With 2.5bn of capital, BGF is Britain s largest single investor of equity in ambitious and growing British businesses.

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2 Sometimes, I ask myself why I m building this business? Because I want to be my own boss. Because I m really, really good at this. Because I want a bright future for my kids. Because I love what I do. Because my town needs jobs. Because if I don t, nobody else will. Because if I don t, somebody else will. Because I have big ambitions. Because it s now or never. Because it s my responsibility. Because I ve been given a chance. Because they said I d never make it. Because I want a yacht. Because I want another yacht. Whatever you re in it for, BGF can help you to build something great. BGF is the UK's most active provider of growth capital for companies with turnover of 5m to 100m. Since October 2011 we have invested over 170m in 35 businesses just like yours. Any more questions?

3 About Barclays Barclays is a major global financial services provider engaged in personal banking, credit cards, corporate and investment banking and wealth and investment management with an extensive international presence in Europe, the Americas, Africa and Asia. Barclays purpose is to help people achieve their ambitions in the right way. With over 300 years of history and expertise in banking, Barclays operates in over 50 countries and employs approximately 140,000 people. Barclays moves, lends, invests and protects money for customers and clients worldwide. For further information about Barclays, please visit our website About Business Growth Fund (BGF) With 2.5bn of capital, BGF is Britain s largest single investor of equity in ambitious and growing British businesses. Its origins are with the Business Finance Taskforce, formed in 2010 to generate ideas that would help return the UK economy to growth. The Taskforce comprised the chiefs of the UK s largest banks, including Barclays, and BGF was one of its key recommendations. BGF was officially launched in May 2011, and made its first investment in October that year. Since then BGF has made more than 35 investments, providing nearly 200m of new capital to UK companies. 1

4 Our Expert Panel We are extremely grateful for the time and help given by the experts on our panel. Andrew Carter, Director of Policy & Research at Centre for Cities, has 15 years of experience working with business, community and public sector leaders to address issues including urban competitiveness, economic development and finance, and inner city entrepreneurship. He has also worked for Rocket Science, an economic development consultancy, and for the London Development Agency. Julian Frankish is Head of Business Economics and Research for Barclays Business Banking. His role at Barclays involves detailed research of all aspects of the UK small business market, in collaboration with both internal and external partners, to help improve the products and services offered. Dr. Imran Hakim, CEO at Hakim Group and an Optometrist by profession, secured funding on BBC s Dragons Den programme for his innovative iteddy which now retails in more than 45 countries worldwide. He recently received an honorary doctorate for enterprise and continues to invest in early stage businesses across a variety of sectors. Dr. Hakim also mentors budding entrepreneurs as a chartered board member of The Indus Entrepreneurs (TIE) and is active on the speaking circuit. Professor Jonathan Levie is Director of Knowledge Ex at the Hunter Centre for Entrepreneurship at the University of Strathclyde. He served as Director of the Hunter Centre from 2000 to He co-directs the UK team of the Global Entrepreneurship Monitor (GEM), a major international research project on entrepreneurial activity. Gita Patel is Co-Founder and Director of Stargate Capital Investment Group, Fund Manager of its Trapezia funds, which invest in women-focused businesses, as well as an entrepreneur and angel investor in her own right. She is a Fellow of the Institute of Chartered Accountants and has a background in banking and entrepreneurship. She also serves on a number of boards including the London School of Economics and Political Science (LSE) Enterprise Ltd and is a governor member of LSE s Finance Committee. Ms. Patel was a contributor to Woman s Hour Women in Business 2011 series on BBC Radio 4 and is listed in the Asian Power

5 Guy Rigby is a Chartered Accountant and leads the entrepreneurial services group at Smith & Williamson. He built and sold his own accountancy firm and has been a director and part-owner of a number of different ventures. Mr. Rigby also wrote the book From Vision to Exit: The Entrepreneur s Guide to Building and Selling a Business. Marcus Stuttard is Head of AIM and has responsibility for Primary Markets in the UK across both AIM and the Main Market. He is responsible for the management and development of AIM, the London Stock Ex s international growth market for small and medium sized enterprises. Prior to his appointment as Head of AIM in 2009, he held a variety of roles within AIM and the London Stock Ex, mainly focussed on primary markets development and the management of the Ex s relationships with the corporate advisory community, including nominated advisers, sponsors, lawyers and accountants in the UK and overseas. He is a regular speaker on growth and business funding issues and sits on a number of industry and policy advisory bodies. Jenny Tooth has been CEO since 2012 of the UK Business Angels Association (UKBAA), the trade body for angel and early stage investing and the voice of the angel and early stage investment market. She has over 20 years of experience supporting small and medium-sized businesses to access investment, both in the UK and internationally. She co-founded Angel Capital Group in 2009 and acts as MD of Angel Capital Innovations, focusing on demand side issues of investment readiness, including supporting key sectors such as nanotechnology and mobile services. Stephen Welton is Chief Executive of Business Growth Fund (BGF) and has over 20 years of experience in the development capital and private equity industry. He joined BGF after 10 years with CCMP Capital (formerly JP Morgan Partners) a global private equity firm, in which he was a Founder Partner and member of the investment committee. He also has extensive UK private equity and growth capital experience as a co-founder of Henderson Investors and Managing Director of Barclays Private Equity. 3

6 Foreword The spirit of entrepreneurialism is alive and well in the UK Not only do small and medium enterprises (SMEs) now account for almost half (48.1 per cent) of private sector turnover every year 1, but StartUp Britain, the national campaign to boost entrepreneurship, recently found that Britain is now on track to start a record-breaking half a million new businesses by the end of At Barclays, we recognise that these types of business are an integral part of the wellbeing of the economy, and we are continually seeking ways to better understand the landscape in which they operate. In October 2012, we published our first Entrepreneurs Index, to measure entrepreneurial activity across the UK The report explored the levels of shareholder activity occurring in SMEs across the UK and Ireland as a key indicator to assess the performance, profitability and the wealth that these businesses are creating. We chose to focus on this crucial final stage of the entrepreneurial journey as a proxy for entrepreneurial activity, as success at this stage of the cycle unlocks funds for future reinvestment and creates the potential to inject wealth into new ventures. This third volume of the Entrepreneurs Index extends our view of entrepreneurism by looking at all stages in its lifecycle; to help us do this we have partnered with Business Growth Fund. Working together, we have created a picture of the levels of entrepreneurial activity in the UK across the different stages: from starting and funding, to growing, and finally connecting with other businesses and individuals through share sales. This will help both Barclays and BGF better understand how we can continue to support aspiring and established businesses through all phases of their lifecycles. It is encouraging to see throughout this edition of the Index that in macro conditions that continue to be unpredictable and challenging for enterprises not only is entrepreneurial activity on the rise, but it is prospering and growing. We are hopeful that this positive momentum will accelerate us toward stronger growth in the wider economy in the coming months and years. At Barclays, we recognise that we need to continue to strive for closer collaboration with the best and emerging entrepreneurial talent in the UK, and to provide the tools and services that businesses need to prosper; whether through access to finance, networks or skills development. We hope that this latest Entrepreneurs Index will help support our mission to do so by driving deeper and more informed understanding of the activity of the nation s entrepreneurs. I hope you find the report an interesting and insightful read. Richard Phelps Managing Director, Barclays Wealth and Investment Management 1 BIS Business Population Estimates October

7 Introduction Entrepreneurs are early adopters by nature and quick to seize market opportunities, meaning that entrepreneurial activity is often viewed as a leading economic indicator. With the number of start-ups in the UK predicted to break the half-a-million 2 barrier for the first time in 2013, new businesses and the entrepreneurs that set them up are becoming an economic tour de force. As such, the study of their activity and behaviours is increasingly important. This third volume of the Entrepreneurs Index, as well as future reports, will aim to provide a barometer of the strength of entrepreneurialism in the UK at regular points in time. To do this, we monitor and analyse a number of different, complementary data sets, some publicly available and others created specifically for this report. We use Companies House data relating to the number of active companies in the UK which is now approaching three million in order to measure the increase or decrease in start-up activity nationally. At a regional and sectoral level, we complement this with Office of National Statistics (ONS) data recording s in the number of VAT or PAYE paying enterprises. We also look at the number of high growth companies in the UK, so that we can see whether these have increased or decreased as a proportion of total companies of a similar size, nationally and broken down by sector and region. Finally, we measure the number of active growing companies recording share sales, the size of these share sales, and whether they are going up or down; we measure these sales across the UK and by sector and region, enabling us to gauge liquidity events and exits. By looking at the findings from these key data sets together, and analysing the s in direction and pace at regular intervals, we can gain a sense of the strength of entrepreneurial activity in the UK. Breaking down the results by sector and region, supported by one-off attitudinal data from a survey of owners of fledgling businesses and interviews with experts, provides a more comprehensive picture of the influencing factors on entrepreneurial activity from start-up, through growth, to the point of liquidity at which wealth is created. In each Entrepreneurs Index we will look in-depth at a closely related subject in the In Focus section. This time, we explore the theme of funding, specifically the growth in alternative sources of funding, which have proliferated since the credit crisis. 2 According to Start-Up Britain s Daily Tracker 5

8 Glossary Active companies The term active is generally used by Companies House in order to differentiate between those companies that are live in the sense that they are not in the process of liquidation or being dissolved. Types of companies included are private limited, public limited, private unlimited, private limited by guarantee and community interest companies. Mid-sized SME For the purpose of this report, we are referring to businesses with revenue of between 2.5m and 100m per annum. Share sales Active companies with growing revenues of between 2.5m and 100m seeing decreases in holdings by shareholders during a six month period. Enterprise A term used by the Office of National Statistics (ONS) to refer to the smallest combination of legal units (generally based on VAT and/or PAYE records) which has a certain degree of autonomy within a group of legal units under common ownership. High growth companies Companies with revenues of between 2.5m - 100m which have increased turnover by 33% over the preceding three years and produced 10% year-on-year growth for a minimum of two years. Start-up A general definition meaning a company that has recently been set up and is in the first stage of its operations; a fledgling business or enterprise. Start-up activity In this report, this refers to the growth or decline in the number of active companies or enterprises in the relevant time period. 6

9 Methodology We have also considered the data through an additional lens which looks at the different needs of entrepreneurs as they set up, grow and in time look to exit their businesses. These needs are not necessarily static or sequential, but we feel add different perspectives to the analysis and are as follows: Start when efficient infrastructure and cash flow is key Fund accessing the first type of finance Grow expand the customer base Connect to a network of information, knowledge and people Data sources The key data sets used in this report are: Active companies. The number of active companies in the UK as published in the Company Register Statistics by Companies House. Enterprises. The number of VAT and/or PAYE based enterprises in the UK as contained in ONS UK Business: Activity, Size and Location. High growth companies. Data on companies in the UK with revenues of between 2.5m - 100m and a 33% increase in turnover over three years, as well as 10% year-on-year growth for a minimum of two of these years supplied by Experian. Results for 2012 include all companies that had filed their accounts as at September 2013, although some are still outstanding. Data for Northern Ireland is excluded from the total figures due to data availability issues. Share sales. Data on the number of active, growing companies with revenues between 2.5m - 100m seeing declines in holdings by shareholders supplied by Bureau Van Dijk for Ledbury Research. Attitudinal data. 561 online interviews carried out among UK individuals with start-up businesses in August 2013 by YouGov for Barclays. All respondents must have been involved in setting up the business they currently work in, which had to be established no longer than five years ago. Assumptions Share sales In interpreting this data, the assumption is that the key driver for decreases in share holdings in these buoyant companies is a liquidity event triggered by individuals choosing to sell their stakes to create wealth. 7

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11 Executive summary Start-up activity is on the up. Companies House data shows a steady, albeit modest, growth in the number of active companies, which has increased by 3% or more in each six month period since the start of Proportion of high growth companies is rising. The percentage of high growth companies among those with turnover between 2.5m to 100m is increasing and is now higher than it has been since The proportion of these companies is rising in every region of the UK. Share sales subdued, but decline slows. Share sale activity in successful, growing companies is still muted as the number with shares changing hands fell 11.2% in H compared to H1 2012, although less steeply than in the previous period (when it fell 13.1%). However, the average size of deals in H is increasing the average share now stands at 47% of total shareholding, up from 29% in H with an indication that more deals are in the pipeline. Service sector boom. There has been a noticeable increase in high growth business services companies from 19% of their total number in 2011 to 22% in The proportion of high growth finance companies also saw an increase from 20% to 22.4% over the same period. Share sales among growing finance companies rose steeply, up by more than 100% in H compared with H Companies in the primary and utilities sector flourish. More than 1,200 mining, quarrying and utilities companies were formed between 2012 and 2013, an increase of 13%, taking the number to 10,285. Share sales in this sector are also up markedly, from 52 to 100, a rise of 92% in H London, the Midlands and Yorkshire & Humberside set the pace. London saw the highest percentage increase in the total number of enterprises between 2012 and 2013 (up 3.5%) from an already high base. While share sales are declining in most UK regions, London has one of the least sharp falls. Yorkshire & Humberside and the Midlands have the greatest proportion, and fastest rise, of high growth companies, with nearly one in four companies meeting this criteria. 9

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13 Section 1 Headline findings The various data sets we analyse to create a barometer of entrepreneurial activity in the UK suggest a positive trend. Start-up activity is rising steadily largely due, our panel felt, to a more supportive entrepreneurial environment, increased flexibility, and cost advantages provided by fast developing technology and social media platforms, as well as an improving economy. The number of high growth companies is rising more quickly than it has for some years. One in five mid-sized SMEs can now be described in this way, as tough economic conditions have created a survival of the fittest. The number of share sales in active growing companies continues to decline perhaps due to prospective sellers and buyers failing to agree on price. However, the fall off is less steep than a year ago, average deal sizes are up markedly and the pipeline indicates better news on the horizon. Chart 1: Key themes Starting/Funding Continued modest growth in the number of active companies Growing Good improvements in the percentage of high growth companies in the population Connecting Declining share sales in active, growing companies, albeit at a slower rate and an increased size of transaction Source: Barclays/Ledbury Research 11

14 Starting/Funding: Number of active companies growing steadily The number of active companies in the UK has grown by 3% or more in each six month period since the end of This growth is steady, albeit modest, with the pace seeing an uptick in the most recent period. These findings chime with data from the Global Entrepreneurship Monitor (GEM), which saw a jump in the percentage of the population 3 who are in the process of starting or are already running new businesses, to 9% in 2012, from its long term stable rate of around 6%, having already risen to 7.3% in Additionally, the growth in early stage entrepreneurial activity reflects a sharp rise in individuals who intend to start a business within the next three years from 5.1% in 2010 to nearly double that figure in Chart 2: Number of active companies in the UK 3 million 2,556,356 2,647,802 2,727,758 2,821,190 Active companies 3.6% Percentage 3.0% Percentage 3.4% Percentage December 2011 June 2012 December 2012 June 2013 Source: Companies House: Company Register Statistics year olds 12

15 Starting/Funding: Entrepreneurial intentions and activity A number of elements are contributing to entrepreneurial activity and boosting the number of active companies in the UK These elements include more positive attitudes toward entrepreneurs supported by government initiatives and high media profile and enabling factors such as the Internet and social networking, as well as underlying economic factors. According to Marcus Stuttard, Head of AIM at the London Stock Ex, growth has really been accelerated due to the fact that it is a lot easier and cheaper to set up businesses than it once was, particularly for those businesses that have got a technology or an Internet layer to them. Our panellists describe changing attitudes as a paradigm shift and an entrepreneurial revolution making setting up in business as acceptable today as going into medicine, law or accountancy. Now people take pride in saying, I run my own business, I am my own master, says Gita Patel, Director of Stargate Capital Investment Group. More people want to determine their own destiny, and they will go through hell and high water in order to do it. Even though most won t make it in any meaningful way, they re realising that they could, says Guy Rigby, who leads the entrepreneurial services group at Smith & Williamson. Chart 3: Entrepreneurial intentions vs activity Entrepreneurial intentions Total Early stage entrepreneurial activity (TEA) % % % 5.7% % 6.4% % 7.3% % 9% Source: GEM Notes: Entrepreneurial intentions refers to the percentage of year olds who expect to start a business within the next three years. TEA is a percentage of year olds who are in the process of starting or are already running new businesses. A number of our panellists note the supportive environment for entrepreneurs from peers and mentors, both financial and emotional, and the plethora of networks, organisations, clubs and information published on the Internet. This collaborative, community spirit is particularly evident among younger entrepreneurs, where it is also keeping costs down: They re very willing to barter. (One may say) I ll make your website because you can t afford it and in turn, do you think you can write this proposal for me? says Gita Patel. This reflects the view of entrepreneurs at the early stages of running their businesses, who cite more independence/ control over their own life (27%) and freedom to be their own boss (25%) as amongst the main motivations for setting up although making a living remains the principal reason (30%). These new business owners also point to being their own boss (49%) and the ability to work from home (39%) as the things they enjoy most about branching out on their own. 4 4 YouGov/Barclays Research Andrew Carter, Director of Policy & Research at Centre for Cities, notes that whereas previously, more cities had a negative churn rate in terms of starts compared to closures more businesses now have a positive churn rate, so more starts than closures. While the pace of growth of entrepreneurial activity may not be sustainable, this is not necessarily a bad thing, according to Jonathan Levie, Co-Director of GEM UK Some of it is necessity driven, so it will inevitably ease off as big firms, and successful, fast-growing new companies, start to recruit. The point is that more is not necessarily better, you have to understand how it links to the economic cycle. 13

16 Growing: High growth companies flourishing As the number of active companies in the UK increases steadily, the quantity and proportion of high growth companies are also rising: one in five mid-sized SMEs can now be defined as high growth. Following a decline in the proportion of these companies between 2008 and 2010, there was a modest improvement between 2010 and 2011 (from 16.3% in 2010 to 17.4% in 2011) and a more encouraging increase to 20.5% in the most recent available data in This was the case for companies across all levels of turnover, but particularly for those with between 10m - 20m. Stephen Welton, Chief Executive of BGF is encouraged by the data but believes more can still be achieved. Now is the time for business owners to capitalise on the improving UK economic conditions. he says. We are hoping to see entrepreneurial ambition matching the increases in consumer and business confidence. Chart 4: Proportion of high growth companies in the UK Percentage of high growth companies 25% 0% 17.4% 2011 Source: Experian for BGF 20.5% 2012 (to date) Julian Frankish, Head of Business Economics and Research for Barclays Business Banking, notes that activity is buoyant by historical standards at present. The value of small business payments data we can analyse amongst our customers suggests very strong growth rates, which fits in with wider economic measures we are seeing. Imran Hakim, CEO of Hakim Group, believes that the recession puts a magnifying glass on businesses, so that those with flaws will fail or refocus and become positioned to flourish when the economy starts to pick up: If company owners keep focus on the fundamentals of the business, then automatically what we re going to start seeing is a lot more, healthier, fast-growing businesses. 14

17 Connecting: Muted activity at the end of the entrepreneurial cycle Despite steady increases in the number of active companies in the UK and numbers and proportions of high growth companies, share sales in active, growing companies remain subdued. Share sales fell 11% in the year to H1 2013; however this decline is slower than in the previous comparable period (when it fell 13%). Also encouraging is that the average deal size is increasing, to 47% of total shareholding in H up from 29% in H Imran Hakim believes share sales may be in decline as a scarcity of credit makes potential purchasers much more selective and, at the same time, current business owners are waiting for a slightly higher premium. In the meantime they are sitting tight, making their businesses more attractive for when the economy is more conducive to acquisitions. At the moment there s still a disconnect between buyer and seller, but in another 12 to 18 months, I wouldn t be surprised if there were a lot more share sales. While activity has been muted in recent years, evidence from recent deal flow and the pipeline suggests that better news is imminent, both on share sales in private companies and at the IPO level. Marcus Stuttard confirms that an increase in activity is observable right across the spectrum, largely linked to the economic cycle. The total raised by newly listed companies, together with those raising more funds on AIM in July 2013 was the highest it had been for over two years at 473.3m and, although still well below its 2006/2007 peak, the total amount raised in 2013 looks set to be greater than The pipeline is definitely building and we ve seen a lot more activity over the last six months, he confirms. Chart 5: Number of companies with share sales Total numbers of active, growing companies* 8, % Percentage (year-on-year) % Percentage (year-on-year) 6402 H H H H *Between 2.5m and 100m which have had shareholding sales Source: BVD for Ledbury Research 15

18 Star sector performers: Business services, finance and mining and utilities Among the various sectors, we identify three star performers this period. Chart 6: Number of VAT and/or PAYE based enterprises Starting/funding % The UK service sector accounts for three-quarters of UK economic output and recently grew at its fastest rate in more than 16 years (according to Markit Q3 2013). Our analysis finds much to be positive about in this area as business administration and support services companies also known as professional services saw a marked increase in the proportion of high growth companies in their ranks (to 22%). Mining/ quarrying utilities Finance/ insurance 9,080 10, % 45,525 45, % Julian Frankish observes: Professional services including accounting, HR and marketing services represents an increasing proportion of our business over time, which he attributes to the trend for businesses outsourcing, the relatively highly skilled work involved and the degree of flexibility in setting up a one or two person firm. Business admin/support services 144, , % Source: ONS; Experian for BGF; BVD for Ledbury The financial sector also shows strong performance across all of the data sets we analysed. There are a significant proportion of high growth firms in the sector (at 22.4%) and share sales also rose sharply (up 103% year on year). Fintech businesses including peer-to-peer lenders, online currency exs and crowd-funding sites may be contributing to the finance sector s success in providing innovative solutions to the challenges facing individuals and businesses struggling to access more traditional routes to finance. Investment in fintech and continuing consolidation among financial services firms in the wake of the Retail Distribution Review, are the most likely explanation for the spike in share sales. 16

19 More surprising, due to higher barriers to entry, is the significant 13% uplift in the number of mining and utilities firms in the UK in the last year. The number of share sales in this sector is also up sharply by almost 100% year on year. This may be attributable to the high value of commodities and renewable energy initiatives increasing interest in the sector. Disintermediation or cutting out the middleman is a significant phenomenon underpinning the sectoral trends our research identifies. Guy Rigby refers to finance and utilities as two sectors that are experiencing significant disintermediation, as new companies differentiate themselves from traditional firms, grow up and start to take out old, established players. 17

20 Star regional performers: Good news for London, Midlands, and Yorkshire & Humberside Chart 7: Top three performing regions: key data Starting/funding Number of VAT and/or PAYE based enterprises % Growing % high growth companies (to date) London 359, , % London 19.0% 19.6% Yorkshire & Humberside 150, , % Yorkshire & Humberside 17.8% 24.7% Midlands 315, , % Midlands 15.5% 23.3% Connecting Number of companies with share sales H H % London % Yorkshire & Humberside % Midlands % Source: ONS; Experian for BGF; BVD for Ledbury 18

21 Looking at specific areas of the UK in more detail, London has the highest increase in the number of enterprises regionally, up 3.5% between 2012 and 2013, from an already high base, representing more than 12,000 additional firms. The South East has the second highest increase in enterprises (up 0.6%) and the North West and East Anglia the joint third highest (up 0.5%). Yorkshire & Humberside is home to the highest proportion of high growth companies in the UK, up to 24.7% in 2012 from 17.8% in 2011, followed by the Midlands at 23.3% in 2012, up from 15.5% the prior period. The same two regions also have the sharpest rise in the proportion of these high growth companies. This is supported by less dramatic, but solid increases in the number of enterprises in both regions (0.4%). While share sales are declining in every region except the Republic of Ireland, London had one of the least sharp falls in the UK at -13% between H and H1 2013, second only to Wales (-7%). Share sales in growing companies in Yorkshire & Humberside (-17%) and the Midlands (-25%) are not falling too steeply in comparative terms either. Our panellists attribute Yorkshire & Humberside s high, and fast rising, proportion of high growth companies to an industrial resurgence in the region s manufacturing activity as the cost differential of production in the UK compared to the Far East shrinks and without the long lead times to ship products. Andrew Carter says that data from the Centre for Cities Small Business Outlook 2013 shows decent improvement in output in Leeds and York, although less so in places like Hull and Doncaster. The Grimsby and Immingham docks are seeing a revival and the first new high-spec office building in five years being built in Leeds are just examples of the region s returning fortunes. In the Midlands, Birmingham is an international commercial centre where the professional services sector dominates and there is a successful manufacturing industry in the East Midlands. Many smaller businesses have set up as part of the supply chain around Rolls Royce, Toyota and Bombardier in Derby. A 200m business park funded by Derby s City Council and Rolls Royce has recently been announced and is expected to create 8,000 jobs in high-tech and advanced engineering in the city. It is no surprise to our panellists that London is racing ahead. They describe it as the world s biggest commercial centre and the centre of the financial world pointing to its stable government, improving economy and ability to attract investment. 19

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23 Section 2 In focus: Alternative funding sources come of age As traditional funding retreated following the credit crisis, alternative sources of funding have emerged and expanded to fill the gap. Two of the areas gathering the most momentum are angel investors and crowd-funding. While our research shows that lack of funding isn t proving an obvious barrier to many, our panellists identify a funding disconnect for entrepreneurs and look at ways in which this might be bridged. 21

24 How the funding needs of a business over time A high proportion of new enterprises are getting off the ground with little or no funding initially. Research among entrepreneurs running fledgling businesses found that almost half needed less than 2,000 to start up their business, with 8% requiring no start-up funding at all. Nearly three quarters (73%) of respondents claimed it was easy or relatively straightforward to raise the start-up capital required for their business, with the most popular funding source for new businesses being existing funds, savings and cash (84%). Increasing flexibility around company structures and working practices is making setting up in business more affordable. The Internet plays a significant role and the kitchen table tycoon has very low overheads. It is eminently possible to run a successful business with a relatively low amount of capital and many businesses don t require substantial funding even down the line. Not everyone who sets up a business wants it to be the next big thing, says Julian Frankish, pointing to the plethora of successful, small, family businesses that are the mainstay of the economy. Chart 8: Costs of setting up a business 0 8% Less than 2,000 49% 2,000 to 5,000 17% 5,000 to 10,000 9% 10,000 to 15,000 15,000 to 20,000 20,000 to 50,000 50,000+ 3% 3% 4% 4% Source: YouGov research for Barclays 0% Percentage 100% 22

25 Source of funds for starting a business While many entrepreneurs get their enterprises started on a shoestring, after a period of successful operation, what is required to take a business on a growth trajectory to the next level is frequently an injection of cash and it is at this stage that a search for funding often begins in earnest. Some types of funding are more suitable at different junctures in the life of a business and the relative appropriateness and attractiveness of the options will vary, depending on the preferences of the entrepreneur and the ownership structure of the business, as well as the stage in the business development and future plans. Chart 9: Source of funds for starting a business Existing funds/savings/cash 84% Credit card Borrowed from friends/ family (needed to repay) Bank overdraft Bank loan Borrowed from friends/ family (didn t need to repay) Grants/capital from external investors Hire purchase /rental agreement Don t know 12% 11% 7% 5% 4% 4% 2% 1% Source: YouGov research for Barclays 0% Percentage 100% 23

26 The funding universe Taking a business to the next stage of its growth requires a number of things, but one of the most critical is capital. Different sized businesses require different types of finance, including debt and equity, and most often a mixture of the two. The various characteristics of debt and equity mean that certain types and sizes of companies, and specific business projects, are better suited to one or the other (or both) and getting the mix right is crucial. Funding also comes from a number of different sources and different types of organisations. For the earliest stages in a company s journey, there are a small number of specific start-up funds and governmentbacked initiatives available, but for most new entrepreneurs, the most flexible and realistic sources of funding will be friends, family and credit cards. As a business grows, a good relationship with a bank should begin to develop, and when revenues become predictable a commercial overdraft should become available. Bank finance tends to be more suitable to support asset purchases, business as usual costs, development and cash flow, says Julian Frankish. Transformational finance is usually the preserve of the equity and mezzanine finance space. If the company is growing, a significant capital injection may be required to handle cash flow constraints. Angel investors and smaller venture capital funds are often best placed to meet this need. Typically, venture capital (VC) is institutional investment into early stage businesses that are about to grow very fast and need funding to support this. VC funds have to be selective, only investing in one or two firms for every 100 they look at and usually expect to see high returns. As the value of VC investment in British early-stage companies in Q fell to its lowest amount since 2009 (according to Dow Jones VentureSource), private investors are picking up some of the slack, encouraged by initiatives such as the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS) for larger investors. These tax breaks are supporting investors willingness to look for alternative investments, says Stephen Welton from BGF. I d say that s a good healthy development, and we need to see more, although he counsels that the motivations behind the investment of private money are different to institutional investments and perhaps more susceptible to interest rate improvements elsewhere. As the company develops, longer-term debt finance should be available, but it will not be limitless and it may not be enough to fund growth plans. This is often the most critical time in a company s development with the potential to continue growing, making bigger profits and employing more people. This is often seen as the greatest equity gap and where a mixture of debt and equity can work well in tandem. 24

27 Beyond here the options continue to increase, and as a company reaches maturity a stock market listing, private equity buy-out, trade sale, or continued life as a large, successful privately owned company are all possible. As businesses increase turnover and become more credit-worthy, the accepted wisdom is that they should raise as much of the cheapest sorts of capital that they can, which is often debt. Despite the limitations it places on them, many entrepreneurs choose to build a business entirely on debt and reinvested earnings, in preference to an outside investor taking a stake in their business, which can represent a loss of control (see GCI case study on page 28). SME Monitor data finds that only 1% of smaller and mid-sized companies consider equity investment from third parties. Taking a business to the next stage of its growth requires a number of things, but one of the most critical is capital. 25

28 The funding disconnect Our panellists agree that if the UK is to continue to support an increasing number of high growth companies, there is something of a funding disconnect that must be resolved. Government initiatives, including generous SEIS and EIS tax reliefs are generally seen as positive, although there is a general consensus that more work needs to be done in raising the profile of these initiatives. One particular challenge our panel identifies is the time commitment entrepreneurs face in looking for funding, which takes them away from running and growing their businesses. While there may not be a lack of funding per se, it is often difficult for those that need finance and those that are willing to provide finance to find each other. Andrew Carter says that the ex mechanism between entrepreneurs and investors is far from perfect. I think that it needs as much attention as the schemes to boost the levels of funding and the levels of entrepreneurship. Stephen Welton agrees. A lot more needs to be done around signposting. Our panellists suggest that technology may hold the key, perhaps in the form of a website where small companies can put their business details and funding requirements, which then comes up with suitable providers. The owners of these companies need somewhere they can go that makes the process of raising money quick, efficient and properly targeted, says Gita Patel. Increasingly, different types of funding are working together. Angel investors are co-investing with crowd-funders and bank finance can often be achieved on better terms for a firm with a public listing or a balance sheet strengthened by a third-party growth capital investor. A new breed of entrepreneur is emerging who is resourceful, thinks laterally and understands what Imran Hakim calls the battlefield for funding. Part and parcel of being an entrepreneur in this day and age is how creative and innovative you are in how you grow and finance your business, he says. A wide range of liquidity and exit opportunities on each rung of the ladder are fundamental to boost the level of funding available as this increases investors inclination to make early stage investments and increases their ability to recycle their money into new start-ups. If you ve got a very vibrant market up at the top of the ladder, then that helps right the way through from friends, family and crowd funding through to the business angels and venture capital, says Marcus Stuttard, who describes AIM as having a magnetic and a pull through effect. 26

29 Alternative sources of funding As traditional funding sources have waned in the wake of the credit crisis, a number of alternatives have expanded to plug the gap: possibilities and that platforms and technology have a crucial role to play in giving potential investors a place to start, although he points to the importance of regulation. Business Growth Fund (BGF) BGF is an independent company with 2.5bn to provide long-term growth capital to fast-growing, privately owned and profitable smaller to medium-sized UK businesses. It is unique in terms of its scale, capital base and UK-wide reach. I think in the situations where we are investing, we are adding something that wasn t there before, says Stephen Welton. Often the alternative is (that) the business just actually carries on doing what it s doing, with its own resources and consequently they don t fulfil their potential. Whereas private equity firms tend to buy the company or look for a controlling stake, BGF has a policy of taking a minority equity stake. It takes a seat on the board as part of its collaborative approach and looks for a strong business model, lots of ambition and a backable plan in the companies it invests in. If it can t invest, it directs entrepreneurs to someone who can. Stephen Welton sees part of BGF s remit as a catalyst to increase choice. If you believe in capitalism and market economics, others will come in and that s a good thing. Crowd-funding and other online marketplaces Online marketplaces that link lenders and borrowers are a relatively new phenomenon for companies seeking finance. There are a variety of crowd-funding platforms, ranging from simple reward-based sites that offer goods and services in return for investment, as well as those operating on debt and equity based models. Our panellists all see the merit of such alternative sources of funding, particularly in the equity space. Julian Frankish believes that the opportunity is in matching people and Currently, the market share crowd-funding is taking from traditional providers is tiny at around 2% 5, but estimates suggest it could provide up to 10% 6 of commercial funding in the UK within a decade. It s growing and it s catching the imagination of the people, according to Guy Rigby. Business Angels Business angels are individuals that provide risk capital to back businesses. They tend to provide funding in the range of 5,000 to 500,000 although increasingly angels are carrying out first-round deals of up to 2m through syndication. Angels offer what the UK Business Angels Association (UKBAA) describes as patient capital and are happy to put in further rounds of finance to grow a business, often supporting it for up to eight years through its growth stages. However, they do require liquidity and therefore may look to pass the baton on to VC or private equity investors, or to look for an acquisition. According to the UKBAA, angels invest an estimated 800m to 1bn each year, up to three times more than VC firms in similar stage businesses. According to research carried out by UKBAA with Deloitte in 2013, 70% of angel investment this year went into seed and early stage opportunities. 58% of angels invested more in this past year than in the previous one, although they increasingly operate in syndicates, to pool skills and contacts, as well as to spread risk. Equity crowd-funding has also become part of the funding spectrum in the business angel community as co-investors, incubators for next stage funding and an alternative where angel funding isn t suitable: If people are starting to get involved on crowd sites, hopefully they will become the next big wave of sustainable longer-term angel investors, says Jenny Tooth, CEO of the UKBAA. 5 SME Monitor 6 Nesta 27

30 A successful entrepreneur s experience with funding GCI Com is a successful information and communication technologies company set up in 1999 by Wayne Martin. GCI placed 75th in the 2013 Tech Track 100, part of The Sunday Times Fast Track 100, and 19th in the Investec Hot 100. The business has a turnover approaching 54 million and has grown through a combination of strategic acquisitions and organic growth. In January 2012, it received a 10m investment from BGF. GCI Com s Chief Executive, Wayne Martin, explains how he has navigated the world of debt and equity funding over the last 13 years to support GCI Com s business objectives: Starting/funding In the first seven years, I traded with no debt whatsoever and used cash flow to grow the business while I gained confidence that the business could stand the burden of debt. Our early acquisitions and technology investments were self-funded and we were able to grow gross margin and EBITDA. Growing In 2007/2008, the business made a decision to make some chunkier acquisitions. To do that we leveraged the company for the first time, gaining a 7-8 million bank finance facility in combination with cash we d accrued. This gave us further evidence that we could gain strategic value from technology and achieve synergy savings. The next natural stage was to ask: How can we do that smarter, faster, larger?, so we looked at private equity. Hidden dangers One private equity firm used the term swampage rights meaning if we didn t deliver on our business case, then they would take more shares in the business, thereby swamping or diluting our shares in the business. I came away thinking that private equity was not something I could align myself with. Expanding debt facilities and revisiting private equity This confirmed to me that (further) debt finance was absolutely the right way to go and we renegotiated our position with the bank to allow us to use our own bank funding debt to continue our business model. In 2011, we had some early meetings with Business Growth Fund (BGF). Their approach not wanting a majority stake, and backing the entrepreneur and senior management team was a breath of fresh air. Going through the BGF process made me realise that not all growth capital is the same. Lessons Unless you ve got that track record, it s actually very difficult to draw down money to accelerate a business. With a strong business and track record, you can go out there and get debt funding and potentially angel investment, VC and private equity money too. If I wind the clock back to when the business was a year old, the onus to prove it would work was absolutely on me. If I didn t believe it, and couldn t make it work, then nobody else could. 28

31 The onus to prove the business would work was absolutely on me. If I didn t believe it, and couldn t make it work, then nobody else could. 29

32 Section 3 Regional spotlight Despite the significant contribution of the South East and London to economic growth, more than half 7 of the nation s economic output is actually created in other parts of the UK Natural clusters focusing on specific activities have grown up in many areas to capitalise on the supply and infrastructure opportunities they present. These areas reflect the particular strengths of different regions, as well as universities, business parks, and successful companies and industries. Notably, start-ups outside of London and the South East appear to embrace the entrepreneurial spirit more, with 43% of owners of fledgling businesses claiming to be constantly thinking of new ideas of how to make money, and pursuing these if they represent a quick win, compared to 33% of those in London and the South East 8. In our analysis of regional entrepreneurial activity we focus on three data sets. To measure the in start-up activity, we refer to the number of VAT and/or PAYE based enterprises and how this has d in a particular region. We also look at the number of high growth companies in each region to establish whether this has gone up or down as a proportion of those companies of a similar size. Lastly, we look at the number and size of share transactions in active, growing companies and if this is rising or falling. We found pockets, indeed whole regions such as London and the South East, where there is a strong increase in the number of enterprises. Yorkshire & Humberside and the Midlands have particularly high and fast growing percentages of high growth companies, with the South West and Wales not far behind. The Republic of Ireland was the only region to see an increase in the number of share sales, whereas every other region saw a decline. Wales saw the least sharp falls in share sales, with London in second place and Yorkshire & Humberside a close third. 7 According to ONS GVA (gross value added) statistics published 2013 (based in 2011 data). 8 YouGov research for Barclays 30

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