Early-stage company entrepreneurs are hamstrung by a lack of information on how to access the external funding needed to support their growth plans, according to new research published today by the Venture Capital Trust Association (VCTA).
The VCTA surveyed 240 senior decision makers in charge of recently launched small businesses less than seven years old and employing up to 250 employees. Despite an overwhelming majority (92%) of respondents requiring equity finance over the coming two years, almost half (44%) say they lack information on how to access it, the figure rising to 47% among entrepreneurs based outside of London and the Southeast.
Business owners say funding agreements most commonly fall through with potential lenders because they fail to agree on a company valuation (43%), lack a proven track record (42%) or fully developed business model (37%).
The VCTA’s study highlights the crucial role played by equity finance in helping early-stage businesses to grow: two-thirds (66%) of respondents believe that increasing the availability of venture capital finance would make the biggest difference to supporting entrepreneurs looking to start or grow a business. This is comfortably ahead of other factors including access to local skilled staff (48%) and better local transport links and infrastructure e.g., broadband (34%).
Will Fraser-Allen, Chair of the VCTA said, “This study clearly shows that more work needs to be done by the venture capital industry to bridge the knowledge gap among young, fast-growing companies seeking the funding required to scale up and realise their potential.
“Young companies often find it difficult if not impossible to obtain debt funding because they are too small and young to fit most lenders’ criteria, leaving equity finance as the preferred route to fulfil their growth ambitions.
“Venture Capital Trusts are specially designed to address these barriers as they invest into young, innovative businesses. By their nature, entrepreneurs often lack a proven business record, and their business model may need to be refined and improved by an experienced external investor. VCT managers are used to overcoming difficulties around valuing early-stage firms and are more likely to find a solution that works for both sides.”
Location is no barrier to growth
Considering the government’s levelling up agenda to improve jobs, pay and living standards across the country, the VCTA’s study examined the importance of entrepreneurs’ choice of location on their chances of success. A large majority (88%) believe their current address is a benefit while just 3% say it is a barrier while 9% believe it has no impact.
Contrary to the perception that firms based in London and the South-East hold an advantage, almost twice as many respondents based outside these regions (24%) say their location is a ‘significant’ benefit (24%) compared to those in and around the capital (13%). However, a marginally higher proportion of London and South-East based business owners (90%) believe that their location is a benefit to them overall, compared to the rest of the UK (88%).
Will Fraser-Allen, Chair of the VCTA, continued: “It’s encouraging that such a large majority early-stage businesses see their choice of location as a benefit. VCT managers invest in companies based across the length and breadth of the UK and have more than 20 regional offices in towns and cities across the country. Investment professionals based in major cities can be closer to the companies in these areas and will have a better understanding of their needs. Local presence ensures that the availability of patient capital is well known and understood by local entrepreneurs.”
“VCTs have an excellent track record of creating well-paid jobs in innovative, fast-growing industries across the country. These companies deliver important economic and social benefits to the UK which range from exports and increased tax take to cutting edge technology and job creation in sectors as diverse as healthcare, online retailing and green technology.”
To illustrate this, the average salary for an employee at an unquoted, VCT-backed company in the Northwest of England is approximately £40,000 which is nearly £10,000 higher than the average wage for the region. Average salaries for quoted VCT-backed companies in the Northwest, rise to £50,000.
In the West Midlands, the average salary for an employee at a quoted, VCT-backed company is over £41,000 rising to more than £47,000 at unquoted VCT-backed companies. The average wage across the region is around £30,000.