According to a new report, the UK’s fast-growing small- and medium-sized enterprises could face a funding shortfall of up to £15 billion in 2020, due to the impact of the COVID-19 pandemic on investor funding.
The report, entitled “The Future of Growth Capital” and co-authored by think-tank ScaleUp Institute, fintech industry body Innovate Finance and accounting firm Deloitte, focused on SMEs where sales or employee numbers are increasing at over 5 per cent per year.
According to the report, investors who might ordinarily put money into promising SMEs are instead focusing on pumping cash into companies they have existing equity in, with equity funding for fast-growing SMEs reportedly down 40 per cent in the second quarter compared to Q2 2019.
Fundraising on London’s AIM stock exchange, meanwhile, doubled in the second quarter, albeit with the amount secured for growth down 45 per cent.
This could see the combined funding from these sources fall by at least £5 billion for this year compared to 2019. Additionally, a £2.5 billion fall in early-stage venture capital is predicted, which, along with a recurring annual funding shortfall of around £7.5 billion would lead to a £15 billion funding deficit for 2020.
A key warning from the study is that many SMEs with considerable potential could founder due to a lack of funding during the coronavirus crisis. The study identified close to 34,000 “scale-up” SMEs across the UK, companies with turnover or employee numbers increasing by at least 20 per cent per year, that could see potential damaged by a lack of investment.
While such scale-ups represent under 1 per cent of the UK’s total SMEs, the report claims that they are more productive and up to twice as innovative as other UK SMEs. Crucially, they generate half of the sector’s combined turnover.
The report argues that filling the funding shortfall could double the number of UK scale-ups within the next decade, with the companies generating an additional £20 billion of business investment per year and creating around 3 million jobs.
According to ScaleUp Institute CEO Irene Graham, funding scale-ups represents “a huge opportunity to really level up and deal with the long-term lack of growth capital”.
The report also warns that SMEs outside of London are particularly are particularly at risk from a lack of funding. It claims that scale-ups based in the capital are securing around 25 per cent of their investor funding requirements, in contract to other parts of the UK, where companies are getting less than five per cent.
According to Innovate Finance CEO Charlotte Crosswell, the shortfall partly results from an uneven approach across both public and private sectors, with more established businesses finding it easier to access financing, leaving a gap in investment for newer, innovative companies looking to grow.
Crosswell says: “As we reset our economy in the wake of COVID-19, this is the moment to address the growth and innovation-capital gap with long-term policy solutions.”
“We accept that there is no silver bullet or single policy that can resolve a complex issue. That is why our recommendations spread across different areas and feed into a long-term solution. The problem is abundantly clear, and it’s now crucial we make the changes and address it.”
“Areas of our growth economy such as the fintech sector – which is full of scaling, innovative companies – are advancing at a rapid pace, and we risk losing an entire generation of vitally important businesses if we don’t make the necessary structural adjustments.”
The report calls for the creation of a “national blueprint for growth”: ““This should be through a tailored and segmented approach to scaling businesses that addresses the UK’s scale-up systemic issues around talent, markets and infrastructure, with a core long-term growth capital strategy tackling regulatory, legal and structural impediments in the short term.”
It suggests several solutions, including seed capital and investment products to be delivered by the government and industry-led responses to the shortfall, such as legal changes to enable more institutional and corporate investment in scale-up SMEs, as well as the creation of a “future opportunity fund”.
The report suggests that the British Business Bank’s (BBB) British Patient Capital, a body that invests public funds in UK scale-ups, enter a joint venture with private equity firms to deliver funding to scale-up and that the BBB itself put more money into promising UK companies through regional offices.
For more on the impact of COVID-19 on UK SMEs, take a look at these recent insights:
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