Giving equity finance a chance

After an era rich in debt, equity financing provides a more sustainable growth track.

I have never met an entrepreneur who willingly wants to give away a part of the business that they have built. That’s hardly a big surprise.

But I have also never met a successful entrepreneur that doesn’t want their business to be more successful; whether that means bigger, more profitable, able to employ more people or simply having their products in the hands of more customers.

For me that ambition is, and should be, the very essence of entrepreneurship. Yet it is becoming an increasingly rare quality. In the past two years as CEO of BGF, and over a career of investing in a wide variety of businesses, I have heard plenty of reasons not to act. Why take on all the risk and uncertainly of developing your business to the next level, to make it more competitive and productive, when it is easier to sell out and reap the rewards? Why try to struggle against austerity, the Eurozone crisis, the next big problem? It all sounds too difficult. But if you are not careful inertia can rapidly become a permanent way of life.

Yes it is true that credit is a factor. But let’s face it, for too long all of us, including business, have subsisted on a diet that is excessively rich in debt. Equally, it is fair to say that overdraft facilities – a seemingly easy and accessible route to credit – are less reliable because they are not committed. But this shouldn’t present an insuperable barrier to growth; it shouldn’t mean ticking over or prematurely selling up; and it certainly shouldn’t deter entrepreneurs from being able to develop promising businesses.

Fulfilling your aspirations for the business

One of the first questions that I ask an entrepreneur is whether they have really accomplished all that that they hoped for when they started their business.

Today they may be achieving strong and stable revenues, providing employment and enjoying a prominent position in their local market. They may have an excellent product or service to offer and a strong customer base. And by anyone’s standards they have done very well.

But why just stop there? What could a robust, properly financed business plan achieve over the next three, five or ten years? Could the business double its workforce or treble turnover? Could it expand out of its home region through organic or acquisitive growth and develop a national or international footprint? Could it develop its supply chain, launch new products and increase exports to new overseas markets?

These can be more than mere aspirations. Growth comes in many different forms and so does the means to fund it. It doesn’t always need to be debt alone. For many businesses equity finance is an option that should be seriously considered.

Growth capital investors, like BGF, buy a minority stake in a business at a fair price. They take a calculated risk on its future and they gain from shared success with management. Theirs is a vote of confidence in an entrepreneur’s ability to build a stronger, more valuable business.

However despite all that it offers, it is a fact that a very limited amount of growth capital is currently being channeled into UK SMEs – just tens of millions of pounds. When you consider the possible universe of good businesses seeking finance to support growth, you cannot fail to recognise a missed opportunity.

Certainly it is something that we at BGF are seeking to tackle with up to £2.5 billion of growth capital available for small and medium-sized businesses with ambition to invest.

But I believe that some of the issues holding the industry back are more systemic. We need fundamental cultural change.

Aspiration and ambition is critical to growth. We should make no apology for it, and we need to create a culture where it is applauded and properly supported.

The financial services market as a whole has a role to play in presenting and articulating the different routes open to SMEs, so there is real choice and higher awareness of what each option provides. Providers of equity finance, like BGF, need to work hard to define what they offer and to earn the trust of businesses they seek to support. Equity investors need to to be open and transparent; and to be seen and act as real partners.

And lastly, businesses need to put aside some of their preconceptions, even misconceptions, about equity finance and have the confidence to plan for growth with an informed and open mind. With more collaboration and co-operation, we will generate greater confidence. It all starts from there.

Related: How to raise first equity finance for your business – What are the different types and what amounts can you raise?

Stephen Welton of the BGF

Stephen Welton

Stephen Welton has over 20 years of experience in the development capital and private equity industry. He joined the Business Growth Fund in 2010 after ten years with private equity firm CCMP Capital (formerly...

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Equity Funding