The Role of UK Government Equity Funds in Addressing the Finance Gap facing SMEs with Growth Potential

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1 Paper for the Institute for Small Business and Entrepreneurship Conference, Dublin 7-8 th November, 2012 The Role of UK Government Equity Funds in Addressing the Finance Gap facing SMEs with Growth Potential Robert Baldock Principal Researcher CEEDR, Middlesex University Business School The Burroughs, Hendon, London NW4 4BT Tel: (+44) , David North Professor of Regional Development CEEDR, Middlesex University Business School Abstract Objectives: This paper examines how successive UK governments have been addressing the equity finance gap since the start of the financial crisis in It explores the notion that an equity finance gap may be holding back the growth of innovative, high-tech SMEs (NESTA 2009, 2011) and draws upon original demand and supply side evidence to assess the extent to which UK government initiatives are addressing this gap, their impacts on business performance and the lessons for future policy. Prior Work: Recent literature highlights the existence of an equity gap, particularly relating to the early stage venture capital (VC) market in the UK (HM Treasury 2003; NESTA 2008, 2009; Murray 2007; Glancey 2009; Mason et al., 2010). As VCs have shifted towards making later stage and follow-on rather than new investments, a larger gap has opened up for new and early stage risk capital. Against this context there has been a growth in national and international public sector initiatives concerned with creating joint public/private financed VC funds. Approach: This paper primarily draws on research commissioned by the Department for Business, Innovation and Skills examining recent UK government VC initiatives, focusing on early stage assessments of its national VC programmes (including the Enterprise Capital Fund) (CEEDR, 2010) and the UK Innovation Investment Fund 1

2 (CEEDR, 2012), whilst also using findings from an access to finance study of UK technology based small firms (Ullah et al., 2011). Evidence is drawn from interviews with ninety-two UK SMEs seeking equity finance since 2007 and 35 equity finance suppliers and intermediaries. Results: The paper concludes with some lessons for policy, including: (i) that whilst demand for equity finance has increased since the financial crisis, access to it has become harder; (ii) that government intervention currently has a vital role in stimulating early stage R&D investment, including at levels beyond the current EU state aid limit; (iii) that SMEs require greater awareness of, and preparation for, equity finance. Implications: The indications are that there is further need for UK policy intervention to stimulate the equity market and ensure that innovative businesses can grow to their full potential. Value: This paper provides a contemporary insight into the current demand and supply for equity finance in the UK, producing new evidence that is likely to be of value to government policy-makers as well as making a contribution to the academic literature on early stage equity and venture capital. Acknowledgements The authors would like to acknowledge the contribution to the research of Adrian Lewis, a venture capital consultant, who undertook fund manager interviews, Dr Farid Ullah and Dr Ignatius Ekanem for their research contributions. They would also like to thank Daniel Van der Schans at BIS and members of project steering groups for their guidance during the research. The findings and interpretations are those of the authors and do not necessarily represent the view of BIS. 2

3 Introduction This paper draws on evidence from two studies examining UK government backed equity finance initiatives and recent research into the financing of UK Technology Based Small Firms (TBSFs) undertaken between 2010 and These involved early assessments of the impact of recent government programmes, aimed at addressing market failures relating to the financing of SMEs with growth potential, for the UK government s Department for Business Innovation and Skills (BIS)(CEEDR, 2010 and 2012). The programmes examined were: (i) the Enterprise Capital Funds (ECF), providing equity finance to early stage and established businesses; (ii) the Capital for Enterprise Fund (CfEF) providing equity and mezzanine finance 1 to existing businesses; (iii) the Aspire Fund, providing equity finance to women-led innovative businesses; (iv) the Finance South East Accelerator Fund (FSEAF), which is part of the Early Growth Fund programme and provides debt and mezzanine finance to smaller-scale early stage and established businesses in the South East region; (v) the UK Innovation Investment Fund (UKIIF) to assist highly innovative companies in the life sciences, cleantech/low carbon, digital technology and advanced manufacturing sectors. These are all commercially orientated venture capital funds, managed on behalf of BIS by private sector fund managers, investing a combination of both public and private money. UKIIF represents a different model to the others in that it is a fund of funds, private sector-led and operating pari passu, which other than the sector selection is only bound by a requirement that it at least invests the 150m UK government funding contribution into UK businesses. It is therefore not bound by EU state aid legislation and can go beyond the 2 million cap on equity and mezzanine finance. Given that some of these programmes were only launched between 2008 and 2010, it has been too early to make a full, quantitative assessment of their effectiveness and impact. The research was therefore concerned with making a more qualitative and interim assessment which addressed a number of objectives, including the characteristics of the applicants to the different funds, their reasons for seeking equity/mezzanine finance, their experience of the customer journey in obtaining funding, the extent to which the government finance enabled them to leverage finance from other sources, their assessments of additionality and views about the actual and expected impact of the funding on business performance. Literature Context: the Equity Gap Only a very small proportion of SMEs seek equity finance (with most large scale SME surveys estimating this to be less than two per cent of those firms seeking external finance 2 ). However this form of finance is vital for many innovative and growth orientated enterprises who play a key role in leading the emergence of new industries and generating economic growth and job creation. Equity finance is suitable for businesses that have high growth potential, but also higher level of risk, lack physical assets to provide collateral on debt finance and may also either lack or have uneven revenue streams that make servicing loan repayments difficult. It has long been recognised by policy makers, practitioners and academics that there is an equity gap in the UK, particularly relating to the seed and early stage venture capital market, which means many potentially viable businesses struggle to raise the finance they need. The boundaries of the equity gap have changed over time. Whereas in 1999 it was thought that the equity gap affected businesses seeking investments of up to 500,000, it is now generally considered that the gap is much wider. For example, NESTA s evidence indicates that private venture capital has been moving away from early stage investments as the size of individual funds has increased, with the private equity market shifting towards larger deal sizes, with a diminishing volume of funds being available for early stage venture capital investment (NESTA, 2008). This has occurred despite a 20 per cent increase between 2001 and 2007 in the number of companies requiring investments below 2 million. The shift reflects the fact that investing in early-stage businesses is not seen as an attractive option by private finance. This is due to several factors, including information asymmetries between investors and new and young SMEs, especially where information is limited and not always transparent and assets are often knowledge based and exclusively associated with the founding entrepreneur (Hsu, 2004). Not only are the risks high, because of the technological, market and managerial uncertainties, but also seed and early stage 1 This is a hybrid of debt and equity financing. It is basically debt capital that gives the lender the right to convert to an ownership or equity interest in the company if the loan is not paid back in time and in full. It offers a way in which little or no ownership is ceded over time. 2 The Annual Small Business Survey 2007; Centre for Business Research (CBR) (2008) Financing UK Small and Medium sized Enterprises: the 2007 Survey, University of Cambridge. 3

4 investment invariably requires considerable managerial input from the venture capitalists themselves before there is the likelihood of a return on their investment. As a result, the history of small, specialist early-stage VC funds in Europe is one characterised by very low returns and several failed funds (Murray, 2007). Established VC firms are therefore frequently of the view that they can make greater and more certain returns by moving to later stage investments (Harrison et al, 2010). Evidence from Scottish Enterprise also indicates that venture capitalists have been shifting towards follow-on rather than new investments, creating a larger gap for new and early stage risk capital (Glancey Johnston, 2009). Consequently, it is now generally accepted that an equity gap exists for projects that are too large for business angels to fund but below the level for most venture capital funds to start investing, which is generally estimated to be in the 250,000 to 2m range, although some recent evidence suggests the gap may now extend up to 10m in certain sectors such as the life sciences (SQW Consulting, 2009; Rowlands, 2009; CEEDR, 2010). It is against this context that there has been a growth in public sector initiatives concerned with creating joint public/private financed venture capital funds (often referred to as hybrid funds). NESTA (2010) reports that publicly backed funds have become increasingly important since the dot com crash at the turn of the century, especially in relation to early-stage funding. Whereas only 20 percent of all early-stage investments had public backing in 2000, this had increased to 68 per cent by 2008, leading to a conclusion that without public funding, the early-stage VC market in the UK would be in a particularly perilous state. Between 2000 and 2009 BIS (formerly DTI) placed 338 million in 28 VC funds which provided finance for over 800 businesses. Other investors contributed a further 438 million, making 776 million in total (House of Commons, 2010; NAO, 2009). One of the first initiatives was the setting up of Regional Venture Capital Funds (RVCFs) in the nine English regions in order to address the equity gap facing SMEs in each region. Although the RVCFs had made 356 investments, there had only been 18 successful exits by December 2008, with all nine funds yet to make a positive return. This confirmed the doubts raised by some commentators (Mason and Harrison, 2003) about the viability of having equity funds operating at the regional scale. Included in the National Audit Office (NAO, 2009) review, the UK High Technology Fund (UKHTF), established in 2000 as a fund of funds, with 20 million government investment, proved an attractive model to private investors levering a five to one ratio of private funds, but failed to deliver the returns of comparable European high technology investment funds which operated on a larger scale. The RVCFs closed to new investments at the end of 2008 and were superseded by the BIS equity programmes which are the subject of this paper and these also include the UKIIF which builds on the lessons learned from UKHTF and is much larger in scale than its predecessor. The Government backed equity funds aim to balance generating commercial returns for the investors in the funds whilst at the same time achieving wider economic objectives. Since one of the ambitions of the funds is to demonstrate to potential private investors that good returns can be made by investing in early stage businesses with growth potential, the responsibility for making the commercial investment decisions is devolved to private venture capital fund managers to help ensure that the investment decisions are made according to rigorous commercial criteria. At the same time, by providing equity funding to innovative early stage businesses with high growth potential that are unable to raise sufficient funds from other sources, the government equity funds aim to contribute to economic growth and job creation within the UK economy. Overview of UK Government Funds This paper focuses on five UK government funds which, whilst all addressing apparent imperfections in the SME finance market, differed in terms of the exact nature of the finance gap and the kinds of businesses being targeted and are briefly described here. Enterprise Capital Funds Enterprise Capital Funds (ECFs) are a rolling programme of funds, with the first funds established in , that are intended to address the equity gap faced by SMEs with high growth potential seeking modest amounts of equity finance. Under the programme, Government funding is used alongside private sector funds to invest directly in businesses, targeting investments of up to 2m that have the potential to provide a good commercial return. There are ten ECFs, eight of which were operational and managed by existing private sector VC funds at the time of the research. The ECF fund size ranges from 10m to 30m with an average of about 26m. The eight active ECFs focus on different stages of business development such as seed, early stage and expansion stage. Whereas some cover a broad range of sectors (e.g. the Seraphim Capital Fund), others tend to 4

5 specialise (e.g. in new media in the case of the Dawn Capital Fund or medical and healthcare investments in the case of the Oxford Technology Management Fund), reflecting the areas of fund management expertise. The Capital for Enterprise Fund The Capital for Enterprise Fund (CfEF) was launched in January 2009 as one of the Government s Real Help Now initiatives to combat the effects of the credit crunch and recession on SMEs. It provided equity or mezzanine funding up to 2 million for more mature businesses that were judged to have viable business models with growth potential but were constrained by over-gearing or the need to repay bank debt. It was a 75m fund of funds made up of 50m from the public sector which is invested pari passu with 25m from four banks (Lloyds, Barclays, HSBC and RBS). Investments ranged from 250,000 to 2m and had to be made between April 2009 and March There were two CfEF funds: the fund managed by Octopus Investment Partners focused on making investments in companies in southern regions, whilst that managed by Maven Capital Partners focused on making investments in companies located in northern regions and Scotland. The Aspire Fund The Aspire Fund was established in 2008 as a beacon for women s access to finance and aims to increase the number of successful women-led businesses in the UK by ensuring that the potential to succeed is not held back through a lack of risk capital. It is intended to provide support for women-led businesses with high growth potential. The Fund operates on a co-investment model 3 being made up of 12.5m from government which is matched equally to private sector funding from a lead investor making a total of at least 25m. It is able to make equity investments of between 200,000 and 2m, including the matched private investment. The Finance South East Accelerator Fund The Early Growth Funds (EGFs) were set up between 2002 and 2004 in order to encourage risk funding for start-ups and growth firms and comprise a range of national and regional level funds based on the coinvestment model. One of the regional funds was the Finance South East Accelerator Fund (FSEAF) that provided mezzanine finance that primarily took the form of debt finance but with certain equity finance characteristics. 4 This fund provided up to 100,000 of finance initially and up to 100,000 in subsequent financing rounds to businesses demonstrating significant growth potential. It recently closed having provided over 12m to around 200 businesses over an eight year period. The UK Innovation investment Fund The UK Innovation Investment Fund (UKIIF) was established in 2010 at a time when it was felt that private VC investment needed stimulus in the UK market (BVCA, 2010). It has received 150 million of UK government funding matched by a further 180m of private funding from two fund of funds managed by the Hermes Environmental Innovation Fund (closure value: 130m) and the European Investment Fund s UK Technologies Fund (closure value: 200m). UKIIF operates pari passu at arms length under the scrutiny of Capital for Enterprise Limited (CfE Ltd) the UK government s appointed body for its VC fund oversight. As it is private sector led and can invest in innovative businesses of any size globally, there are no EU state aid restrictions on the size of initial investments or follow on investments. The only criteria the fund follows relates to its focus on the life science, cleantech/low carbon, digital technology and advanced manufacturing sectors and that it at least invests 150 million into UK based businesses during its expected year life cycle. Methodology The research involved both demand and supply-side perspectives. Demand-side perspectives were obtained by interviewing a sample of business applicants for finance from the five government funds being studied, with additional insight gained from interviews with TBSFs seeking other forms of equity finance in this period. The supply-side perspective was obtained by interviewing a number of fund managers who dealt with applications for the government funds and twenty-two equity industry experts, including the British Venture Capital Association (BVCA), European Venture Capital Association (EVCA), three private VCs, two other public sector 3 This model relies on a lead private investor finding potential investee businesses which they present to the fund manager who then decides whether to use the BIS funds to invest alongside the private investor based on an assessment of the latter s investment track record and the strength of the due diligence work undertaken. 4 FSEAF finance mostly takes the form of loans to businesses that have been unable to obtain finance from other sources. It is considered to be mezzanine finance as it does have certain equity characteristics. In particular, unlike normal bank loans, with one or two exceptions FSEAF loans have turnover levies. 5

6 VCs, three alternative mezzanine fund managers, six business angels, three bankers, one grant fund and two TBSF sector intermediaries. Business manager interviews The senior managers of 69 businesses that had applied for one of the five government equity funds were interviewed, 15 in face-to-face meetings and the rest by means of extended telephone interviews. Whilst telephone interviews were use in order to meet time and cost constraints, in practice these were just as indepth as the face to face interviews, typically lasting one hour. The use of telephone interviews also enabled a far greater range of companies from across the UK to be included in the research. Furthermore, all interviews were supported by background financial and relevant business information on the companies and where appropriate follow-up information was provided in further telephone or exchanges. The sample was drawn from across the equity programmes and selected to include recipients of funding, current applicants, and businesses from the dead deal logs of the various funds (except in the case of UKIIF). Table 1 shows the status of the businesses participating in the research by equity fund. Out of the 69 interviewed businesses, 52 were recipients, eight were still going through the application process, and nine were from the dead deal log (comprising some businesses that withdrew their applications and others that were rejected for funding). Additionally evidence has been drawn from 23 other TBSFs that had been seeking equity finance, other than from the government equity funds in the study, during the period This provides further insight into the problems encountered by innovative small firms seeking equity finance in this period. Table 1: Business Interviews by Equity Fund Scheme Recipients Current Rejections / Applicants withdrawals Total ECF CfEF Aspire EGF (FSEAF) UKIIF Sub Total: Government Equity Fund Other TBSFs seeking/using equity finance Total Fund manager interviews Thirteen face-to-face interviews were held with the fund managers of eight UKIIF, four ECF and one CfEF. These interviews provided valuable insights into the structure and operation of the funds, the type and range of applications, decision-making criteria, their views of the customer journey and the effectiveness of the investments made to date, and their assessment of whether the BIS funds were addressing an equity gap. The funds, which were selected in order to give a good spread in terms of location, type of private sector contribution, and the types of investment and sectors targeted, comprised: i) The Catapult Growth Fund (ECF) (based in Leicester) ii) IQ Capital Fund (ECF) (based in Cambridge) iii) Oxford Technology (ECF) (based in Oxford) iv) Seraphim Capital Fund (ECF) (based in London) v) Maven Capital Partners (CfEF) (based in Glasgow, but with regional networks) vi) Hermes GPE Environmental Innovation Fund (Fund of funds manager, based in London) vii) European Investment Fund UK future Technologies Funds (Fund of funds manager, based in Luxembourg) viii) Zouk Cleantech II (Hermes fund, based in London) ix) Scottish Equity Partners Environmental Energies (Hermes fund, based in Glasgow and London) x) WHEB Ventures (Hermes fund, based in London) xi) DFJ Esprit (EIF UKFTF fund, based in London and Cambridge) xii) Advent Life Sciences (EIF UKFTF fund, based in London) xiii) Gilde Healthcare III (EIF UKFTF fund, based in Utrecht and Cambridge USA) 6

7 Findings and Discussion Business Profile The profile of the businesses receiving investments was largely as expected given the objectives and market position of each programme. Most of the businesses surveyed were young, early stage businesses established since 2000, with several applicants for ECF being pre-trading businesses, undertaking R&D and developing prototypes and/or in the initial stages of launching their products and services. A high proportion, particularly in the case of ECF and Aspire recipients, were developing and delivering market leading products and services (especially in IT/software related activities and medical/healthcare technologies) and were at the leading edge of technological developments in their fields. This was certainly the case with the 16 UKIIF businesses which were all involved in highly innovative market leading activities. A high proportion of the businesses were already exporting or planning on exporting the majority of their sales, especially those with global market leading products and services. In contrast, the applicants for CfEF tended to be older businesses, although several had undergone ownership changes since They covered a broad range of activities, although a significant proportion was in the IT/software sector. While most interviewed managers considered their business to be innovative, either in terms of the way they were applying technology or being focused on a niche market, fewer considered that they were using cutting edge technology compared to the ECF applicants. At the time of applying for the government funds, the majority of businesses were small, employing less than 50 people. The mean employment size of the ECF applicants interviewed was 10 employees (median 5.5). Also, most of the FSEAF recipients were micro businesses with less than 10 employees. The majority of UKIIF recipients were also micro or small firms with a mean size of 35 employees (median 8), although it did fund three established medium sized businesses that were developing innovative new products. An example was a recycling company with more than 200 employees diversifying into bio fuel production. CfEF typically funded larger established medium sized businesses with between 50 and 250 employees. The Applications Funnel The interviewed fund managers were asked to give an indication of the number of applications received and the proportion that resulted in a deal. In the case of the ECFs, the number of applications received per annum varied from just over 500 to 2000, with typically between six and 15 per cent receiving a first meeting with the fund manager. Many of the applications received did not meet basic criteria and therefore were rejected immediately. Of those applications which were offered a first meeting, investments were agreed with between one and 16 per cent, depending on the fund. The conversion rates between applications received and investments made were therefore very low in the case of the ECFs, the highest being 1.6 per cent. Similarly, UKIIF fund managers referred to between 0.5 and two per cent of initial applications receiving funding, representing just a handful of successful businesses each year. CfEF on the other hand exhibited a conversion rate of around 6 per cent, reflecting its focus on established businesses which typically put forward better quality propositions where the uncertainties are less than in the case of seed and early-stage applications. It might seem surprising that over 90 per cent of the businesses that submitted an application to these government funds were either unsuccessful or withdrew from the process. Fund managers explained that many applicants were rejected early on in the process because the businesses were not investment ready, that entrepreneurs underestimated their financial needs and/or had a poor understanding of the requirements of finance providers, and that some were looking for grants rather than equity or mezzanine finance. One ECF fund manager also commented that the majority of applicants presented a poor investment case, common weaknesses being that the intended market was too small and that the product did not demonstrate sufficient competitive advantage. UKIIF fund managers indicated that whilst there had been some recent improvements in the quality of applications they remained variable and that the demand for equity finance was increasing as bank and mezzanine finance had become more difficult to obtain. They also stressed the need to get to know the entrepreneurs before committing to investing and that this was intensive work requiring fund managers to focus on small portfolios of investee businesses. These findings are consistent with research into the early stage VC market that draws attention to the poor quality of much of the deal-flow, resulting in investors finding it difficult to find sufficient numbers of high growth potential firms (NESTA, 2009). As others have suggested (e.g. Mason and Harrison, 2003) this implies that the existence of the equity gap may be as much to do with demand-side deficiencies as supply-side failures. 7

8 Reasons for Seeking Finance The majority of applicants for the ECFs, Aspire and UKIIF were seeking early stage capital to fund R&D and product development as well as provide working capital. Equity finance was perceived as the only viable option for raising finance due to their lack of financial assets, insufficient trading record, the owner s unwillingness to secure/guarantee debt finance against private property or concerns about over-gearing which made them unsuitable for debt finance. Two of the applicants commented that they turned to equity once they had found out that there were no grants to fund applied development leading to commercialisation. The amount of equity sought by the 12 interviewed ECF recipients ranged from 300,000 to 3m (median 750,000), the four Aspire recipients sought between 500,000 and 2m, whilst the 16 UKIIF recipients sought between 75,000 and 10.43m (median 2.41m) and demonstrated demand for early stage R&D equity finance at beyond the EU state aid cap of 2m. The applicants for CfEF were typically seeking development capital to help with their expansion plans and in some instances this was linked to carrying out financial restructuring. For example, four of the interviewed recipients wanted equity finance to obtain better gearing with their existing bank debt. These businesses were turning to equity and mezzanine finance because they had reached the limit of their bank lending facility or had unsuccessfully applied for bank loan finance. The amount of finance sought by the 11 interviewed CfEF applicants ranged between 500,000 and 2.8m, with a median of 1.5m. In the case of the FSEAF, all nine of the interviewed businesses had been seeking debt finance but had been unable to obtain conventional bank loans, mainly due to being early stage business propositions which were deemed to be too risky by the banks. Whilst the surveyed managers generally accepted that they were presenting risky propositions, they were typically averse to considering equity funding and ceding a share of ownership. They therefore turned to the FSEAF as a lender of last resort for term loans of between 50,000 and 100,000. A number of interviewed business owners mentioned the unwillingness of banks to lend since the credit crunch, indicating that they were not able to obtain finance through the Small Firms Loan Guarantee (SFLG) and subsequent Enterprise Finance Guarantee (EFG) schemes. Some indicated that the banks considered their business growth propositions to be too speculative for loan finance and that they were directed towards equity finance as being more suitable to their level of risk and stage of development. The interviewed fund managers also commented on how the SME finance market had changed as a result of the credit crunch. For example, one ECF fund manager had been able to do joint deals with the banks prior to 2007, but had found that this was no longer possible. Fund managers suggested that the early stage equity gap had widened in the last few years as VC funds had moved up market whilst many high net worth individuals had moved out of the market completely as a result of poor portfolio performance and having lost money on existing investments. Responses from the business angels and equity investors in the recent TBSF financing report (Ullah et al., 2011) suggest a more cautious approach from private investors, requiring increasing levels of due diligence and rigour before investing. Furthermore, there is a high level of locking in to existing investments which are taking longer to mature, or requiring follow-on investments to maintain, a situation which has been exacerbated by the withdrawal to later stage investment by larger VCs, as documented by Mason et al (2010). Alternative Funding Considered Those businesses seeking equity finance typically considered a range of options such as private investors, business angels and corporate VC funds. ECF applicants for example typically considered five to six funds before deciding on an ECF. The selection of equity funding source usually came down to timing and availability, with the government equity funds being the only ones that would provide the right amount of finance at the right time. In other instances it was the fund manager s approach and the business fit with the fund, particularly with regard to sector and networking activities, which proved to be the deciding factor. This was particularly the case with UKIIF. This fund was not promoted as a government backed programme and few recipients knew that it was. Therefore, recipient businesses were very viable market leading propositions, often with experienced serial entrepreneur managers who were used to working with VCs. For these managers UKIIF was the fund of choice because it specialised in their business sector and the fund manager had the expertise to take the business to the next level. The VC was a great fit for our business as they have a US office with excellent working knowledge of the social media communications sector. CEO of a later stage R&D communications company, seeking UKIIF for early commercialisation into the US market. 8

9 In some cases corporate VC funds had been prepared to offer more substantial finance (typically in excess of 3m), but this was too much for the business s requirements at that time or, in some UKIIF cases, perceived as potentially restrictive to the business development model. In other cases business angel funding was available, but this was small-scale, often below 50,000 and would have involved considerable negotiation to put together sufficient packages of finance, even where angel syndicates were involved. Business angels also often required higher levels of equity share in the business than was acceptable for the business owner for the level of finance provided. It is notable that several early stage R&D businesses in the TBSF study also rejected angel finance because they wanted too greater share of the business: Although this funding would have been ideal for product development, the investor wanted more than the 25 per cent share offered. TBSF rejection of 100,000 business angel finance, after an 18 month search. Apart from a few applicants to the FSEAF and CfEF, mezzanine finance was rarely sought. It was generally considered as more expensive than debt finance, because of the higher servicing costs, but also more complex than other forms of debt finance, and not suitable for early trading businesses that lacked smooth revenue flows. Where mezzanine finance was taken, this was typically used by established businesses seeking term loan debt finance for business growth that were unable to obtain bank finance but did not want to cede ownership under equity finance. Additionality Table 2: Ability of recipient businesses to raise finance from elsewhere without BIS funding ECF/Aspire/CfEF/FSEAF UKIIF definitely would not have raised finance from other sources 7 (19%) 1 (6%) probably would not have raised finance from other sources 4 (11%) 0 (0%) no strong opinion 2 (6%) 0 (0%) probably would have raised finance from other sources 10 (28%) 4 (25%) definitely would have raised finance from other sources 13 (36%) 11 (69%) Total recipient businesses 36 (100%) 16 (100%) Table 3: Extent to which recipient businesses would have gone ahead with business plans without BIS funding ECF/Aspire/CfEF/FSEAF UKIIF would not have gone ahead at all, in any format 10 (28%) 1 (6%) would have gone ahead at the same time, but on a smaller 2 (6%) 5 (31%) scale would have taken longer to go ahead, but at the original 9 (25%) 3 (19%) planned scale would have taken longer to go ahead and on a smaller scale 9 (25%) 4 (24%) would have gone ahead at the same time and at the same 6 (17%) 3 (19%) scale Total recipient businesses 36 (100%) 16 (100%) Overall, there appears to have been a moderate level of financial additionality and a high level of project additionality recorded by the recipient businesses. With regards to financial additionality (Table 2), almost a third of recipients (30 per cent) in the first study of four government equity finance programmes (BIS, 2010) thought that they would not have been able to raise the finance that they needed from other sources had they not obtained the government funding. Although almost two thirds (64 per cent) thought that they would have been able to raise the finance from elsewhere, many thought that this would have been more difficult to put together and would have ceded too much equity share (e.g. if it involved raising the funds required from several business angels). Several of the ECF recipients mentioned that other VC funds had been taking an interest, although they doubted whether this would have been on such good terms as their offer from the ECF. 9

10 It is notable that only one UKIIF business recipient thought that they definitely would not have raised alternative finance, whilst more than two thirds believed that they definitely would have raised alternative finance. This reflects the strong business plans and managerial expertise in these businesses, which are innovative global leaders and where the managers are fully prepared to cede ownership share for the business growth and development rewards that equity finance can deliver. In terms of project additionality (Table 3), the first study indicated just 17 per cent that would still have been able to proceed at the same time and on the same scale without the government funding. On the other hand, 28 per cent indicated that they would not have been able to go ahead at all, in any format 5. Whilst the rest (55 per cent) considered that they would have gone ahead, in most cases this either would still have been at the original planned scale but have taken longer (25 per cent) or would have been on a smaller scale and taken longer to go ahead (25 per cent), with the rest (5 per cent) still going ahead at the same time but on a smaller scale. It is interesting to note that in the case of the CfEF recipients, almost three quarters thought that they would not have been able to go ahead with their planned business project at that time had their application been unsuccessful. In two cases the growth project would have been halted altogether because no alternative funds were likely to be found and the businesses had exhausted their bank debt finance options as one of them stated: without this finance the business might have collapsed with the loss of 25 jobs. UKIIF reveals just the one recipient business that would not have gone ahead. In this case the CEO stated: We had been looking for a mix of equity and bank finance for several years and were only able to secure a loan with a Czech bank after UKIIF finance was in place. Without this package of finance, the project would have been aborted. Despite 15 out of 16 recipient businesses potentially being able to proceed without UKIIF, the fund did exhibit considerable project additionality, with three quarters of projects likely to be scaled down or slowed down without this funding. Many of these managers reported that a crucial point was that the UKIIF VC managers really understood their business and took a hands-on approach to driving the business forward and, whilst other funding might have been available to them, they were far less constraining than banks, business angels or corporate investors were likely to be. Customer Journey Routes to finding these government funds varied considerably, with some businesses employing corporate VC advisors and exploring large numbers of funds through VC networks, whilst others became aware of them through press releases and advertisements. Whereas many ECF applicants had found out about the fund managers from private VC networks, the FSEAF appeared to be particularly well promoted through business support networks such as Business Link, UKTI, local innovation centres and Chambers of Commerce. The typical time taken to find the government fund was two months, although often shorter for the FSEAF but longer for some of the businesses applying to ECF and CfEF. UKIIF was not promoted as a government programme and the average time to find the funds was three to four months. However, the private equity funds it invested in were considered by both recipients and market analysts to be amongst the top performers and the natural selection for highly innovative businesses in the cleantech/low carbon, life science, digital and advanced manufacturing sectors. To some extent the time taken to find UKIIF funds also reflects their early stage of development and may speed up once they are more established. The application process was generally judged to have worked well, with just under three quarters of recipients (72 per cent) rating it as good or very good. Many respondents praised the thorough and professional approach taken. However, some respondents found the level of due diligence more rigorous and time consuming than they had been led to expect. Indeed, some who claimed to be highly experienced in VC deals were critical that the level of due diligence went well beyond that necessary for a deal of this size. This may reflect that the level of due diligence required for an equity deal is fixed and does not vary by size of investment rather than any additional government imposed bureaucracy, since UKIIF also exhibited extensive due diligence. A particular observation from Aspire Fund recipients was that due diligence processes had to be duplicated between the required lead funder and Aspire, which appeared to be unnecessarily time consuming and expensive. The application process itself typically took about two months, although quicker for FSEAF term loan deals, but longer for more complex equity and mezzanine deals. The main reasons for delays were due diligence requirements and agreement negotiations. In some cases delays were due to problems with other funders that were going to be part of a funding package and therefore out of the control of the government fund managers. 5 It is interesting to compare this with the results of the NAO s recent survey of recipients of BIS s previous equity funds (the UK High Technology Funds; Regional Venture Capital Funds; and Bridges Funds) which found that 23 per cent of businesses would not have gone ahead with their planned activity in the absence of finance from the funds. 10

11 UKIIF typically took four months to move from application to final deal and this was particularly related to the amount of due diligence and time taken by fund managers to get to know the business, as well as negotiations (notably over low valuations) and in some cases requirements to find and agree terms with junior equity investors in the finance round. The 23 UK TBSFs, and various equity investors and intermediaries interviewed indicate a process of finding, applying, negotiating and accessing equity finance that has become far more complex, rigorously intensive and time consuming since the onset of the financial crisis in The extended timeline to find finance may also have been increased by the larger numbers of early stage SMEs that are now considering equity finance as a substitute for bank debt finance which has become harder to access and more expensive (Fraser, 2009). Many of the TBSFs which struggled to find equity finance had no previous experience of finding it, or preparing properly to successfully present and negotiate for it. Conversely, the more experienced serial entrepreneurs successfully accessing ECF and UKIIF knew where to look for funds, or quickly used VC finders and were highly prepared for presentation pitches, extensive due diligence procedures and negotiations over valuations and equity share. The overall picture is of a process taking twice as long, 12 months instead of six, to access suitable equity finance (Ullah et al., 2011). The Dead Deals Examination of the nine dead deal businesses that were interviewed shows that there were various reasons for not completing the deal. Three cases, all applicants to the CfEF, withdrew their applications because they received offers from other finance sources that they preferred. These comprised a mezzanine funding deal from a regional VC fund; a better deal from an existing equity shareholder in the USA; and a bank loan at a significantly lower rate of interest than the CfEF offer which would have involved refinancing the company s existing debt. These cases appear to show that the CfEF is not displacing private sector funds by undercutting them. Another CfEF applicant was unable to proceed once it became clear that it did not meet the qualifying criteria. Two ECF applicants withdrew from the negotiations once it became clear that the level of funding from the fund fell well short of what they were seeking ( 7m and 4m). Of the remainder, two ECF applicants were turned down at the first meeting stage for reasons to do with the quality of the business proposal, whilst another did not proceed because of the difficulties of obtaining an agreement between the co-investors. Less than half of the 23 TBSFs which had sought other forms of equity finance had so far been successful in access this. Those that were successful tended to be follow-on later stage corporate equity investments, or earlier stage funds from other government backed programmes such as the Scottish Co-investment Fund, with a few obtaining individual or networked business angel funds. Very few had a choice between potential equity investors. A couple of private and corporate VC fund early stage R&D life science applicants were turned down because the business was not at a stage where it could demonstrate commercial viability and a couple turned down business angel offers because they required too greater equity share, whilst one or to others were put off by the complexity of multiple business angel deal negotiations. The Deal Structure For the interviewed recipient businesses of the ECFs, CfEF, and Aspire, the equity finance offered from the government supported fund ranged between 250,000 and the 2m ceiling cap, whilst for FSEAF the finance ranged from 50,000 to the 100,000 funding ceiling. For UKIIF, which could invest at beyond the EU state aid cap, the equity finance offered ranged between 75,000 and 10.43m. In a small minority of cases funding was split into tranches which could be delivered according to business performance. For equity finance the typical level of equity share of ownership was around per cent, although in one extreme case the ECF took 85 per cent. In a small number of mezzanine cases (mainly CfEF recipients) term loans over a three to five year period also carried equity warrants (i.e. giving the fund manager the option to buy shares at a specified price) of between five and 15 per cent. Funding Leverage There were differences between the government funds in their desire and ability to leverage additional finance at the time of funding. In general, it was the Aspire and ECF recipients (mostly early stage businesses at the pre-trading stage) that were interested in raising additional finance rather than the more mature businesses applying to CfEF. Only one CfEF case raised additional funds, with a further two restructuring their existing bank loans as a direct result of the CfEF deal. 11

12 In the case of Aspire, the intention was that as a co-investment fund, much of the funding would be provided by the lead investors who would then refer their clients to Aspire. In practice however, in two of the four Aspire cases the lead investors were found after initial contact with the Aspire Fund. Overall, the aggregate Aspire investment for the four cases was 1.4m which was matched by 2.8m of other investment. In seven of the 12 ECF cases other funding followed (or was conditional upon) the ECF funding, including cases where business angel and bank loan finance was unlocked on completion of the deal. Table 4 shows the type and amounts of funding that were leveraged in for these seven cases and that overall, 4.7m of ECF funding raised 7.9m from other sources. Table 4: Sources of Leveraged Funds for ECF Recipients ECF FUNDING OTHER FUNDING Case1: 1 st tranche 2 nd tranche 500k 250k Business Angels Business Angels 200k 250k Case 2: 250k VC Fund Business Angels Network Individual investors 250k 250k 300k Case 3: 600k Different fund from same fund manager 600k Case 4: 500k Other VC funds 1.5m Case 5: 600k Corporate Equity Investor Seed Fund Business Angel Network Individual Investors Case 6: 300k Individual Investors Bank invoice financing Case 7: 1.7m Bank debt finance Business Angels 500k 250k 100k 100k 200k 750k 1.8m loan + 500k overdraft 300k In the case of UKIIF, leveraging further funding was not a government requirement, but with over four fifths of fund investment going into first round early stage R&D projects, whilst the UKIIF fund was typically the lead investor other investors were often encouraged in order to prevent over exposure, broaden knowledge capital (e.g. by bringing in a private VC with particular market knowledge) and provide sufficient funds to develop the business. In several cases the UKIIF lead investor funds recommended other private equity funds as junior investors in the financing round and it was considered that these investment alliances would help to present a more robust and favourable position for the company at future investment rounds. At the time of the research UKIIF had invested almost 46m out of total project financing of 96m, with 55 per cent of additional finance representing 25m being attributed as leveraged through UKIIF. These leveraged funds came from a variety of sources, including private VCs, business angels, bank loans and mezzanine funds. Actual and Likely Impact on Business Performance The interviewed fund managers generally felt that it took between 18 months and three years for the benefits of investment to start to become evident, but longer (in some cases five years or more) before the firm reached profitability. They confirmed the J Curve pattern of returns on early stage venture capital investments, with negative returns being incurred following the initial investment (typically because of the costs of R&D during the pre-trading period) leading to a break even position once trading commenced, followed by a steep rise in profitability once the market for the product took off. In many cases the interviews were conducted within 12 months of the funding being received from the government fund so it was too early to gain clear evidence of the full impact of the finance on these businesses. Two thirds of the ECF, Aspire and UKIIF recipients were still essentially at the pre-trading stage, these being businesses where the bulk of the funding had been used for R&D, developing intellectual property and prototypes, and patenting products. However, the majority of ECF, UKIIF and Aspire recipients assessed the impact so far to have been very positive, enabling leading edge innovatory developments that would not have taken place without government funding. 12

13 Where businesses were already trading, improved performance in sales and profitability was typically judged by the business owners to be at least 50 per cent attributable to the funding. Although most of the CfEF deals had been completed in the six months prior to the interview, the key benefit of receiving finance according to the recipients had been to unblock the intended expansion path of the business enabling improved sales and profitability in the future. Some of the FSEAF recipient businesses surveyed had received their funding a few years previously and so were in a better position to assess the impact of the funding. Eight of the nine interviewed recipients indicated that the FSEAF finance had made a positive impact, improving their business performance and assisting development and growth. However, more than half of them considered that they were currently performing below expected levels with regard to their sales turnover and profitability, due to poorer than forecast market conditions as a result of the economic downturn. Further views on the impact of the recession came from two of the interviewed ECF fund managers who estimated that the performance of some of their trading businesses was as much as per cent down on forecast. To give an indication of the growth prospects of the recipient businesses, the interviewed business owners were asked for their actual sales turnover and employment levels from the time of receiving the funding and their forecast levels over the next three years. The projected growth path of the ECF, Aspire and UKIIF recipients, many of whom were still at the pre-trading stage at the time they were interviewed, followed the accelerated growth pattern for high technology SMEs. The median annual sales turnover of the 12 ECF recipient companies at the time of funding was zero, rising to 50,000 in 2009, and then forecast to rise steeply to a median of 600,000 in one years time and 5m in three years time. Two businesses had a forecast sales turnover of 20m in three years time. Much of this sales growth would be in international markets, with three quarters of the ECF recipient companies expecting per cent of the predicted sales growth to be exported. Similarly, the Aspire recipient businesses expected to generate sales turnover of between 5 and 10 million within three years, with balance sheet profitability in excess of 20 per cent of sales. The 16 UKIIF businesses had increased from a median sales turnover of zero at the time of funding to 1.8m in early 2012 and forecast median sales turnover of 4m in one year s time and 20m in three year s time, when 14 would be trading. These are exceptional potentially global market leading businesses and virtually all will be exporting, with at least half forecasting more than half of their sales revenue coming from exports in three years time. Table 5 shows the actual and forecast average levels of employment for the recipient businesses relating to each of the government funds. Comparing the employment of the 36 recipients from the four first study government funds (ECF, Aspire, CfEF and FSEAF) at the time they were interviewed with that at the time of receiving the funding shows a mean increase of five jobs (a 10.7 per cent increase overall), with the biggest increases being for CfEF recipients (8.5 extra jobs; 6.1 per cent increase) and ECF recipients (6.2 extra jobs; 61.7 per cent increase). The 16 UKIIF recipients demonstrate more rapid employment growth, almost doubling in size between the time of funding and the time of the second study in early UKIIF recipients also demonstrate high future employment growth potential over the next three years, with employment at that time expected to be almost four times that at the initial funding stage. Table 5: Actual and Forecast Employment of Recipient Businesses Fund No. of surveyed recipient businesses Employment at the time of funding Employment at the time of interview (Feb-Mar 2010) Forecast employment in 12 months time Forecast employment in 36 months time mean median mean median mean median mean median ECF Aspire CfEF FSEAF UKIIF Table 5 also shows the significant employment generation potential of both the ECF and Aspire recipients, with their employment in three years time expected to be three to four times what it was at the time the deal was agreed. In comparison, the FSEAF recipients were forecasting more modest employment growth, 13

14 although still more than doubling (120 per cent increase) their employment from the time of receiving the funding. Even though the CfEF recipients tended to be much larger companies than the recipients of the other funds, they were still forecasting that their employment would almost double (97 per cent) over the next three years. Of course, it remains to be seen whether or not the interviewed business owners have overestimated their business performance over the funding period. Recent UK TBSF research (Ullah et al., 2011) found that from a sample of 100 SMEs equally split between those trading for more and less than five years, the median employment growth between 2007 and 2010 was just one. However, this hides the potential of the more dynamic growth oriented TBSFs that were using or seeking equity finance. In this study the ten TBSFs that had received equity finance exhibited considerably higher employment growth between (mean 13.4, median 7, range: 0 to 45 FTEs) when compared to their 90 counterparts (mean 2.1, median 0, range -15 to 40 FTEs). It is interesting to note here that other evidence (NESTA, 2009), using a large panel dataset of 7,741 firms and comparing the 782 firms that had received funding under one of six government hybrid funding schemes with the rest, found that the recipients of funding had not exhibited significantly better performance with regards to profitability, but had achieved slightly better performance with regards to employment (an additional 1.8 jobs per firm) and labour productivity (an additional 57,800 of sales per employee). This led the authors of the study to conclude that, whilst the growth of the investee firms had yet to take off, their modest achievements gave some grounds for optimism. Additional Non-financial Benefits Aside from the impact of receiving finance on business performance, many respondents commented on receiving non-financial benefits as a result of completing the deal with the government fund. Typically, these related to the presence of a fund representative as a non-executive director (NED) or board member and the more rigorous approach to corporate management this imposed on the business. Others referred to the benefits of the management advice received, which was particularly helpful where the existing directors were better suited to R&D and sales rather than financial management. Other benefits included being part of a large business support network, access to sectoral expertise, and access to further investors including business angels. There was widespread belief that having a VC investor on board will substantially increase the firm s chances of obtaining future equity and other forms of external financing. The chairman of one recipient company commented that the ECF had institutionalised help, with a network of partner investors who are locally based, understand how high tech sector businesses operate, and can offer real sector specific assistance with built-in mentor support. Two Aspire recipients for example commented on the excellent PR that they had received...which has opened lots of doors. There were a number of instances of where recipient businesses had been introduced to potential customers and suppliers through these networks. For UKIIF recipients their VCs sectoral knowledge was a key factor. Examples included assisting with complex regulatory and licensing issues in the life science sector, finding specialist consultants to assist sales and marketing and introducing the firm to potential customers including assisting with negotiations which could be complex and daunting in the case of prospective large overseas business customers. One cleantech energy company CEO summed up the importance of the VC manager s sector knowledge: The VC had the right chemistry, understood the technical issues and the market, coming from a cleantech background. The fund manager could add real value to the business, understanding the company and its goals. 14

15 Conclusions This early assessment of five government equity programmes indicates that they are addressing the financial needs of the investee businesses and enabling them to go ahead with projects that may have been difficult to fund effectively from other sources. As the high level of project additionality indicates, the funds proved particularly helpful in terms of their timing and ability to allow the successful applicants to pursue growth and development projects within desired timescales, on acceptable financial terms and notably in the case of UKIIF with suitable VC fund managers that knew the sector and could contribute to business growth, therefore not holding the firms back with their planned development. It was also evident, notably in the case of the recipients of the ECFs, that government supported funds can produce considerable leverage, unlocking other finance from business angels, other VC funds, and in some cases the banks. Clearly a much longer period of time is needed to fully assess the impact of these funds on the recipient businesses and on the wider economy as early stage indications are unlikely to provide a true reflection of their ultimate value and financial return. Fund managers considered that it generally takes 18 months to 3 years before any benefits to the businesses become evident and two to five years to reach profitability. The majority of the businesses receiving seed and early stage funding from the ECFs, Aspire and UKIIF were still at the pre-trading stage at the time of being interviewed so it will be a few years yet before the funds will be able to make a return on their investments and exit from the businesses. Perhaps not surprisingly, the fund managers and business owners expected that there would be significant increases in employment and turnover within the next three years, resulting in a satisfactory return and justification for these investments. Although most of the CfEF deals that were studied had only been completed in the few months prior to the interviews, it was nevertheless clear that they were already having a beneficial impact on these well established businesses which were being held back by the difficulties of obtaining bank finance as a result of the credit crunch. It was also evident from the TBSF study that those that had received equity finance between had performed significantly better in terms of employment growth, when compared to their counterparts, suggesting that investment in these types of businesses can stimulate economic growth. There can be little doubt that these hybrid funds, targeted at different types of growth orientated SMEs, are addressing various gaps that exist in the SME finance market. As generally acknowledged, the availability of venture capital for new and early stage companies has been deteriorating for some time, with the credit crunch exacerbating the early stage equity funding gap. Corporate and private VC funders have been moving out of the seed and early stage market whilst other investors such as business angels have preferred to support their existing portfolios (or withhold making investments altogether) rather than make new investments. Data from the British Venture Capital Association shows that early stage VC funding fell by 18 per cent between 2008 and 2009 (BIS,2010) and that there was a net overall decline in BVCA UK VC members investment of 21 per cent between 2007 and 2010 (BVCA revised figures, 2010). There also appears to be an increasingly held view, supported by some fund managers and business owners interviewed in this research that the equity gap now extends above the 2m investment ceiling, possibly up to 10m, for early stage high tech businesses with high set-up R&D costs and long lead times to market. Overall, the view from the demand side is that it is taking up to twice as long (12 months instead of six) to find and obtain equity finance, compared with before the credit crunch, whilst from the supply-side there is evidence of greater caution from equity investors and greater demand for equity finance from UK SMEs resulting from the increased cost and difficulty in obtaining bank finance. Whilst UKIIF recipients highlighted that serial entrepreneurs with previous experience of using VCs know how to find, pitch, negotiate and obtain equity finance, the TBSF study revealed that there are increasing numbers of early stage R&D companies with owner-managers seeking equity finance for the first time who do not know where to find this type of finance or how to go about obtaining it. Whilst there is currently an understandable spotlight on the supply of VC and equity funds, it is also important not to overlook the failings that exist on the demand side. This study has drawn attention to and supports other research findings in terms of the poor quality or inappropriateness of most of the applications received by VC fund managers. Only a very small proportion of the applicants to the government equity funds resulted in a deal (less than 2 per cent for the ECFs and UKIIF and 6 per cent for the CfEF). When rigorous commercial criteria are applied by experienced VC fund managers, as in the case of the government backed equity funds examined, only a very small proportion of the business propositions are judged to have the high growth potential, level of risk, and rate of return that investors are seeking. Although a proportion of applicants may well have found the finance they need from other sources, these findings suggest that a considerable proportion of applicants are not investor ready. At one level this supports the case for investor readiness programmes which can increase the chances of applicants success and also avoid the waste of resources 15

16 relating to failed applications (Mason and Kwok, 2010). More fundamentally, it underscores the need for better quality business propositions that are going to be sufficiently attractive to VC investors (NESTA, 2009). References BIS (2010) Financing a Private Sector Recovery, Department for Business Innovation and Skills, Cm BVCA (2010) BVCA Private Equity and Venture Capital Report on Investment Activity 2010 CEEDR (2012) Early Assessment of the UK Innovation Investment Fund, Report for the Department for Business Innovation and Skills, May CEEDR (2010) Early Assessment of the Impact of BIS Equity Fund Initiatives, Report for the Department for Business Innovation and Skills, July CEEDR & Sanders Thomas Ltd (2009) SME Access to Finance in London: A Scoping Study, Report for the London Development Agency. Fraser, S. (2009) Small Firms in the Credit Crisis, Evidence from the UK survey of SME finances, Warwick Business School, University of Warwick Glancey Johnston, K. (2009) The Risk Capital Market in Scotland, Scottish Enterprise. Harrison, R., Don, G., Glancey Johnston, K., and Greig, M. (2010) The early-stage risk capital market in Scotland since 2000: issues of scale, characteristics and market efficiency, Venture Capital, Vol.12, no. 3 pp Hsu, D. (2004) What do entrepreneurs pay for venture capital affiliation? The Journal of Finance, LIX, pp HM Treasury and Small Business Service (2003), Bridging the Finance Gap: Next Steps in Improving Access to Growth Capital for Small Businesses, London, HMSO House of Commons Committee of Public Accounts (2010), Department for Business, Innovation and Skills: Venture capital support to small businesses, The Stationery Office Ltd., London. Mason, C. and Harrison, R. (2003) Closing the regional equity gap? A critique of the Department of Trade and Industry s Regional Venture Capital Funds Initiative', Regional Studies, Vol.37, no. 8 pp Mason, C. and Kwok, K. (2010) Investment readiness programmes and access to finance: a critical review of design issues, Local Economy, vol. 25, no.4 pp Mason, C.M., Jones, L. and Wells, S. (2010) The City s Role in Providing for Public Equity Financing Needs of UK SMEs. Report to the City of London by URS, Mason et al. (March) Murray, G.C. (2007) Venture capital and government policy, in Landstrom, H. (ed) Handbook of Research on Venture Capital, Edward Elgar, Cheltenham Murray, G. and Lingelbach, D. (2009) Twelve Meditations on Venture Capital, University of Exeter Business School, Paper No. 09/06, September National Audit Office (2009) Venture Capital Support to Small Businesses, Report to the House of Commons, 23 Session, NESTA, (2008) Shifting Sands: the changing nature of the early stage venture capital market in the UK, Report by Yannis Pierrakis & Colin Mason, NESTA Research Report September

17 NESTA, (2009) From Funding Gaps to Thin Markets: UK Government Support for Early-Stage Venture Capital, Research Report September 2009 NESTA, (2010) Venture Capital: Now and After the Dotcom Crash, Research Report, July 2010 Rowlands, C. (2009) The Provision of Growth Capital to Small and Medium Sized Enterprises, Report for the Department for Business, Innovation and Skills. SQW Consulting, (2009) The Supply of Equity Finance to SMEs: Revisiting the Equity Gap, Report to the Department for Business Innovation and Skills. Ullah, F., North, D. and Baldock, R. (2011) The Impact of the Financial Crisis on the Financing and Growth of Technology-Based Small Firms in the United Kingdom, Report for the Institute of Small Business and Entrepreneurship (ISBE) Research and Knowledge Exchange Fund by CEEDR and Aberdeen Business School. 17