How One Fairness Investor Is Searching for To Entice Onerous-To-Attain SMEs

Each January, a slew of emails arrive in my inbox providing statistics, evaluation and touch upon VC funding into Britain’s startups and early-stage companies. For these with an curiosity within the well being and prospects of the U.Ok. innovation economic system, the varied experiences often make for heartening if considerably predictable studying. Frankly, we’ve all develop into used to the truth that fairness funding – even within the face of Brexit and Covid – stays on an upward pattern.  

Witness the newest figures from London & Companions and Dealroom.co. In response to the information, London is presently the world’s fourth most engaging funding hub, having attracted $25.5 billion in VC money in 2021.    

With a lot capital out there, it will be simple to imagine that for startups and comparatively early-stage corporations, essentially the most pure factor on the planet is to exit into the market and lift as a lot money as is humanly potential from prepared VCs. However there may be maybe one other aspect to the story. Not all entrepreneurs welcome the prospect of dilution and nor are they all the time desperately eager on committing themselves to an exit that aligns with the expectations and timelines of enterprise capitalists. Consequently, they could be reluctant to hunt fairness finance, even when it will assist them to develop extra shortly.  

It is also vital to notice that whereas VC funding throughout the entire of Britain continues to rise, London nonetheless attracts the lion’s share.

In opposition to that backdrop, BGF (Enterprise Progress Fund) has sought to fill a spot within the SME finance ecosystem.

Based eleven years in the past, BGF prides itself on being an SME-friendly investor. In offering affected person capital to assist long-term tasks, it typically takes a minority stake within the companies it backs. It has additionally gone out of its solution to be accessible, having made some extent of opening places of work throughout the U.Ok. reasonably than specializing in just a few established entrepreneurial hubs. Final 12 months it invested a document £600 million, up 55 % from the 12 months earlier than.  

As Chief Funding Officer, Andy Gregory explains, from the outset, BGF sought to be enticing to SME homeowners who would possibly in any other case have been reluctant to cede any diploma of possession in return for fundingl.  “We got down to be a minority investor,” he says. “As such, we’re a junior companion. We thought that will make us a extra enticing supply of capital.” 

As issues stand, BGF it has sixteen places of work throughout the U.Ok. and Eire, permitting it to construct relationships with potential investees and companions akin to consultants, finance brokers and banks on a region-by-region foundation. “We discover that having a presence on the bottom is totally essential to the work we do,” says Gregory.  

A Query Of Belief

Whereas BGF makes investments on the idea that entrepreneurs will in the end work in direction of some sort of exit, Gregory says there is no such thing as a quick time period strain. Founders can work to their very own timelines and money in when the time is correct for them. Underpinned by this philosophy, the agency has positioned itself as a supply of affected person capital. An investor that may give its portfolio corporations time to develop their merchandise.

All this sounds extremely benevolent – minority stake funding with no strain for an exit – however how does it work in follow? In any case, BGF is in the end looking for to safe returns for its shareholders and that in the end requires some extent when all events can promote up and transfer on.   

Gregory says  BGF invests off its personal stability sheets and isn’t topic to the fund cycle that dictates the practices of many VCs. This implies its timelines are extra versatile. Nevertheless, he acknowledges that exit stays the endgame.  “As a minority shareholder, we will’t drive an exit. Nevertheless, we have now to consider the entrepreneurs we work with do wish to exit in some unspecified time in the future.”  

So a specific amount of belief is required and Gregory says quite a lot of effort goes into constructing a relationship with founders earlier than investments are made. Publish funding, it offers value-add assist to assist its corporations develop. It should, for instance, assist with the appointment of non sexceutive administrators by way of a nationwide expertise community.  

BGF logged 30 exits final 12 months. Some occurred after holding shares for a comparatively quick time, others had been long term. We had an exit with an funding we made in 2012,” says Gregory.”It was considered the precise time to exit.”

A Completely different Mindset  

Gregory says BGF’s method to funding has been profitable in serving to a broad vary of companies to succeed. However does its method – characterised by minority stakes and  long-term capital – enchantment to sure sectors?

Gregory stresses that BGF is a generalist investor, however in recent times it has been placing an rising quantity of emphasis on two sectors the place the provide of affected person capital aligns neatly with the realities of growing and bringing merchandise to market over protracted intervals of time  – particularly cleantech and life sciences.  

In opposition to the backdrop of Covid-19 and COP26, each sectors are sizzling in the intervening time. Which may change – tendencies within the innovation economic system come and go  – however Gregory doesn’t suppose so. “There’s a enormous demand for innovation,” he says. “We’re taking a really long-term view of each cleantech and life sciences “

He additionally sees an actual alignment between BGF and cleantech entrepreneurs, particularly. “We’re a purpose-mission pushed investor. The identical tends to be true of cleantech entrepreneurs,” he says.  

BGF has established itself as a major investor within the UK areas and it’s had notable successes. Having initially invested £3 million in meal supply firm Gousto, with comply with on rounds taking the full to £26 million, it has seen the corporate attain the coveted $1 billion unicorn standing.

Because the U.Ok.finance ecosystem develops, it stays to be seen whether or not fairness finance might be out there to an ever widening pool of SMEs. Within the present market, BGF sees a spot that also must be crammed.