Why scaleups still shy away from debt and equity growth funding
4 min read
29 May 2018
The Supper Club took a look at whether entrepreneurs understand how best to use external funding to grow their businesses.
Over the past few years, the number of UK scaleups has grown. However, many have a poor appetite for external funding. Alex Evans, The Supper Club’s programme director, suggested it was due to low awareness of funding options and a limited understanding of how to use them.
The findings come off the back of The Supper Club’s foresight event on The Future of Finance, which echoed previous research from the Scale Up Institute (SUI).
Boosting the number of high growth companies by 1% could create an additional 238,000 jobs, the SUI explained. But while there are 35,210 scaleup companies in the UK, 28% report using equity finance – and only 13% plan to use it soon.
Companies that do use eternal funding are inclined to use one of the more popular avenues. Some £2.9 billion was claimed in R&D tax credits during 2015-16, according to HMRC, with the average amount of relief claimed via the SME scheme increasing from £56,223 to £61,514.
Despite a dip in deal numbers in 2016, the crowdfunding boom returned. “We’ve found a rise of equity peer-to-peer lending and the Enterprise Investment Scheme has driven startups, but too few founders are using, for example, debt and equity to scale,” Evans explained.
“At the same time, the UK lags behind the US where finance seems to be more abundant, less risk averse and prepared to wait longer for a return on investment.
“The Patient Capital Review is addressing part of this, but the UK funding industry needs to convince founders that it is more patient and can offer valuable support beyond capital. Clearly, the funding landscape has evolved faster than its perception.
“It’s a situation that needs to be tackled given that this is a rare moment in British business history when high growth entrepreneurs are revered; afforded so much government support, and investor appetite. Scaleup leaders have more choice, power and opportunity than ever. If you don’t use it though, you might not have it for long.
The Supper Club member Adam Blaskey, founder of The Clubhouse, raised finance through numerous channels – most of his funding came from friends and family.
He advised: “If you’re raising money then build in enough comfort room in your model and raise slightly more at the outset so you don’t have to worry about cash flow as you’re growing. You need to have an optimistic plan which is realistic at the same time.
“The best lesson I’ve learned is that there are lots of different sources of funding available. On the one hand, there is lots of money out there, but getting that money committed and invested in your business is not as easy as it may seem. It takes a lot of hard work. My recommendation would be to look at everything from asset finance and discounting to venture debt.”
Jeff Booth, co-founder and CEO of BuildDirect, likewise cited funding from family and friends as the reason his company started.
“Sometimes the most common avenues just aren’t available to you,” Booth explained. “I know, I’ve been there. But turning to family and friends was the best decision we could have made. Most of our early investors contributed small amounts – as little as $10,000. But we asked everyone we knew, and it added up.
“It actually turns out that nearly 40% of startups are initially funded this way, though you rarely hear about it in the news. That’s probably because it’s a lot sexier to announce a large investment by a hotshot VC than it is to admit that your parents are backing your startup.”