BGF is the UK's most active provider of growth capital for companies with turnover of 5m to 100m

Transcription

1 Volume 4

2 So, what exactly is our investment focus? High-tech to high street. Factories to fitness. Print to digital. Getaways to takeaways. Hard data to software. Big energy to a wee dram. Downtime to downloads. Good design to good health. Clicks to bricks. Whatever the sector, our focus will always be on you, your business and your plans. BGF is the UK's most active provider of growth capital for companies with turnover of 5m to 100m

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 45 investments, providing over 250m of new capital to UK companies. 1

4 Expert Panel We are extremely grateful for the time and help given by the experts on our panel. Dr Sally Ernst, Founder, UK and Australian Cyber Security Networks. Dr. Ernst has over 15 years of corporate venturing, internationalisation and governance experience in tech companies, spanning Australia, the UK, China, the Philippines and the US. She has held board positions, contributed to government-led forums and is in an angel investor group. Both her MBA and Doctorate specialise in corporate and tech entrepreneurship in a radical innovation context. She has been quoted on these topics in the media, more recently with a business perspective on cyber security risk, and regularly speaks for world leading universities, industry bodies and professional service firms. Julian Frankish, Head of Business Economics and Research, 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, Entrepreneur and CEO of the Hakim Group. Dr. Hakim secured funding 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. Dr. Jonathan Levie, Professor and Director of Knowledge Exchange 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. Guy Rigby, Head of Entrepreneurial Services, Smith & Williamson. He 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. 2

5 Joanne Smith, Founder and CEO of The Consulting Consortium. Ms. Smith has worked in financial services for over 20 years. Her expertise is in compliance-related matters, across all sectors of the industry. Since 1990 she has worked in a number of financial services companies including Royal Insurance, HBOS and KPMG, as well as the Financial Services Authority. In 2000, she founded The Consulting Consortium (TCC) which specialises in providing compliance services and resources; TCC is now the largest independent compliance consultancy in the UK. Hamish Stevenson, Founder and CEO of Fast Track. Mr. Stevenson set up Fast Track in 1997 with cornerstone sponsorship from Richard Branson. Fast Track publishes league tables in The Sunday Times, ranking the UK s top-performing private companies, from the fastest-growing to the biggest; and runs awards and networking dinners for the top entrepreneurs that run them. Mr. Stevenson is an associate fellow at Oxford, where he held a research fellowship in entrepreneurship and completed his doctorate in management. Jenny Tooth, CEO, UK Business Angels Association (UKBAA). The UKBAA is the trade body for angel and early stage investing and the voice of the angel and early stage investment market. Ms. Tooth has over 20 years of experience supporting small and medium-sized businesses to access investment, both in the UK and internationally. She is also co-founder of Angel Capital Group and is a regular speaker on angel investing around the world. Alastair Walmsley, Head of Primary Markets, London Stock Exchange. Mr. Walmsley is responsible for attracting and advising companies from around the world on raising equity capital on the London markets. Before taking up his current position in mid-2012, he worked in Equity Capital Markets and Corporate Broking at Morgan Stanley and Merrill Lynch, and has 15 years of experience advising companies on how to finance their growth ambitions. Stephen Welton, Chief Executive, Business Growth Fund (BGF). Mr. Welton launched BGF in May He has worked in the development capital and private equity industry for over 25 years, including roles at Henderson, Barclays and most recently JP Morgan Partners (CCMP Capital), where he was a Founder Partner and member of the Investment Committee. In 2013, Stephen joined the Advisory Group, formed specifically to guide the UK government on the direction and priorities for the new British Business Bank, a government-funded institution which provides lending and broader support to small and mid-sized businesses. 3

6 Foreword Welcome to our fourth Entrepreneurs Index, our bi-annual study of the entrepreneurial lifecycle in the UK, in partnership with Business Growth Fund (BGF). Yet again, the data gathered paints a positive picture of the entrepreneurial landscape, with a number of interesting regional nuances. Since October 2012, we have analysed the levels of shareholder activity occurring in small and medium-sized enterprises (SMEs) across the UK as a key indicator to assess the level of entrepreneurial activity. A year later, we extended our analysis to include the number of start-ups, as well as high-growth companies, and in so doing now cover all stages of the entrepreneurial lifecycle; from starting, to growing, to finally exiting the business through share sales. Barclays pays close attention to entrepreneurship, as it plays such a fundamental role in the UK economy. Figures from StartUp Britain show that micro and small businesses represent 95 per cent of all companies and employ more than seven million people in the UK. These figures reflect our belief at Barclays that entrepreneurs are a huge source of invention, employment and productivity growth. As such, we are continually seeking ways to better understand how and why innovation ecosystems emerge and what can be done to ensure that they flourish. It is encouraging to see throughout this fourth edition of the Index that not only is entrepreneurial activity still on the rise, but the proportion of these start-ups going on to prosper and grow is also on the up. We are hopeful that this momentum will continue to drive the UK economy toward further growth in the coming months and years. We believe that existing and future companies will thrive in an environment where the general population is entrepreneurial by nature and open to opportunities for change and improvement. Therefore, we continue to strive for closer collaboration with upcoming entrepreneurial talent in the UK, and seek to provide more targeted support for these businesses and their owners, whether through access to finance, networks or skills development. We hope that this latest Entrepreneurs Index helps us achieve our ambition while at the same time providing a useful indicator of overall level of entrepreneurial activity in the UK. We hope you find this report an interesting and insightful read. Richard Phelps Managing Director, Barclays Wealth and Investment Management 4

7 Introduction The entrepreneurial spirit is stronger than it ever has been in the UK. Record numbers of people are setting up new businesses here last year alone saw the creation of more than half a million companies 1 and the latest figures from StartUp Britain show that this trend is continuing in Finally, we measure the number of active growing companies recording share sales, using data sourced from Companies House. We measure these sales across the UK by sector and region, and by the turnover band of the selling companies, enabling us to gauge liquidity events and exits. Entrepreneurs will play a pivotal role in ensuring the UK s return to economic prosperity. They are significant employers, with small and medium-sized enterprises (SMEs) accounting for the majority of private sector employment in 2013, according to statistics from the Federation of Small Businesses. They are major sources of innovation, and disruptive new technologies and business models 2. They are also major sources of tax revenues for governments, and bring broader benefits to the economy through a trickledown effect of both personal and business expenditure. Analysing these latest data sets, and observing the direction of travel from the research undertaken for our previous reports, helps us to build a picture of the strength of entrepreneurial activity in the UK. Meanwhile, the addition of qualitative analysis from interviews with our panel of experts including entrepreneurs, investors, academics, business network leaders, stock exchange representatives, and accountants, among others enables us to deliver a more comprehensive view of the UK environment for businesses at each stage of the entrepreneurial cycle. This fourth volume of the Entrepreneurs Index aims to provide a measure of the UK s entrepreneurial activity across geographic regions and business sectors during 2013, with comparisons against previous reports enabling us to draw out key trends in the evolution of entrepreneurship in the UK. To achieve this, we study a number of 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 has reached almost 3 million to provide a measure of the change in start-up activity nationally. At a regional and sectoral level, we complement this with Office of National Statistics (ONS) data recording changes in the number of VAT or PAYE paying enterprises. We also look at Experian data on the number of high-growth companies in the UK, to assess whether these have increased or decreased as a proportion of total companies of a similar size, both nationally, and by sector and region. In each of our Entrepreneurs Index reports, we look in-depth at a closely related subject in the In Focus section. This time, we explore the theme of share sales and entrepreneurial exits, in an attempt to more fully understand why we have seen a continued decline in share sales of active growing companies. To do this, we outline some of the challenges UK businesses currently face when looking to sell, and whether a decline in this activity reflects a determination among today s entrepreneurs to take full advantage of a resurgent economy before making the decision to sell

8 Glossary Active companies The term active is generally used by Companies House to denote 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 Businesses with revenues of between 2.5m and 100m per annum. Share sales Active companies with growing revenues of between 2.5m and 100m seeing decreases in share holdings by shareholders during a six-month period. Enterprise A term used by the Office for 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 and 100m that have increased turnover by 33% over the preceding three years and produced 10% year-on-year growth for a minimum of two of these 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 This refers to the growth or decline in the number of active companies or enterprises in the relevant time period. 6

9 Methodology 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. Latest data available is up to March Start-ups. Figures for the number of new companies across the UK during 2013, sourced from Companies House data (via StartUp Britain). High-growth companies. Data on companies in the UK with revenues of between 2.5m and 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 were compiled in January 2014 and are based on the company accounts with year-ends to March 2013, although some are still outstanding. Share sales. Data on the number of active, growing companies with revenues between 2.5m and 100m seeing declines in share holdings by shareholders, supplied by Bureau Van Dijk for Ledbury Research between July and December This is a measure of companies recording share sales, and is not limited to owners exiting the business in wealth creation events. 7

10 Executive summary Steady growth in start-ups. The economic recovery is driving an increase in entrepreneurial activity: There has been a year-on-year increase in the number of businesses recorded in the UK. There was a 6.9% increase in the number of active companies in the UK between December 2012 and December A record 526,446 new businesses were registered with Companies House in the U.K. during the whole of Chart 1: Steady growth in start ups High-growth trajectory. There was an impressive increase in the percentage of high-growth companies within revenue bands of 2.5m to 100m in the 12 months up to March Every region across the UK saw an increase in the number of these companies. Chart 2: High-growth trajectory. Old economy sectors rejuvenated. The largest proportional increases in high-growth companies have been in traditional, cyclical industries, such as construction, manufacturing and transport. The increase in the percentage of high-growth companies for these sectors was 55%, 47% and 37% respectively, for the period from March 2012 to March Chart 3: Old economy sectors rejuvenated. 8

11 Share sales decline in early economic recovery. Overall, there was a decline in the number of active companies undertaking share sales in the second half of But there is significant variation across size bands, with the smaller companies experiencing the biggest decline, while companies with turnovers of 10-20m and 20-50m seeing an upturn in share sales Chart 4: Share sales decline in early economic recovery. +20% +10% Share Sales Level 0-10% -52% -16% +20% Turnover: 10 to 20m +10% Turnover: 20 to 50m -23% -20% Turnover: 5 to 10m -30% Turnover: 50 to 100m -40% -50% Turnover: 2.5 to 5m No longer a solely London-led recovery. Although London undoubtedly remains core to the UK economy with greater numbers of high-growth companies and companies with share sales present there than anywhere else it is clear from our data that many regions are seeing a resurgence in entrepreneurial activity. Several regions outstripped London in terms of the proportional rise in highgrowth companies for the period from March 2012 to March 2013: The Midlands, the North West, East Anglia, and Yorkshire and Humber are all performing well, with percentage changes in high growth companies of 54%, 44%, 42%, and 38% respectively. For London, this figure was just 17%. Chart 5: No longer a solely London-led recovery. 9

12 Chart 6: Key themes Starting Growth in the number of active companies has continued. Growing Considerable increases in percentages of high-growth companies across regions. Connecting Further declines in share sales of growing companies, but reason to expect upturn in Source: Barclays/Ledbury Research 10

13 Section 1 Headline findings The overarching theme to be drawn from our data is that UK entrepreneurial activity is increasing. There has been a rise not only in the number of active companies but also in the numbers that are moving from the start-up phase to become a high-growth business. This positive outlook reflects the growth we have seen in the wider economy, and the improved investor and consumer confidence that has accompanied that growth. In addition, our panel identified several further factors underpinning this trend. The funding universe has expanded for entrepreneurs, with the emergence of sources such as the Business Growth Fund (BGF), angel investment networks and crowd-funding. There are also tax breaks for those investing in start-ups. In addition, entrepreneurs have been able to capitalise on new technologies to compete on a level playing field with larger, more established companies, while better support networks are now available to offer support and guidance throughout the growth cycle. We have seen a strong resurgence in old economy sectors such as construction 3, transport and manufacturing, which has partly been assisted by high levels of commercial building work and civil engineering activity on large government-funded projects. At the same time, our data on high-growth companies also suggests the recovery is no longer primarily London-led. The Midlands, North West, East Anglia, and Yorkshire and Humber have all performed extremely strongly against this measure. But not every trend in UK entrepreneurship is overwhelmingly positive. Although entrepreneurial activity is increasing, we have seen the number of share sales continue to decline, suggesting that entrepreneurs may be struggling to make the transition from the expansion to exit phase of their journey. In reality, however, there could be many reasons for a growing valuation gap between buyers and sellers, such as: A reluctance of entrepreneurs to sell at such a promising stage of the economic recovery; A lack of funds among the venture capital and private equity communities; and A continuing lack of risk appetite among potential buyers. Our In Focus section explores this finding, and the underlying reasons behind it, in greater depth

14 Starting/Funding: Consistent growth in number of active companies The number of active companies in the UK has grown by 3% or more in each six-month period since June 2012, and by 6.9% between December 2012 and December In addition, there is further encouraging data showing that a record 526,446 new businesses were started in the UK during 2013, and nearly 60,000 start-ups have already been registered in Chart 7: Number of active companies in the UK up to December million Percentage change (previous period) 2,915,353 2,900 2,821,190 2,800 2,727,758 Active companies 2,700 2,600 2,556,365 2,647, % 3.3% 2, % 2, % December 2011 June 2012 December 2012 June 2013 December 2013 Source: Companies House

15 Starting/Funding: Cultural shift Members of our expert panel felt that the UK is undergoing a cultural shift in the perception of entrepreneurship, which is encouraging more people to set up their own businesses than ever before. This cultural shift is partly driven by changes in society. For example, the government has introduced a number of well-publicised initiatives aimed at encouraging start-ups, and popular television shows such as the BBC s Dragons Den have raised the profile of entrepreneurship as a career path. At the same time, as younger generations move into the workforce, it has become apparent that their career expectations differ from those of older generations, and that they want to move between jobs and work projects more frequently 5. The cultural shift also reflects, however, a reaction to the economic crisis. High levels of unemployment 6 have made it harder for school-leavers, college and university graduates, and other skilled young people, to find opportunities in the corporate world. As a result, they may turn to entrepreneurship because they believe it offers better job prospects and the chance to become one s own boss and, in an environment where many companies continue to shed jobs, even a comparable level of certainty. The combination of tough economic conditions created by the recession and the emergence of a new, technologysavvy generation has encouraged a wave of innovative start-ups to form. To appreciate this, we need only observe the 76% increase in the number of tech and digital companies incorporated in London between 2009 and 2012, from 49,969 to 88, BGF Chief Executive Stephen Welton says that significant structural changes in the economy through the digital transformation and the increasing reliance on new technologies are creating a new segment of business, which means there is a lot of opportunity for new companies to start and grow quickly. If you look at the Apple and Android ecosystems for example, and all of the apps that come off the back of that, there is huge innovation going on, and innovation is often better served by smaller companies than large ones, he says. Many innovative new businesses are also emerging from educational institutions across the country, with hubs developing around universities and science parks. I think UK businesses are having growing success in being able to commercialise some of the extraordinary knowledge and IP that is developed in these institutions, says Alastair Walmsley, Head of Primary Capital Markets at the London Stock Exchange Group. Another liberating factor for many new technology or online-based businesses is that they do not need the same level of business infrastructure that was required in the past. New technologies, such as cloud computing, have greatly reduced the barriers to entry for many companies, and make it much easier for them to access foreign markets at an earlier stage in the life-cycle, giving many new entrepreneurs a more international outlook than they may have had in the past

16 At the same time, an explosion of online networks has also enabled entrepreneurs either to reach people overseas to carry out tasks such as website design more cheaply, or even to exchange or trade-off skills between them in a highly collaborative way. We are seeing collaboration happening around hubs such as the digital cluster in Shoreditch, with people swapping services like web development, says Joanne Smith, CEO of The Consulting Consortium. This is part of the reason why creating hubs is so beneficial for fostering entrepreneurial activity. While Dr. Sally Ernst, Founder of the UK and Australian Cyber Security Networks, describes the UK s entrepreneurial environment as being supportive, even to the extent of being benevolent in some instances. I think the UK culture is quite unique in that people who have experience or have made a mark in a particular area appear to be quite benevolent in opening doors or sharing their intellect, she says. Guy Rigby, Head of Entrepreneurial Services at Smith & Williamson, also points out that start-ups have recently been able to take advantage of very low-cost services from providers keen to secure their business. There are many entrepreneurs who have managed to get what they need for almost nothing, for example professional services or IT services where start-ups may get their first year s hosting without charge, he says. This world of free will end at some point but it has certainly meant things have been relatively soft on the supply side for entrepreneurs, and has enabled them to buy things cheaply. 14

17 Starting/Funding: Improved investor and support networks Another key driving force behind the rise in start-up numbers is the availability of an increasing range of alternative funding options, through the emergence of crowd-funding, organisations such as BGF, angel investment networks, and the government s Start Up Loans scheme. This has meant that, despite tight credit conditions more generally, entrepreneurs have in many cases been able to meet their financing needs. In 2013, research undertaken by Deloitte and the UK Business Angels Association (UKBAA) found that tax breaks under the government s Seed Enterprise Investment Scheme (SEIS) were successfully drawing more angel investors to start-ups and very small businesses 8. Meanwhile, entrepreneurial networking organisations, such as E2Exchange and Enterprise Nation, are expanding across the country and are an invaluable source of guidance and information for many entrepreneurs embarking on new business ventures. More could be done, however. There is still no single repository of information that makes the process easy, says Alastair Walmsley. Entrepreneurs would really benefit from having a single point of contact that looks at their business strategy and can then explain the funding options available. Jenny Tooth, CEO of the UKBAA, says that SEIS has made a big difference in pushing investors toward companies at the seed stage. We ve got a number of stakes in the ground that help to build the financial ecosystem around entrepreneurship, while platforms such as crowd-funding are really helping to ensure that there is financial support for start-ups, in the early stage when they may not yet be ready for angel finance, she says

18 Growing: Conditions favouring high growth Entrepreneurs will be encouraged to learn that the UK is becoming an increasingly favourable environment for businesses to grow. Our figures show an impressive increase in the number of mid-sized SMEs that fit our definition of high-growth companies (see chart below). In the 12 months up to March 2013, there was a 5.3 percentage point increase in the overall number of highgrowth companies in the UK. This story is consistent across every sector, with all except public administration showing an increase in the percentage of high-growth companies. Chart 8: Percentage of high-growth companies. 30% 25% 27.3% 27.4% 20% 23.2% 15% 19.4% 16.2% 17.9% 10% 5% 0% Source: Experian 16

19 Growing: The recovery The economic recovery taking hold is one obvious factor behind this increase in high-growth companies, as Dr. Imran Hakim, CEO of the Hakim Group, reflects. I would use three words to summarise the trend: optimism, confidence and acceptance, he says. Confidence in the economy and in the structures around us is key for entrepreneurs, while renewed optimism goes hand-in-hand with an increase in investment and business activity. I mention acceptance because entrepreneurs must accept that this is a new business landscape. We are starting to see those more resilient business models that will thrive in this environment. Those businesses that were able to survive, and even capitalise on the recession, tend to have a number of factors in common. They are more resilient to market downturns, can exploit opportunities in a recovering economy more easily, and often take advantage of new technologies such as digital to make cost savings and reach customers more easily. I think we have come out of the recession as better business people, says Dr. Sally Ernst. The ability to be chameleon-like and morph into what the market needs at the time is really important. I think we have come out of the recession as better business people. Dr. Sally Ernst 17

20 Growing: Government policy The government has launched a number of recent initiatives to support the growth of SMEs in addition to SEIS and the Start Up Loans scheme already mentioned that are now beginning to bear fruit. Alastair Walmsley points out that there have been some significant policy changes in the past year. In its budget statement in 2013, the UK government introduced a policy of allowing the inclusion of companies listed on the Alternative Investment Market (AIM) and other SME equity markets as eligible investments for stocks and shares ISAs 9. In addition, the government is abolishing stamp duty and stamp duty reserve tax on growth market shares in order to boost investor participation in equity growth markets and improve the conditions for growing companies raising equity financing 10. Those are aspects which obviously play to the cost of capital in the public markets and we re absolutely delighted the government has pushed those initiatives through, says Alastair Walmsley. Even investors at much earlier stages of the value chain were very conscious of the potential benefits for their own investment landscape and to the companies that they re engaged with in terms of providing that continuity of finance. We saw some of the policy initiatives at the public market stage as assisting different elements of the same journey for private companies, he says. But despite some very positive policy developments, there is still plenty more that government could do to encourage entrepreneurial growth. One simple improvement would be to raise awareness among entrepreneurs of the funding and tax incentives that are available 11, and to make the process of accessing those funds easier. Joanne Smith says that her company, The Consulting Consortium, the UK s largest independent regulatory and compliance consultancy, was fortunate enough to obtain a maximum grant from the government-funded Technology Strategy Board at the first time of asking, but notes that the difficulty of the process would probably discourage some entrepreneurs from applying. An entrepreneur with an idea and a passion driving them to create something does not want to get caught up in a bureaucratic process to try and get a grant, she explains. A more complex goal for government would be to enhance the education and training of young people so that entrepreneurs possess more of the requisite skills from the outset, as well as having access to a bigger talent pool when they are recruiting. Right from school level we should think about providing mentors and guidance to young people, educating them about starting their own business, says Joanne Smith. Apprenticeship schemes would be a way forward for developing skills and we should also start to run hub centres for budding entrepreneurs like we see in the San Francisco Bay area in the US. Dr. Jonathan Levie, Professor and Director of Knowledge Exchange at the Hunter Centre for Entrepreneurship highlights the interconnected issue of training for growth as something that government, support agencies and universities must work together to address. Many entrepreneurs realise that they or their staff are not geared up for growth, but they cannot afford or think they cannot afford to train themselves or their key senior staff, he says. The government has launched a Growth Voucher initiative that provides 2,000 worth of advice and support to small businesses, which can help with finance and cash flow, and recruitment, among other things. The Growth Voucher initiative is a positive measure, but many entrepreneurial teams need training to internalise basic skills for growth, for example in selling, which is a fundamental requirement for growing a business, says Jonathan Levie. From a funding perspective, BGF Chief Executive Stephen Welton says that further extending the SEIS scheme, more heavily promoting the Enterprise Investment Scheme (EIS) and extending entrepreneurs relief, would help to reinforce that the UK is one of the best places to start and grow a business tax_on_growth_market_shares.pdf

21 Growing: Funding the growth cycle The emergence of a strengthening angel investment community is undoubtedly a crucial factor in driving the growth trajectory of UK SMEs. Jenny Tooth points to the growth of syndication, in which business angels join forces to participate in the same deals, as an important means of meeting the financing needs of growing companies more effectively, and this has been given extra impetus through the 100m Angel CoFund which co-invests with syndicated deals. In particular, this process is mobilising angel investors to fill the perceived gap that has been vacated by venture capitalists. Alastair Walmsley adds that another benefit of the UK environment is that its public equity market functions at an earlier stage than in most other jurisdictions, particularly through the junior market, AIM. There is a large community of investors and advisers that are absolutely focused on small cap capital raising, so businesses can raise money at an earlier stage, he says. If you tried to raise 10-25m of capital anywhere else in the world via public markets, it would be very difficult because the community doesn t exist like it does in the UK. Business angels are starting to build quite significant firepower, and this also means that they have the capacity to go through multiple rounds of finance through syndication, which enables them to build a really strong platform for high-growth businesses, says Jenny Tooth. Ultimately, they may co-invest with venture capital and private equity or look to pass the baton to them, but the angel community is growing and filling that space which is able to take care of the earlier stages of the high-growth market. Another important part of the entrepreneurial cycle in the UK is that, once entrepreneurs have achieved sustained success and generated sufficient wealth, they then have the opportunity to become angel investors themselves. We need those entrepreneurs who are now achieving growth and success, particularly at the higher end, to see the opportunity in reinvesting their capital gains back into small businesses, says Jenny Tooth. 19

22 Growing: Proceed with caution While the UK s recent return to economic growth is of course good news for business owners, our panellists warn that the growth period immediately following a recession is a notoriously dangerous time for entrepreneurs. For example, companies can run into serious problems if they expand too quickly in order to seize new growth opportunities but do not have a balance sheet that is sufficiently resilient to support this expansion. Unfortunately, history shows that, at this stage in the cycle, you get a lot of business failures, says Stephen Welton. And Julian Frankish, Head of Business Economics and Research for Barclays Business Banking, says that some businesses will stumble across high growth unexpectedly during this period as demand for their services comes in from unexpected places, and risk then arises in overstretching. This becomes very much an issue of capacity, he says. Businesses are likely to be experiencing new challenges they haven t necessarily faced. Do they have the skills and qualities to cope? Most business owners are not unreasonably reluctant to give up too much control of their business to external partners, but they need to strike the right balance here and be open if it will take their business forward. Some traits of high-growth businesses The Sunday Times Fast Track 100 league table ranks Britain s one hundred private companies with the fastest-growing sales over their latest three years. Over the past 17 years it has become the definitive barometer of privately owned growth companies in the UK. Overseas expansion. More than half of the companies (56%) in the Fast Track 100 league table for have expanded overseas to boost revenue growth. Some, such as knitwear retailer WoolOvers, have launched international websites to target non-uk customers. Others have opened overseas offices to expand their geographical reach, such as LION Trackhire, which supplies temporary trackways from offices in Worksop and Stuttgart. Growth in the UK in many industries has been pretty stagnant until now, so the fastest growing companies are often looking for opportunities overseas, something you would have seen less of 10 years ago, says Hamish Stevenson, Founder and CEO of Fast Track. More B2B than B2C. Many of the companies making it into the Fast Track 100 have focused on identifying a problem faced by large corporates and then filling that gap with a niche product or service. A prime example is Centek, which makes centralisers for the oil and gas industry devices that keep pipelines centred in holes before they are cemented into place. It sells to customers such as Shell and BP. Exploiting technology. Many of the companies exhibiting exceptional growth in the UK are better at exploiting technology than their rivals. Uttoxeter-based cashback website operator, TopCashback, offers deals from thousands of companies and has more than 2.5m registered users. In February, it launched Snap & Save, a mobile app already downloaded by 200,000 people, which lets users take a photo of a receipt and claim cash back on selected in-store products

23 CASE STUDY: The Cennox growth story Clive Nation founded Cennox as a specialist ATM services group in He managed to build the business organically until 2009, using his own cash and expertise in ATM systems, but, by 2009, he was at a growth juncture. In 2010, Nation made a small acquisition, mainly to increase the skill base of his business, and later that year obtained a government-secured bank loan that allowed him to make the first major acquisition for his business. I d been self-investing until that time and recognised that I needed to make an acquisition to really achieve that next phase of capital growth. After the integration was finished he continued to pursue his acquisition strategy which meant finding external funding, and in June 2012, Nation approached BGF. BGF made a 3m equity investment for a minority stake in Cennox, which Nation says has been vital to prevent the business from running into some of the difficulties that can hurt companies in this growth phase. As we see the economy grow, I think the danger for entrepreneurs is they can expand too quickly and don t have sufficient cash, says Nation. we just didn t have enough working capital. Clive Nation I ve spent a lot of time making sure we have sufficient working capital as it is important for our growth and our credibility. There are some very large projects coming out of the banks for us now, but before the investment it would have been beyond our ability to consider them because we just didn t have enough working capital, and that s the danger, he adds. Following successful acquisitions, Cennox has grown to comprise two main businesses: ATM Parts and Field Services. A recent acquisition in the US has seen its international operations grow to generate 40% of overall revenues. Nation says for businesses to remain on a highgrowth trajectory as Cennox has done the key is in careful planning that looks as far ahead as possible. The important thing to recognise is you must look for funds way before you actually need them, because if you are on the back foot or your performance misses a beat, it becomes very hard to convince anyone to invest in your business, he says. 21

24 Star regional performers: Good news for London, Midlands, and Yorkshire & Humberside Chart 9: Top three performing regions: key data Starting Number of VAT and/or PAYE based enterprises % change Growing % high-growth companies Midlands 315, , % Midlands 17.1% 26.3% Yorkshire & Humberside 150, , % Yorkshire & Humberside 18.4% 25.3% London 359, , % London 19.0% 22.1% Connecting Number of companies with share sales H H % change Midlands % Yorkshire & Humberside % London 1,866 1,151-38% Source: ONS; Experian for BGF; BVD for Ledbury 22

25 Star sector performers: The old economy reborn Perhaps one of the most reassuring trends in our data, as far as the UK s fledgling economic recovery is concerned, is that it reflects strong growth in cyclical sectors. According to data collected for this report, the biggest proportional increases in high-growth companies have been in construction (55%), manufacturing (47%) and transport (37%). According to PMI data, the UK construction sector saw a near-record upturn across all subsectors, with January 2014 its best month for six-and-a-half years 13. This makes a lot of sense, says Jonathan Levie. You have the government measures to try and get the construction industry going again, and first-time buyers buying houses, that have clearly made a difference. Stephen Welton agrees, pointing out that the resurgence of construction is amplified because of large infrastructure projects, such as Crossrail. This feeds through into a lot of the supporting activities like building materials and logistical support, he explains. It is often around these large public spending projects, and big contract work for multinationals, that entrepreneurs find niche opportunities and spring into action. In the case of manufacturing, Jenny Tooth argues that investors are focusing on the more technological end of the sector. Angels are still very much drawn to businesses that have a technological base, where they can see strong IP and scalability, and are investing in clean-tech, new manufacturing technologies, such as 3D printing, and transport technologies, she says. Star sector performers: Tech remains key While its proportional increase in high-growth companies might not be as impressive as the old economy sectors, the UK s tech industry continues to be a huge success story. London boasts Europe s fastest growing tech cluster: a staggering 27% of all job growth in London now comes from the tech and digital sector, while the number of these companies incorporated in London grew by 76% between But the sector is growing across the regions too, and new tech companies are springing up all over the UK. Imran Hakim, who owns and manages a number of optometry businesses, says the focus of entrepreneurs will clearly be on emerging technologies in the future. There s a lot going on with cloud technologies and, if you look at companies like Google, you can see where they think the future is going. We have had web 2.0 and will be moving to web 3.0 soon, with wearable tech such as wearable Internet and wearable mobile, he says. Meanwhile, Alastair Walmsley points to considerable developments in high tech engineering. We had a couple of Durham University spin-outs floated on the market last year, one of which was Applied Graphene Materials 15, which some people are calling the new miracle material, and the other was a business called Kromek 16, which specialises in digital colour x-ray imaging, he says. Medical technology, renewables and clean energy are all areas where we re starting to see very interesting developments

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27 Section 2 In focus: Recovery yet to translate into wealth creation The UK s entrepreneurial environment appears to be in good health, with a strong rise in start-ups across the country and an increasing number of mid-sized SMEs achieving high growth. This positive picture is twinned with a return to real economic growth in 2013 and an upgraded IMF growth projection for , as well as a strengthening investment appetite among CFOs of the UK s largest companies 18. Yet, despite this, we are seeing a seemingly less encouraging story in relation to entrepreneurial exits and wealth creation. The most recent data from Companies House shows that there was a marked reduction in the number of UK companies with share sales during 2013, continuing the decline seen in these figures during Of course, there is a range of potential motivations for selling shares: raising growth capital; flotations; bringing new partners into the business; or exiting the company. Nevertheless, there is a clear trend for a reduction in share sale activity of all types

28 In the first half of 2013, the number of active companies with growing revenues of between 2.5m and 100m that underwent share sales declined by 809 from the first half of 2012, an 11.2% year-on-year fall. For the second half of 2013, the drop from the last six months of 2012 was 1109 (16.4%). These figures vary across each turnover band, however. Among companies with turnovers of between 2.5m to 5m, there was a significant 55% year-on-year reduction in share sales. Among those in the 50m- 100m bracket, the decline was lower, at 25%. Then, among companies in the 10-20m turnover band, there was an increase of 18% in share sales, and an increase of 7% for those in the 20m- 50m range. (See Chart 11 on page 27) We should be aware, however, that our share sales data is a lagging indicator, given that it covers only data recorded up to December 2013, and at the time of extracting data, not all companies would have registered the share sales they had undertaken in Other data covering the second half of 2013 shows a more encouraging picture. For example, the second half of 2013 saw an improvement in the number of public offerings, particularly on the AIM. This suggests that the trend for a decline in share sales could soon be reversed, and may look much more positive in Chart 10: Number of companies with share sales. 10,000 8,000 6,000 7,770 7,211 6,751 6,402 5,642 4, % 2,000 0% H H % H H % H Source: BVD 26

29 Riding the growth wave Having adapted to survive during the challenging economic climate of the recession, many entrepreneurs now find themselves with a resilient business model and new expansion opportunities presenting themselves in a UK economy experiencing renewed growth. Julian Frankish says it is natural that, with optimism returning, entrepreneurs want to hold onto businesses they have worked hard to develop and sustain through the difficult economic climate. The smart move, according to Imran Hakim, is for entrepreneurs to take full advantage of renewed consumer and investor confidence to heighten their pace of growth and push up the sale price. We are going to get compound growth in a lot of these businesses, he explains. This means that the ROI a year or two down the line could be exponentially better than where you are now. He adds that, while liquidity levels have certainly improved since the immediate aftermath of the financial crisis, they are still far below the levels seen before Over the next two years, further improvements in liquidity will broaden the potential investor pool and could increase the competition for assets, driving up prices. Chart 11: Change in the number of companies with share sales across turnover bands (% change year over year). 20% 18% 10% 7% 0% -10% -20% -30% Turnover bands -16% -17% -25% -40% 2.5M to 5M 20M to 50M 5M to 10M 50M to 100M -50% -60% Dec-12 10M to 20M Total Jun-13-55% Dec-13 Source: BVD 27