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Early-stage businesses defy economic gloom and target £2m each of new equity capital to fund growth plans

  • New capital to be used to fund R&D, tech upgrades and recruitment

New research published today reveals that the UK’s class of small, fast-growing entrepreneurial businesses are looking to raise an average of £1.9 million in equity finance over the coming two years to fund their growth plans.

The study, commissioned by the Venture Capital Trust Association (VCTA), among 240 senior decision makers in charge of recently launched small businesses less than seven years old and employing up to 250 employees, reveals a strong appetite for growth despite the economic challenges facing the country.  An overwhelming majority (92%) of respondents said they are likely to consider raising equity through a Venture Capital Trust.

Pro-growth mindset

In a clear sign that businesses of this type are pursuing a pro-growth agenda, the most popular reasons for requiring equity finance are to invest in Research & Development (48%), new technology (45%), and equipment and machinery (42%). Over a third (36%) plan to use the funding to hire new talent and around a quarter (23%) to launch a new product or service.  Just 17% of respondents said the fresh capital would be needed to improve their cash flow, which can be a sign of distress.

Over the last financial year, VCTA-backed businesses delivered £12.5 billion in revenues, generating £3 billion in exports and investing £548 million in R&D. Over 75% of post-2015 VCT investee companies have invested in R&D.

More equity sought outside London and South East

Businesses outside the UK’s main economic hub of London and the South East are on average seeking £2.04 million in fresh equity by 2024, compared to £1.3 million among entrepreneurs located in and around the capital, underlining the urgent demand for equity finance across all parts of the country.

A growing appetite for equity capital is reflected in the volume of investment activity by VCTs, which has increased by 28% year on year in the period January – October 2022. Over 1,100 of the most ambitious companies across the United Kingdom currently benefit from VCT funding, each of which is looking to scale and grow at pace.

Typically, when receiving their first investment from VCTs, entrepreneurs have managed to get their business started, have a small number of employees and a handful of customers, but lack the organisational infrastructure to be able to accelerate growth.

The VCTA’s appetite for equity survey[1] found that an overwhelming majority of firms (96%) have sought to raise finance over the past two years.

Will Fraser-Allen, Chair of the VCTA, commented:

“It’s encouraging to see such a strong level of demand for equity capital among early-stage

businesses across all parts of the country.  That businesses plan to deploy new capital to fund areas such as R&D, new technology and recruitment speaks to their pro-growth mindset.  With the UK facing an uncertain future, their contribution is particularly important as many larger companies are under pressure to reduce costs and shelve investment plans.

Early-stage businesses rely on equity capital to scale up as they lack the track record required to attract other types of funding, and Venture Capital Trusts are a critical source of support.

“Young businesses, run by entrepreneurs with ambitious expansion plans, are supporting the health of our economy. We strongly believe that VCTs are ideally placed to continue funding this growth.”

Stuart Veale, Managing Partner at Beringea, the manager of the ProVen VCTs, commented:

“There is an entrepreneurial boom taking place in the UK – more and more people are motivated to take a leap of faith and set up in business, often tackling the great social, environmental, and economic challenges of our generation. The VCT scheme therefore plays a vital role in supporting the ambitions of entrepreneurs throughout the country and driving the UK economy back to growth.”

According to VCTA data, VCTs have an excellent track record of stimulating well-paid jobs in innovative, fast-growing industries across the UK, delivering on the government’s intention to level up regional economies outside of London and the South East. For example, the average salary for an employee at an unquoted, VCT-backed company in the North West of England is approximately £40,000, nearly £10,000 higher than the whole-region average wage. Amongst quoted VCT-backed companies in the North West, the average salary rises to £50,000.

Over the last financial year, VCTA-backed businesses delivered £12.5 billion in revenues, generating £3 billion in exports and investing £548 million in R&D. Over three-quarters of post-2015 VCT investee companies have invested in R&D.

[1] Research was conducted among a sample of 240 senior decisionmakers at UK SMEs in August 2022. Respondents were split evenly by the 12 UK regions and by headcount (1-9, 10-49 and 50-249). All respondents fit the criteria for VCT investment, with responding businesses having been trading for an average of 3.5 years and having total gross value of assets standing at £7.2 million