Scale-ups face £15bn funding shortfall as coronavirus ravages investment

Scale-ups face funding crisis as backers double down on existing investments and AIM exchange dries up

UK scale-ups face a funding shortfall of up to £15bn this year, due to lack of investment because of the coronavirus pandemic.

Companies outside London have especially struggled for investor support, as investors look to shore up existing investments.

London scale-ups secured about 25 per cent of their investor funding needs so far this year but companies in several UK nations and regions achieved less than 5 per cent, says a new report, The Future of Capital Growth.

>See also: New company launches fell by a quarter between January and May

According to the Scaleup Institute and fintech association Innovate Finance report, the scale-ups funding shortfall doubled from about £7.5bn in 2019 because of COVID-19.

The UK’s 33,860 scale-up businesses constitute a critical portion of UK small- and medium-sized enterprises (SMEs) and contribute £1 tr to the UK economy annually. These scale-ups represent half of the SME economy and are twice as likely to innovate and have international businesses than their peers.

The UK is the top destination in Europe for fintech investment and has strong growth in sectors such as life sciences, advanced manufacturing and media. Although it ranks third in the world for starting a business, it only ranks 13th when it comes to scaling them.

But equity funding for these companies dropped by 40 per cent in the second quarter compared with the same period in 2019, says the report.

>See also: What the Government needs to do to save British start-ups

Meanwhile, growth capital fundraising on the AIM stock exchange in London, which is focused on smaller companies, fell 45 per cent in the second quarter.

The report predicts that the amount of funding secured from these two sources would drop by at least £5bn in 2020 compared with 2019. The amount of early-stage venture capital committed would also fall by £2.5bn.

Adding that to the £7.5bn shortfall carried over from 2019 would result in a £15bn deficit this year.

However, if that £15bn deficit was filled permanently, says the report, the number of scale-ups would double within 10 years, creating 3m new jobs.

This is significant because although scale-ups account for less than 1 per cent of all SMEs, they represent half of their combined turnover.

Scale-ups funding shortfall

Funding the scale-ups could “level up” prosperity and productivity across the UK, a key government aim, Irene Graham, chief executive of the ScaleUp Institute, told the Financial Times.

The report calls for a “national blueprint for growth”, where the Government could provide seed capital and investment products, as well as bring industry together to devise solutions to the scale-up funding problem. This could include legal changes to allow pension funds and insurers to invest some of their money in scale-ups.

The report suggests that British Patient Capital, part of state lender British Business Bank, creates a joint venture with private equity firms to deploy money into scale-ups.

It also suggests that the BBB should open eight regional offices to funnel money to promising companies across England.

Further reading

Government should triple equity to invest in businesses to £30bn


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