New report by ScaleUp Institute, Innovate Finance and Deloitte identifies £300m funding gap for local companies seeking to grow.
The report, The Future of Growth Capital, looks at the regional funding disparities as part of an assessment of an emerging national growth capital gap of £15bn as a result of the COVID-19 pandemic. In total, £119m of equity investment was raised in the North East region in 2019 – yet if all our local North East growth companies sought capital, the investment needed is close to £300m – highlighting the urgent need for the region to assess how it develops sustained local access to capital to fuel our scaling businesses that can aid our economic recovery.
The report highlights the importance of ensuring that local growth opportunities can be met as part of a targeted national strategy to stimulate local economic growth as part of the recovery effort. Growth capital refers to the financing that enables scaling innovative companies, both young and established, to reach maturity.
The gap – the difference between demand for and supply of growth capital – stood at £5bn-£10bn a year before the COVID-19 crisis. The pandemic has significantly exacerbated the issue and effectively doubled the gap, with it now reaching £15bn.
The report lays out five specific and practical recommendations to tackle the long-standing, structural problem of a lack of available capital for scaleup companies. The recommendations are:
1. Create a ‘National Blueprint for Growth’ that delivers a strategic joined up approach to support and champion more consistent and effective economic growth across all regions and sectors.
2. Accelerate the unlocking of Institutional and Corporate Funding through changes in legislation and organisation that crowds in the existing significant private sector capital that can make inroads into closing the growth capital gap.
3. Expand and build upon the British Business Bank (BBB) by strengthening the regional presence of the BBB with empowered decision making deployed under a national framework, and continue the developments of its products along with Scottish Investment Bank (SIB), Development Bank of Wales and Invest NI.
4. Expand the role and scale of Innovate UK and its direct deployment of innovation capital to our most innovative, early stage and scaling businesses.
5. Create a “Future Opportunity Fund” to develop diverse sectors and impact investing potential that is focused on emerging, socially inclusive markets, including the carbon netzero economy.
The UK’s 33,860 scaleup businesses constitute a critical portion of UK small – and medium-sized enterprises (SMEs) and contribute £1 trillion to the UK economy annually. These scaleups represent 50% of the SME economy and are twice as likely to innovate and have international businesses than their peers.
Taking these actions now to close the gap will provide opportunities to ‘level up’ the regions and aid the UK’s economic recovery postCOVID-19, generating future prosperity and boosting regional economies, productivity, innovation and internationalism. This includes an estimated 10-20 per cent boost in regional business investment, doubling the number of scaleups in the UK and supporting levelling-up objectives delivered through strong growth across all regions. This work has been undertaken in collaboration with industry, investors and the Business Action Council (BAC).
Stephen Hall, office senior partner at Deloitte in Newcastle, commented:”No one can deny the widespread disruption caused by the COVID-19 pandemic. In the short and medium term, it’s vital that we find new ways to get the regional economy growing again. However, longer term it also represents a unique opportunity to reset some of the fundamental challenges the UK has faced for quite some time – levelling up, diversity, carbon emissions, unemployment – to name but a few.
“We believe therefore that COVID-19 should act as a catalyst for change. Now more than ever it is vital that businesses are encouraged to start and scale up to their full potential. After all, it could be a chance to create a positive and lasting legacy from the upheaval of this crisis.”
Irene Graham OBE, CEO of ScaleUp Institute, commented:”Scaleup companies are key to economic recovery. They make a significant contribution across the country in every locality and sector. As this report highlights, even through the COVID-19 period, they remain highly innovative and are still investing in R&D and job creation. As we seek to build back better we must be bold in addressing our scaleup challenges and the widening gap in long term patient capital.
“We believe that the combination of approaches set out in this report can finally solve long standing growth capital issues and make significant inroads to the leveling up agenda. As this report emphasises, the public and private sector must work together in a collaborative effort to deliver the step change required.”
Charlotte Crosswell, CEO of Innovate Finance, commented:”As we reset our economy in the wake of COVID-19, this is the moment to address the growth and innovation-capital gap with longterm policy solutions.
We accept that there is no silver bullet or single policy that can resolve a complex issue. That is why our recommendations spread across different areas and feed into a long-term solution. “The problem is abundantly clear, and it’s now crucial we make the changes and address it. Areas of our growth economy such as the FinTech sector – which is full of scaling, innovative companies – are advancing at a rapid pace, and we risk losing an entire generation of vitally important businesses if we don’t make the necessary structural adjustments.
Download the report here: growthcapital.report. Read the full recommendations here: growthcapital.report/recommendations.
