Last year, there were numerous landmark events that stole the limelight. Following the decision of the British people to leave the European Union, the setting of record low interest rates and the election of Donald Trump, it seemed there was little scope to talk about much else. However, amid all the column inches dedicated to these significant political and economic events, there have been some important developments regarding SME support in the UK. In particular, it appears that scale-ups are finally taking centre stage.
In the Autumn Statement last November, Chancellor Philip Hammond declared that Britain was “open for business” – a claim supported through a number of initiatives that have been roundly welcomed by the UK’s 5.5 million SMEs. Following a series of digital and transport infrastructure investments, £400 million of venture capital funding was committed via the British Business Bank to encourage start-ups to scale. The Patient Capital Review was also launched by the treasury to examine the frustrating shortfall in growth capital – this comes after it was revealed 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.
The British government has evidently recognised the importance of supporting businesses at the scale-up stage. Indeed Theresa May has recently given small business minister Margot James the task of supporting the growth of thousands of start-ups into substantial companies.
The government cannot act alone though – alternative finance, and more specifically crowdfunding, must also address its role in helping scale-ups to reach their full potential. As such, the challenge ahead of the crowdfunding sector will be to adapt its existing platforms to support the greater capital needs scale-up businesses have. While existing platforms have successfully supported the evolution of start-ups over the past six years, too many of these businesses now find themselves in a state of limbo, having grown too large for crowdfunding platforms yet too small for institutional lenders. In order to support these businesses, the crowdfunding sector itself will need to find ways to scale-up its platforms.
Brexit or no Brexit, investor appetite to support scaling businesses remains strong – IW Capital and Crowdfinders’ research in the wake of the EU referendum – found that over half of UK investors were considering SME investments in the year ahead. But if scale-up businesses are to receive the necessary volume of funding to support their more substantial growth ambitions, crowdfunding platforms must bring in additional support. Almost half (45%) of alternative finance platforms currently report some institutional involvement in their finance structure and these funding lines will need to be strengthened to bolster the pot of money available to high-growth SMEs.
Furthermore, in 2017 and beyond crowdfunding platforms will need to continue to evolve by ensuring they conduct sufficient due diligence to establish credible valuations. These valuations will be critical in attracting lead investors, as well as making sure that investors are able to exit deals further down the line, at which point they will hopefully be keen and able to reinvest in other scale-ups.
In the coming months, we can expect the findings of the Patient Capital Review to carve out a new pathway for SME investment. As the Brexit negotiations begin, the government’s growing awareness of the potential scale-up businesses and alternative finance hold should provide an increasingly focused strategy of public sector support. Moreover, if crowdfunding platforms – like the businesses they have funded thus far – are able to scale up in both the investment they attract and the best practice they apply, the industry will be even better placed to fill the funding gap currently hampering SME growth.
Luke Davis is chief executive of IW Capital and co-founder of Crowdfinders