In her speech at the Confederation of British Industry, prime minister Theresa May noted that while the UK ranks third in the OECD for start-up support, it lags behind in 13th place for the number of SMEs that manage to scale up.
In order to understand the deficit that exists between a company’s initial and progressed stage of growth, the PM announced the launch of the Patient Capital Review – a treasury-led investigation supported by a panel of experts, chaired by former private equity head, Sir Damon Buffini. The review will attempt to understand the lack of accessibility medium-sized SMEs face in relation to growth finance, resulting in a now £1bn funding gap affecting the newer entrants to Britain’s private sector.
The initial success of Britain’s start-ups has been one of the most encouraging signals of the UK’s recovery from the 2008 economic crisis. Now, eight years later, the successful start-ups that benefited from the alternative finance revolution, bolstered by the fintech and crowdfunding booms, find themselves at something of a dead end. Whilst it’s perfectly simple to create a crowdfunding page and share it with friends and family on social media, it’s far more difficult to raise the level of growth capital needed to scale from a grass-roots start-up to an established medium-sized enterprise.
This burgeoning collective of growing businesses – supported in their infancy stages through debt and equity crowdfunding – now find themselves in a state of limbo, too large for the level of retail finance available on crowd-backed platforms, yet too small for institutional backing. According to the British Bankers’ Association, business applications for loans and overdrafts are at their lowest rate since 2014. The unfortunate shortfall has resulted in a £1bn funding gap, described by the former prime minister David Cameron as a “funding black-hole of missed investment opportunity”.
However significant prospects exist for government and private investors to produce lucrative business opportunities out of this funding challenge. The Scale Up Institute has estimated that unlocking the UK’s scale-up potential could create 150,000 jobs and deliver a £225 billion boost to the GVA measure of UK goods and services by 2034. Soon to operate as an independent entity, potentially outside of the single market, there exists an even greater impetus upon the post-Brexit government to support the growth of British businesses. Investors are already keen to invest in Britain’s promising scale-up SMEs and Britain’s entrepreneurs need the capital, infrastructure and financial education necessary to take their businesses to the next level.
Poor access to capital is one of the key reasons as to why half of start-ups fail within the first five years of trading therefore a maturing crowdfunding industry must adapt to reflect the status of British business. Industry initiatives such as Race to Scale – a £100 million funding drive launched to support British scale-ups – are vital to engage private investment as a contributory means to a solution. However it is of critical importance that industry measures are met with policy backed reforms.
That said, a series of measures have been implemented across the course of the year that recognise the nation’s benchmark status of excellence in innovation and seek to improve entrepreneurs’ access to growth capital. The Patient Capital Review was preceded this month by the national roll-out of the Bank Referral Scheme. Under this scheme, businesses turned down for funding by traditional banks will now be referred to alternative lenders. With a renewed focus, I have every confidence the funding gap can be closed and the full potential of Britain’s entrepreneurs can be unleashed.
Given the commitment the prime minister and the government have shown so far this month to prioritise investment in growing SMEs as a core component of their post-Brexit growth strategy, I earnestly await the announcements which will be made in the Autumn Statement. I hope the government’s actions will speak even louder than Theresa May’s well-intended sentiments. Infrastructure across the UK needs the same level of support by way of greater trade links, greater funding for local councils and improved transport systems to connect Britain’s growing businesses with the new markets and skills vital to their scale up ambitions.
