One study by the British Business Bank found that only a small proportion (16 per cent) of business startups have high growth ambitions, and a smaller proportion actually achieve high growth. In fact, according to this analysis, “High-growth businesses formed 6.6 per cent of businesses with 10 or more employees in 2010–2013, equivalent to roughly 10,000 businesses”.
Back in 2014, the accountancy body, ACCA, also observed that “fast-growing, innovative, intangible-capital intensive businesses were already credit rationed in the heady days of 2006–7, not only in the UK but throughout Europe. We believe that this is part of the reason why high-growth firms’ share of UK job creation has fallen consistently since the early 2000s. More recent evidence confirms that the bias against innovative businesses did not emerge during the recession, but is a structural problem of the UK finance market. Fast-growing businesses are less likely to be successful when applying for loans, indicating a preference among the banks for stable, non-contingent growth.”
Too often when people think of alternative finance they jump to the conclusion that lending is focused on small startups which are low value and high risk.
That view is certainly echoed by one leading industry leader (and investor in just under 20 alternative finance platforms): Geoff Miller, until recently CEO of GLI Finance. He thinks too many in the industry focus on the plight of startups and don’t think about the challenges facing high-growth businesses. According to Miller, “Too often when people think of alternative finance they jump to the conclusion that lending is focused on small startups which are low value and high risk. While in some areas of the credit ecosystem that’s true, jumping to such conclusions only highlights the lack of understanding around the sector. Many of our platforms are funding well-established, multi-million-pound-turnover businesses, which have a long track record that allows their risk profile to be accurately assessed. It goes back to the point that the central problem the industry addresses is the complexity of SMEs’ financial needs and being able to address these over the long term as businesses grow.”
Then again, maybe the focus on using loans to fund growth is the wrong approach? Perhaps equity might be a better solution? That’s certainly what the co-founder of one of the UK’s fastest growing crowdfunding platforms thinks. Tom Britton is CTO of Cambridge-based Syndicate Room, an internet-based service that helps dynamic entrepreneurs raise money by selling equity stakes in their business. Its relatively unique approach is to work alongside existing angel investors – frequently entrepreneurs who’ve already made money from private business – and smaller venture capitalists. This partnership approach has helped it grow at breakneck speed.
We asked Tom to map out the prospects for equity-based crowdfunding in the UK.
Are credit and equity more readily available for SMEs now, and is there really still a funding gap? If there is, which niches are most acute?
“Platforms seem to have helped plug the space for first and second funding rounds and while the number of rounds above £1m is on the rise, there is still a huge gap in the £1m to £5m space that was vacated years ago by early-stage VCs.”
How will equity crowdfunders fight back against traditional investors, such as VCs?
“It’s not so much fighting back as learning to work together. We’ve already had VCs leading funding rounds where the crowd is allowed in, so the momentum has started. Ultimately, though, platforms automate a number of the functions that traditional investors charge to provide. In the end I suspect the fees charged by these traditional investors will come down, or more limited partners will shift their money elsewhere.”
Aren’t we in the UK too focused on startups and not businesses in the £0.5m to £5m gap? How will this latter group be better served by alternative finance providers?
“In the early days, had you put even a £200K round in front of the crowd they would have baulked, knowing there was little chance of that amount being raised. The supply of capital was restricted because people were still trying to figure out what equity crowdfunding could offer, so the platforms focused attention on the early-stage rounds that were likely to be completed. Now, though, given the larger awareness and larger crowds, it’s precisely that £0.5m to £5m gap that platforms are starting to address, and not just with crowds but by truly playing the role of platform, including more traditional investment players in the same rounds.”
If total transactions are in the low hundreds of millions for equity funding now, what’s your prediction for total origination by 2020?
“The appetite for these types of investments from the crowd is increasing and, as platforms are bringing in family offices, institutions and VCs to invest alongside the crowd, it’s easy to see this market growing well beyond £1 billion by 2020.”
The 15 questions businesses should ask themselves before looking for funding
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