By Luke Davis, IW Capital.
New data from the British Business Bank has revealed that UK smaller companies received a record £8.8 billion of equity investment in 2020 despite the disruptive effects of both Covid and Brexit. This record growth looks set to continue in 2021, with £4.5 billion of investment reported in the first three months of the year already, while our own research at IW Capital – where we provide vital growth finance for SMEs – reveals that 16% of UK investors are looking to back startups and SMEs in 2021.
The figures come from the British Business Bank who first started to track this form of investment over ten years ago. The Bank was also a key contributor to this record, supporting over 20% of all UK equity in 2020 – the majority of which involved the newly launched Future Fund.
The Fund, launched in May 2020, provides convertible loans, ranging from £125k to £5m to eligible investee companies. Technology and IP-based businesses have so far made up around 40% of the companies receiving investment, with Business and Professional services following at 26% of the firms. This still leaves, however, a significant portion of the market if not uncatered for then certainly under-funded – a chronic problem for UK businesses over the past decade.
SMEs are a vital sector of economies the world over, but especially so in the UK, where firms with fewer than 250 employees contribute over £2 trillion to the economy. They make up 99.9% of private sector businesses and employ around 60% of the workforce, and as such are crucial to the UK economy and its growth. This is a significant portion of the overall GDP and much of it is spent in local communities – something which has come to the fore during the pandemic.
Considered in tandem with the fact that before the pandemic, small firms were hiring at a rate three times higher than large companies, this evidence demonstrates just how powerful SMEs will be in tackling potential unemployment as a result of the end of furlough.
Investment in small firms also almost always comes with advice, guidance and an outside perspective that can prove invaluable to a business looking to grow, scale or simply survive – especially in the current climate. Through angel investment and other forms of private finance, entrepreneurs are offered advice, connections and introductions that can make the difference between success and failure or scale and stagnation.
This investment support comes at a time of record optimism in the SME sector, with three quarters of CEOs expecting overall economic conditions in the UK and Ireland to improve over the course of the next 12 months. The combination of optimism and investment backing could spell a perfect storm for growth in the sector that is so vital to the UK economy.
The economy in 2021 is already heating up, with it set to return to pre-pandemic levels by the end of the year, and its continued growth will be fuelled by the small businesses that provide its foundation.
The record level of investment reported in 2020 is great news and – from our experience through the last year and a half – not at all surprising. There has never been more demand to support SMEs and startups in their growth journey, whether that be through the Enterprise Investment Scheme or any other route to provide funding, and the trend is by no means over.
Our research indicates that a significant proportion of the UK’s investment community are actively investing in these firms. Opportunities in this sector exist not only for great returns but also to make a real difference in the life and growth of a business. something that is becoming more important for investors as they adopt a more altruistic approach.
IW Capital invested in at least six different growth SMEs during 2020 and the majority of them have grown at a rapid pace thanks to our support. The growth of these businesses ranges from sustainable packaging that pivoted to produce plastic-free PPE, to apps making seamless hospitality service possible during a pandemic. The unifying elements they all possess are passion, determination and talent, all qualities that the UK entrepreneurial sector has in spades.