Funding sources have never been so plentiful, but what if they all dry up?

Small Talk

David Prosser
Monday 15 February 2016 10:07
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All at sea: small firms fear they will be stranded on exports if Britain leaves the EU
All at sea: small firms fear they will be stranded on exports if Britain leaves the EU

Is the funding environment for Britain’s smaller businesses about to take a turn for the worse? It looks that way with stock market volatility now returning to centre stage.

The debt market looks fragile, with the capital position of banks once again coming under close scrutiny. And while alternative finance continues to grow steadily, there are grumblings about stress here too – witness the warning last week, for example, from the former City regulator Lord Turner about the exposure of some peer-to-peer lenders in the small business sector.

There are also concerns about equity capital. A new report from the analyst Beauhurst warns that while 2015 was a strong year for fundraising, 2016 looks much tougher, particularly for those firms at the earliest stage of their development.

The headline numbers from Beauhurst look impressive. Growth businesses raised £4.9bn from investors last year, against £3.9bn in 2014 and £2.5bn in 2013. However, that total for 2015 was skewed by the increasing size of the average investment; the number of deals actually rose by just 3 per cent, Beauhurst says, after several years of double-digit growth.

Even worse, seed-stage investments fell sharply over the course of 2015. In other words, those businesses at the earliest stage of their development found it tougher to raise money.

That is a reflection of the changing attitude to risk among investors, many of whom have become markedly more cautious as market uncertainty has increased. In the current volatile environment, that looks set to continue. In which case, seed-stage companies may find it even harder to win backing – and the nervousness may also begin to affect more mature companies.

Beauhurst’s research also underlines just how crucial new entrants to the funding scene have become in recent years. The most prolific investors last year, Seedrs and Crowdcube, didn’t exist as recently as five years ago, when equity crowdfunding platforms had yet to open for business. Neither did the Business Growth Fund, now the most active backer of growth-stage companies.

We should be grateful for the impact these new entrants have made. Without them, very large numbers of companies seeking funding would have been denied the opportunity to begin realising their potential.

However, the dependence of start-up and developing businesses on brand new sources of funds is concerning. The appetite for risk among more traditional investors appears never to have returned following the financial crisis. Now the markets are once again troubled and febrile, there is little prospect of that changing.

As a result, Beauhurst is predicting a small fall in the number of equity fundraising transactions in 2016, as well as a rise in the total amount of money raised as investors gravitate towards larger transactions they perceive to be less risky.

If so, that will send out the wrong signal to UK start-ups, which have been buoyed in recent times by government support, a resurgence in enthusiasm for entrepreneurialism, and genuinely impressive success in areas such as fintech.

The good news is that while the banks have never really returned to funding smaller companies, other than indirectly via the Business Growth Fund, the financing options for growing businesses are broader than ever before in the UK. But if funding does begin to dry up, that breadth will be little consolation.

What can be done to avoid this prospect? Well, risk aversion is difficult to manage, but we can at least offer greater mitigation. Generous tax breaks are already available to investors in smaller companies, but we may soon need to offer even more support of this kind.

Deal me out: investors put the brakes on AIM’s growth

More bad news for AIM, which is finding the going increasingly tough amid the global market volatility. A new study warns that liquidity on London’s junior stock market has declined markedly over the past 12 months – with daily dealing volumes falling more than twice as quickly as on the main exchange.

The average daily value of shares traded in the typical AIM-listed company fell to £114,000 over the course of 2015, according to research published by the accountancy firm UHY Hacker Young – a 27 per cent reduction on the previous year. By contrast, liquidity on the main London market was down by only 12 per cent.

Laurence Sacker, UHY’s managing partner, warned that the fall was likely to act as a disincentive for larger investors thinking about putting money into AIM-listed companies. “Until AIM’s liquidity improves, institutional investors are likely to remain largely on the sidelines,” he said. “The inability of institutional investors to easily trade out of a position in AIM shares will continue to be an impediment to the growth of the market.”

Brexit fear as SMEs struggle to export outside Europe

Small and medium-sized enterprises (SMEs) could suffer a disproportionately adverse effect if the UK votes to leave the European Union, a new study suggests, because these companies are finding it far tougher to expand into export markets beyond the single market.

The research, published by the commercial insurer RSA, warned that 72 per cent of smaller firms struggle to gain traction in export markets beyond the EU, while 82 per cent see European markets as important to their growth. More than half the businesses in the research said uncertainty over the UK’s continued membership of the EU was already holding back their growth.

David Swigciski, SME director at RSA, said the Government needed to work harder to resolve such uncertainties – and to offer more support to businesses looking to export further afield. “The UK’s SMEs are stuck in the gravitational pull of the EU,” he said. “Current government export support isn’t working for our smaller businesses, who are struggling to trade beyond Europe.

“Not only are our SMEs missing out on growth markets, they face significant risk from uncertainty over a possible Brexit and our future relationship with Europe.”

Small Business Person of The Week: ‘Singles on our site are able to meet like-minded people’

David Vermeulen
Founder, 
The Inner Circle

I launched the business three years ago in Amsterdam after getting frustrated with my own experience on dating websites.

I found there were just so many people on the sites that it was actually very difficult to find someone I wanted to meet. When I talked to other people about the problem, they said the same.

We started by inviting a few single friends to list on the site and to invite their own friends too; within four weeks, we had 4,000 people and I realised the business could work.

The idea is that anyone can register for the website, but they then go on to a waiting list. We review each potential member personally on the basis of factors such as their age, education and profession – so that we get a really well-balanced mix of people on the Inner Circle site.

That reviewing process is the most time-consuming element of the business, but we think it’s worth it.

The way we work ensures that singles are able to meet like-minded people with similar lifestyles, backgrounds and interests.

The Amsterdam site grew quickly and we decided to launch in London, which has now become our fastest-growing site (we also have operations in Barcelona, Milan, Paris and Stockholm). We have now got around 31,000 London members, compared with only 200 in 2014,

The business model is to monetise the platform in two ways. First, members list for free but then pay extra in order to gain access to additional services. Second, we organise lots of events in the cities where we have sites.

We’ve had no outside financial backing, but that hasn’t held us back – our sales went through £1m for the first time last year and we’ve been profitable right from the start.

@davidprosserind

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