Equity finance access and use in early-stage UK ventures

I recently worked on some new groundbreaking research with the ERC examining access to and use of equity finance amongst UK early-stage ventures. This involved the first national survey to explore the process of how potential high growth startup ventures access their first formally reported round of equity finance. The research is important because the effective financing of early-stage business ventures is notoriously difficult, given their high risk of failure. Yet, for a flourishing economy, the UK needs to fund these potentially game-changing new innovative ventures which can transform industry, create high quality jobs and address global concerns such as climate change and healthcare.

Before this research, UK data had only previously provided evidence for those ventures that successfully obtain equity finance, and therefore failed to address the question of why other ventures may be unsuccessful. From an economic development perspective, it is important to understand whether there is venture demand failure or financial supply failure taking place which might prevent viable ventures to grow.

The report is timely, given the British Business Bank’s Small Business Equity Tracker 2024 findings that demonstrate a 48% decline in annual equity investment in 2023, with indications that early-stage equity finance had become difficult to access because the energy crisis and high interest rates had reduced startup seed equity investors’ appetite for such high risk investments.

Our research demonstrates the importance of equity finance to early-stage innovative companies. Equity finance, where venture owners cede a share of their business in return for investor funding to develop and grow their business, serves as an important alternative to bank debt finance, which is typically not available to research and development (R&D) ventures that are pre-revenue and therefore lack a trading track record.

The survey of 727 UK startups found that around one third had sought equity finance during the past year (2022-23), but only half of these were receiving any finance (the average amount of their finance being only two-fifths of their application requirement), and typically after multiple (five or more) applications. The business journey to accessing equity finance, which most frequently comes from business angels, venture capitalists and crowdfunders, is often long and difficult (see also BEIS Innovative Firm’s Journey to Finance, 2017).

Deeper analysis revealed that lack of prior experience in using equity finance, lack of access to external assistance through Innovate UK, a new venture incubator, or external consultant and a location outside of London and the South East were all factors in lower application rates, whilst on the other hand, productive higher capital expenditure startups were more likely to apply for finance. Equity applicant success rates were significantly advantaged by prior track record of using equity, and being in revenue significantly increased the percentage of equity finance required that was raised.

The research points to some important policy recommendations. These are aimed to help overcome geographical disparities in equity finance, and to assist startups which have long research and development period prior to commercialisation – the so-called ‘patient capital’ businesses which are found to be most difficult for equity investors to fund. The recommendations include:

• Continue to provide the Seed Enterprise Investment Scheme (SEIS) tax break, but adjust this to support longer horizon research and development businesses.
• Enhance public-private co-financing, ensuring that the loss of former European Union investment funds, post Brexit, are replaced.
• Innovate UK, the UK government agency supporting innovative startups is doing a good job through programmes like Business Growth, but these must ensure that support is reaching across the UK’s regions.
• Investment readiness support programmes are vital to assisting innovative startups to find and successfully apply for equity finance – these must be made available across the regions.
• Grants play a vital role in R&D startup funding. Enhanced national grant programmes like the Energy Entrepreneurs Fund should be developed to assist long horizon R&D sectors. These should be blended with equity investment – such as through enlarging the IUK Investor Partnerships programme – at the earliest possible stage in order to embed commercial acumen from the angel and VC equity financiers into the business case.
• UK University equity seed funds have been successfully growing in recent years and should be further supported to ensure university spinouts and collaborations with innovative startups. More support could be provided to developing and establishing regional university group early-stage seed funds, like Northern Gritstone and Midlands Mindforge.
• Government must do more to unlock institutional pension funds developing Pensions For Purpose to support more startup patient capital provision to address globally challenging health and climate issues.
• Government should look to multinational financing solutions, including working with Republic of Ireland and also seeking a return to closer working with the European Investment Fund.

Our report into UK startup financing sends clear messages to the new UK Government and support agencies like Innovate UK, the British Business Bank, Research England and the devolved nations to support more University-industry research and development collaborations to fund solutions to global challenges such as health and the environment. The ERC will add to the evidence base by undertaking further follow-up research to understand potential high growth startups’ investment readiness and access to equity finance in the Autumn of 2024.

For further Information contact stephen.roper@wbs.ac.uk ; r.owen@mdx.ac.uk

Professor Robyn Owen, Director of Centre for Enterprise, Environment and Development Research (CEEDR) and GreenFin, Middlesex University Business School

Acknowledgement:The views presented are those of the authors, who would like to thank their research sponsorship from the UK Department for Business and Trade and Innovate UK.

 Please note that the views expressed in this blog belong to the individual blogger and do not represent the official view of the

Enterprise Research Centre, its Funders or Advisory Group