Hunting for unicorns could see us miss the easy targets
Every year, the health of Britain’s venture economy, and particularly tech, ecosystem is judged by the number of unicorns – companies that have secured billion-dollar valuations.
The number of unicorns goes up, and the growing strength of the emerging next generation of UK businesses is celebrated. At the pinnacle of the apex, it’s a good measure.
However, the pandemic has in many ways shone a light on small businesses, the entrepreneurs leading them and the important role they play as an engine for the economy and its employment base. Whilst it is those businesses that raise the largest sums that capture the headlines it is the much greater number of innovative, fast-growth entrepreneurial success stories where much of the venture funding is focussed.
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The full business landscape has been hit hard by the pandemic, but among the most affected have been those smaller British businesses just starting on their scaling up journeys.
If we truly hope to ‘build back better’ after the pandemic, we must prioritise the tens, if not hundreds of thousands of strong, high potential businesses across the country.
We need to ensure long-term, patient capital is available to the many; building £10m; £25m ; £50m or £100m of value across multiple businesses in multiple sectors adds to our economic wealth and high value employment.
Whilst some sectors naturally attract attention; fintech and edtech to name but two, the niche innovator can still provide value, whether this is a new project management tool for the construction industry or diagnostics technology for specific oncology applications. Businesses in these sectors have all delivered significant growth, employment and value creation – but not necessarily headlines.
There will always be a place in the investment pathway for the big bets on the companies that will fundamentally disrupt a sector. But as we recover from one of the most significant economic crises in living memory, a more holistic view of the venture funding landscape is required.
Under stakeholder pressure to see return on investment, the biggest VCs will naturally have a bias towards those scale-ups with the best characteristics to scale.
While it is important for the UK to continue to develop these businesses and for them to attract capital, arguably of equal importance is to ensure that capital to smaller emerging business continues to flow, as their combined value creation and employment base will likely exceed that of the unicorn.
We risk backing the few and forgetting about the many. To support a business-led recovery, there is a more urgent need for funding to be channelled towards a wide range of companies, rather than a tiny volume of innovative entrepreneurs.
The investor community will undoubtedly have a role to play in supporting the UK’s road back to prosperity, particularly given the reliance of fast-growth, often pre-profit companies on the venture capital purse. The full ecosystem has a role to play in this – from government to the largest VCs and all the support schemes in between.
A key part of this is to more evenly spread investment between companies at different stages, rather than those at Series C and beyond. For investors to have a positive impact on the recovery, it will be through supporting companies far earlier in the investment pathway.
Further to this, there must be emphasis on supporting scale-ups all around the country.
However, the latest data from Beauhurst highlights that high-growth companies in London secured 58% of equity deals in 2020, a proportion not compatible with a recovery that is dependent on ‘levelling up’ and regional growth. When cultivating a vibrant ecosystem, it’s important that focus is given to regional talent and regional clusters. London will remain at the forefront but the regions need to feed off its success rather than be starved by it.
To do this, government has a role to promote the infrastructure it already has in place to achieve this. Over the past year, many businesses have latched onto the Chancellor’s various financial support packages, despite criticism that many have fallen through the cracks between such schemes.
But a framework for public-private investment in growing businesses already exists.
Between Venture Capital Trusts, or those targeting seed-stage companies such as EIS and SEIS, funding infrastructure is in place to pool patient capital and inject it into businesses of various stages around the country. Although businesses have been vocal in their concerns on the short-term impacts of Brexit, a departure from EU State Aid regulation could provide an opportunity to expand this framework, and therefore the support given to our scale-ups.
Whether a robotics company in Newcastle or a marketing software firm in Norwich – growth businesses sit at the heart of the economy.
Yes, it is essential that we continue developing the next world-beating British companies, but that has to be done in tandem with ensuring there is sufficient capital for all the other growing companies that play their own role in providing exports and attracting talent to our shores. In the current economic environment, the road to success will require a more patient approach built on sustainable growth.
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