There’s good news with total investment in SMEs doubling last year, but relatively little of the cash is going towards highest growth businesses. Arun Kakar finds out why
Funding in SMEs almost doubled last year, but little of the cash is going into businesses at the crucial ‘scale-up’ stage where they could be transformed into serious players, according to an authoritative survey that shows how firms are missing out.
While some £8.27 billion was poured into SMEs last year versus £3.9 billion in 2016, 81 per cent of these deals took place at the seed and start-up stages. Of the 35,210 ‘scale ups’ - defined as companies posting annual growth above 20 per cent (across three years) with turnover between £1-20 million and ten or more employees – a mere 1,505 received investment. Furthermore the number of investment deals has plateaued over the last five years for these firms, at around the 20 per cent of investment.
The report from The Supper Club, an entrepreneurial network and advocacy group, shows that over the last five years the number of SME investment deals has risen from 1,010 in 2013 to 1,500 — a 50 per cent rise. The corresponding increase in the ‘scale up segment, however, was under 20 per cent, with the number of deals going from 260 to 280.
As a result, argue the report authors both investors and SMEs are failing to fill this considerable vacuum in finance, even though these firms contribute £900 billion to the economy and represent up to 3.5 million jobs. ‘It’s still a cottage industry,’ says Stephen Welton, CEO of Business Growth Fund, which contributed to the report. ‘There is still a lack of scale-up funding and only 31,000 scale-up businesses. If we’re serious about creating giants we need a bigger pool of capital.’
Despite comprising less than one per cent of companies in the UK, high-growth ‘scale-ups’ contribute 22 per cent of the UK’s Gross Value Added and are estimated, by The Supper Club, to create 3,000 new jobs every week.
The barrier to raising investment is not only down to investor sentiment however: it’s also due to bosses of scale-up firms, too. Just 13 per cent of these high growth businesses were planning on using equity finance, according to the ScaleUp Institute, a not-for-profit enterprise body, with the majority instead opting for core bank finance (loans, overdrafts and credit cards) or private loans to fund growth.
Scale-up leaders are pessimistic and unclear about equity finance. Some 60 per cent reported a fear of losing control or, more worryingly, poor comprehension of equity finance as the main obstacles taking the plunge. With the average UK scale up growing at 34 per cent per annum, it’s easy to appreciate the scepticism about yielding control in the face of such momentum. ‘Entrepreneurs can have a tendency to hold themselves back during scale-up,’ notes Shelley Hoppe, CEO of Southerly, a creative content agency. ‘We’re good at running a business; accessing capital is another skill, says ‘But there’s only so far you can go organically: without external investment, you can plateau. There is a fear of giving up control that must be assuaged.’
Some 42 per cent of UK scale-ups were founded by entrepreneurs between the ages of 18-34 and are sensitive to alternative funding channels such as peer-to-peer lending and crowd funding that offer quick cash without sacrificing the sort of control they perceive a private equity firm would usually demand.
Yet separate research from Sapio, a market researcher, earlier this month found that despite lofty ambitions and new funding channels, confidence fails to match expectations. Two thirds of UK scale ups said that they are looking to increase revenue by over 50 per cent for the next two years but the same number expressed confidence in their abilities to meet that challenge.
To plug this gap, the onus is on the funding industry to show that it can offer more than just capital without looking for control. After all, some investors can provide insight as well as capital, and few are looking to take control from successful entrepreneurs.
‘It’s a bit of a myth,’ Andrea Reynolds, founder and CEO of equity platform Swoop Funding tells Spear’s. ‘Investors have little interest in actually controlling. What they are doing is betting on you to get on and build that business.’ Reynolds notes that resistance to equity is stronger in the UK than in other European countries, even if statistics confirm that investment boosts market connections and productivity. For scale-ups to prosper - and UK business to flourish - concrete benefits like this must be made clear.
Arun Kakar writes for Spear’s