections, tax returns and other legal documents.

Tight Application Windows

There is little notice of a new grant competition opening and most grants have a window of only 1-2 months. Given the time it takes to write an application particularly for large grants, this window is too tight for most businesses so they don’t apply.

Time-Consuming and Costly Application Process

Traditional methods of applying are time-consuming and costly, requiring significant resources and effort to build a successful application.

A large majority of applicants write their own funding applications, possibly 70% to 90%. Most are written by a Founder / CEO as they cannot afford to outsource the work involved to make an application. For those that apply themselves, most go into the process blind of what it actually entails. For example, the time it will take to write a grant application and pull all the information required, together. (6-12 weeks).

The financial cost associated with applications for amounts over £100,000 can also be significant, often involving fees for hiring professional grant writers, which can be as much as £6000 or more + success fees per application.

Vague Eligibility Criteria

Criteria varies from funder to funder and from competition to competition. Most VCs, for example, do not clearly state their investment criteria on their website and some grant providers change their priorities after applications have been submitted.

Slow Approval Process Circa 6-9 months after the application closing date is normal for grants. It takes 3 months or so after the closing date, before a grant applicant knows if they are successful. And 6 months before they receive monies because of due diligence etc.

With investment, it can take up to a year before an applicant knows if they have been successful. Conversely, with loans, it can be just a matter of days!

With only 20% or less of applications receiving funding, is the collective time spent writing applications actually worth it given there are many other essential activities a Founder/CEO needs to do?

Inefficient Assessment Processes

One of the disappointing realities of applying for funding is that you can submit a brilliant application and still not secure funding. Many applicants with great ideas are losing out to others purely because they lack insight into how to best present their case to assessors.

Another challenge is that assessment processes rely heavily on human judgment and are often prone to errors, inconsistencies, and biases. Assessment is often based on the subjective judgment of individual assessors, which can vary widely depending on their personal knowledge and experience. There is also a shortage of experienced assessors and this can lead to inconsistent or unfair decisions with there not being any right of appeal.

Another limitation of traditional assessment methods is reliance on limited data analysis. This can result in a narrow view of the applicant’s worthiness, and lead to inaccurate or incomplete assessments.

Lack of Useable Feedback

Most applicants for investment that are unsuccessful, are not advised of the reasons. On grants, feedback varies - from none to some but invariably unusable.,

As there are 000s of applications each year, giving constructive feedback to every rejection can easily amount to increasing the cost to funders of at least an additional FTE.

Lack of Transparency

Grant funders sometimes reject applications for arbitrary reasons, such as the order received or a cut-off number not transparently established. A grant application could also be incredibly well written, but not a project the funder is interested in, or the funder’s board is only funding specific kinds of projects not transparently stated on the funder’s website.

Lack of Published Failure Rates

As mentioned earlier, funders receive 000s of applications each year and generally, it is understood that over 80%, fail. However, I've been unable to obtain any statistics on this to date. Related to this , I've contacted around 30 funders so far and only one was willing to advise the failure rate.

The best a business thinking of applying for a grant or investment can therefore do is to try and contact funders one by one but this is so time-consuming. (to date, I've not found any funder's website stating how many applications they decline ).

Funders slow to implement technology such as AI

Most, for example, are reluctant to use AI in the application and assessment process. One investor, said they estimate only 10% of VCs use AI. Regulatory compliance also holds grant providers back as do the risks or uncertainties involved in turning to technologies which may appear unproven.

No qualifications or code of conduct required for Grant Writers

Most SSBs have no experience in applying for grants and those without experience may find the process daunting so seek professional assistance .

Whilst there are ethical guidelines and codes of conduct that apply to funders involved in providing grants, investment and loans in the UK, these codes do not apply to grant writers. Conversely, in the USA, professional organisations, such as the American Grant Writers' Association, have established qualifications and codes of ethics that members are expected to follow.

In the UK, there is no equivalent association and anyone can set up business as a grant writer (no qualifications required). This includes self-employed writers and grant writing firms.

Consequently, the quality of writing varies significantly. Less experienced or lower-quality grant writers may have a higher failure rate due to weaker writing, poor alignment with funder guidelines, or failure to present the project in the best light.

Grant Writers prohibitively expensive Most grant writers charge large fees (£5000 - £6000 upfront plus 3-6 % success fees) without providing a guarantee of success. Because of these high fees, most applicants write applications themselves.

Grant Writers success rates not published Grant writers rely on fees for their income and won’t undermine their revenue model by turning away SSBs they believe have limited chances of success. In this context, there is no obligation on grant writers to publish their success rates. Research indicates that many advertise that they have a circa 50-70% success rate when 20% or 30% success rate is more the norm.

The best a SSB can therefore do is to try and establish what a grant writer’s track record is but they would have to look at many different provider’s websites to get an idea of what businesses were successful and at what amount. This process is incredibly time-consuming and even if a business can reach out to each writer, the chance of receiving a clear response on the success rate is slim.

Next steps

Hopefully readers will find the information above useful and if any of you have other challenges to add, please let me know - nigel@fundability.org.uk. If you notice any errors or have details to add, please also advise.

The next Blog will be on Charities' perspective on fundraising.