By Daniel Lanyon on 4th September 2017
London and the wider United Kingdom has a reputation for innovation and fundraising but policy makers are scratching their heads as why to this doesn’
London and the wider United Kingdom has a reputation for innovation and fundraising but policy makers are scratching their heads as why to this doesn’t more often lead to growth.
Entrepreneurs in the UK have a problem with size, or a lack thereof. Just one in 10 UK start up firms receiving seed funding goes on to later stage fourth round investment compared to one in four US firms, according to new research by the UK government.
While there are some notable exceptions in recent years particularly in the fintech world such as Funding Circle, Zopa, Monzo, Ratesetter, Transferwise and Nutmeg - who have all raised big sums this year - the rate of 'scaling' is worrying policy makers.
The numbers come from a new report by the UK government, currently at the consultancy stage entitled Financing Growth in Innovative Firms, which is part of a broader governmental policy to boost the UK’s less than desirable levels of productivity, currently at pre-financial crisis levels.
The evidence increasingly suggests that the UK is lagging behind its potential in the longer-term process of scaling up start-ups into successful firms. This type of growth, most agree, makes a particularly important contribution to productivity "by supporting the creation of globally competitive ‘frontier’ firms " and spreading new technological innovation, the Treasury says in the report.
"By not realising the economic benefits derived from its strengths in creating start-ups with world-leading ideas, the UK therefore appears to be failing to maximise its potential productivity gains. Consequently, the number of UK firms at the global frontier of productivity is reduced."
The UK Scale Up Ecosystem
Source: HM Treasury
Evidence for the lower number of young, large-scale companies in the UK comes from a number of different sources, the Treasury found. Firstly, it says there are proportionately fewer young large listed companies in the UK than the US, reflecting lower rates of scale-up. More specifically, 10 of the UK’s largest 100 listed firms were created after 1975 compared to 19 in the US, but only two in Europe (ex-UK),
"This reflects wider evidence that the UK and other European economies show a significantly higher share of static firms that do not shrink or grow compared to the US.13 This is also supported by recent industry analysis14 that concludes that the UK lags behind the US and other leading economies in the relative proportion of scale-up companies."
The UK, it adds, underperforms in the creation of ‘unicorn’ firms, i.e. those start-ups that reach a $1bn valuation or more. While these firms’ short-term valuations do not always reflect their long-term prospects, they can act as a proxy for the amount of underlying investment within individual countries, it argues.
WWhile the UK has more unicorns than other European countries, there are significantly fewer UK unicorns than for the global leaders: 54 per cent are US-based; 23 per cent China based, 4 per cent in India, 4 per cent in the UK, 2 per cent in Germany and 2 per cent in South Korea (May 2017).
In the fintech world, the UK is by far the leader within Europe but its continued dominance was brought into question by data out last week that show the number of venture capital deals as percentage within in Europe has been declining for UK fintechs.
Some such as the fund manager Neil Woodford argues that there is a gap in the supply and use of ‘patient capital’ and this is holding back more firms from growing to scale in the UK
What can be done?
The report has several pertinent suggestions to remedy the scaling up problem and in each case it suggests coordininating In investment through the British Business Bank.
First, it suggests that a new national investment fund could ‘channel new investment into patient capital’ through public-private partnership.
“This could provide scale to new private investment; however, private investors may not have the appetite to participate in a new fund without an established track record of successful investment.”
An alternative approach, it suggests, would be to ‘incubate’ a fund on the government’s own balance sheet as a new subsidiary of the British Business Bank. Eventually, this would enable the selling of all or part of the fund to private investors once it has established a suitable track record.
Lastly it say the government could simply increase government investment through existing channels, although it warns this may in the longer term reduce vibrancy within the market as well as not being ‘fiscally sustainable’.
“The size and structure of a new fund would depend on whether a domestic replacement to the European Investment Fund (EIF) is required. Even with a continuing relationship with the EIF, there appears to be a good case for a new fund.”
Call to action: The consultation, which is being supported by an industry panel chaired by Sir Damon Buffini, closes on 22 September 2017. Email responses should be sent to firstname.lastname@example.org.
AltFi is returning to Amsterdam for its second annual Summit in the city. The inaugural event last year was a roaring success, with key figures from across Continental Europe's alternative finance and digital banking sectors highlighted. These included Jeroen Broekema, managing director of Funding Circle Netherlands, and Mieke van Engelen, head of innovative partnerships at ABN AMRO's standalone lending platform, New10.