There is a sleeping giant in the UK economy. Britain’s rapidly expanding small businesses, if boosted by just 1%, could generate 238,000 new jobs in a handful of years and an extra £38bn for the economy.
But these businesses have not been given the support they need to maximise their potential. At least that’s the message from a recent report by Barclays in collaboration with the business schools at Oxford and Cambridge universities, which said UK scale-ups need better management skills and better access to finance in order to grow.
“Early-stage startups are extremely well catered for now,” says Luke Davis, founder of crowdfunding platform Crowdfinders and private equity firm IW Capital. “But it’s the later development capital stage – once the business has proved the concept, they’ve got revenue and they have clear sight to profitability – they are the sorts of companies that are being funded less and less.”
The problem, he says, is the level of funding these businesses need. “The £2m-£10m finance mark is an awkward space to be in; too small for large-scale institutional backing, yet too large for crowd-based platforms. This limbo-land is all the harder to navigate when you consider banks have reduced lending to SMEs at a rate of £100m a month despite nearly half a million more growing businesses since 2013.”
To change this, Davis has launched Race To Scale, a funding initiative designed to secure finance from a partnership of private lenders and crowdfunding platforms for established startups looking to scale up their businesses.
Through Race To Scale, companies pitch at a Crowdfinders Live event and, if successful, win funds through one of the initiative’s funding partners, which include Davis’s own businesses, crowdfunding platforms such as Seedrs and the UK Business Angel Association.
Manchester-based biotech startup Incanthera, won £150,000 in equity funding after pitching at Crowdfinders’ most recent live event in April. The cash will be spent on the research and development of its cancer drugs. Founded in 2010 to commercialise the research coming out of the Institute of Cancer Therapeutics at the University of Bradford, Incanthera had difficulty securing cash after its initial support ran out. “It’s always difficult to attract funding for early-stage bioscience companies, due to the shortage of specialist investors and the high-risk nature of drug development,” explains the company’s chairman Tim McCarthy.
The funding gap for young but established companies wanting to grow into thriving medium-sized enterprises isn’t unique to Britain. Philipp Benkler, managing director and co-founder of software testing startup Testbirds, says he and his entrepreneur friends encountered similar problems in Germany. Benkler launched his business in Munich in 2011 but now also has an office in London, as well as sites in Amsterdam and Stockholm, plus four franchise sites in eastern Europe.
Now Testbirds employs 85 people, but Benkler says the dearth of investors with capital to the tune of £2m-5m to invest made scaling up a significant challenge. “Growth investors look at your KPIs (key performance indicators) [because] your metrics are defined. And startup investors are basically betting that your business model will turn out to be good. But if you’re just in-between, there is no market. There is no one willing to take the risk. You have to jump over this £2m-5m bridge,” he said.
But Prof Stelios Kavadias at the Cambridge Judge Business School and one of the authors of the Barclays report, says money isn’t the real problem; startups need better guidance on how to grow strategically.
“I think unless we address [management] issues first, whatever money we’re throwing is going to be of limited value,” he says. “In my mind, we have not supported SMEs that want to grow from a management stand point, and that should come first.”
Kavadias says that while banks have money to invest in SMEs, they lack the insight to know which businesses at the scale-up stage are going to be a savvy bet. “It would make sense for there to besomeone who can identify who are the SMEs that the banks should be looking at, or potentially help SMEs in raising the average management capability, so that the problem of who they should give money to is not so pronounced.”
In terms of how this would work in practice, he says: “Whether this will happen based on an organisation like us (Judge Business School) or an internal division in a bank or government agencies is an open question.”
Funding and hands-on support for ambitious startups – while insufficient – does exist. Charlotte Pearce, who founded the direct marketing company InkPact, graduated from the New Entrepreneurs Foundation, which she says has been invaluable to the rapid growth of her business. “It gave me that support system and opened my eyes to what the London tech scene was like,” she says.
“It was the biggest catalyst – we had to go from a small lifestyle business based in Southampton, to getting investors on board, to a more scalable company utilising technology and working with much larger enterprises on a much bigger scale.”
Davis agrees that the benefit of alternative finance goes beyond just the cash investment. “If you get an investor who puts in £50,000-£100,000, but they’ve got a really good network and a really good understanding of the sector the company operates in, that can be infinitely more valuable than money itself,” he says.
The expertise of angel investors helped Ed Molyneaux scale-up his business FreeAgent, which sells accountancy software for freelancers and micro businesses. “Our first angel investor had been involved in 10 or 11 software companies,” he says. “They’ve made us think very hard and make some difficult choices in our business.”
Now in its 10th year, FreeAgent has 109 staff and 50,000 subscribers. But Molyneaux says that as a tech startup outside London, finding the necessary support to grow the business was tough. “No one in Edinburgh really understands software, so you’d find Scottish Enterprise would be helping you find mentors, and they’d be from completely different industries and didn’t have a clue about software and weren’t really optimistic about it,” he says.
The London-centric focus of the few investors available that do bankroll scale-up businesses is another reason Davis set up Race To Scale, which is hosting events in cities around the UK. Molyneaux says the investment he has secured for FreeAgent has come from London, Berlin and the US.
While securing finance takes a significant chunk of the chief executive’s day job, doing it is vital to the long-term future of the business.
“It’s what I’ve spent most time on over the last seven years or so,” Molyneaux says. But 10 years in, he feels like he’s just getting started: “It feels like we’re now getting the hang of understanding how different channels work and how we might build new ones and how we might spend money to be able to do that. I think it takes a certain size of business to enjoy the luxury of being able to try a few different things at once and seeing what works.”
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