How funding can accelerate scale
WAY TO
GROW
2
(source: Beauhurst)
(source: Beauhurst)
2017
8.27bn
invested in
1,505
companies
2015
4.3bn
invested in
1,010
companies
2014
3.4bn
invested in
739
companies
2013
4.3bn
invested in
488
companies
2016
3.9bn
Invested in
1,436
companies
Total investment in SMEs doubled in 2017, but the latest data reveals that surprisingly
few scaleups have secured external funding. Of the 35,210 in the UK, only 1,505 received
investment.
The investment landscape
The number of deals being brokered is encouraging, but growth capital has plateaued over
the past five years. Seed and venture stage funding still accounts for the majority of deals.
Number of deals
2013
2014
2015
2016
2017
260
310
440
310
460
620
300
540
690
270
460
700
280
530
690
Growth
Venture
Seed
3
Scaleup companies matter. They
are across sectors, in every area
of the country and are generators
of exports, jobs and growth in our
local communities. They are highly
productive, innovative, diverse
and international. Increasing their
numbers is vital for improving UK
productivity and national economic
growth.
Over the past few years, the number
of UK scaleups has grown. ONS data
indicates that the number of businesses
that can be classified as scaleups in
the UK has risen from 26,985 in 2013
to 35,210 in 2016. This is encouraging,
with these businesses generating an
estimated 900 billion in turnover and
3 to 3.5 million jobs.
However, we still lag significantly
behind international counterparts and
we need to continue to step up our
game if we are to realise our ambition
to be the best place in the world to
scale a business. While scaleups most
need help on talent, access to markets
and leadership, they also cite access to
finance - and notably patient capital - as
a barrier to their growth.
Scaling businesses consistently point
to the problems of finding long-term
investors for Series B and above,
which is why they have often turned
to overseas investors. This requires
deeper pools of connected capital in
the UK, available through the lifecycle
of a business to reach global scale,
sustained growth and longevity.
When it comes to finance, scaleups are
not just looking for cash: they want
smart money which brings knowledge,
skills and customer and market
connections with it.
Financial providers must work more
closely with local communities to
provide tailored solutions for scaleups
where they are based. But it's not
just a question of supply. It's also
important to increase the provision
of education about growth capital
finance so that scaleup leaders are
fully aware of all the available options
so they can structure their companies
appropriately.
The economic growth that scaleups
can generate will only occur if scaleup
leaders understand where and what
growth capital is available. We know
that learning from the experiences of
peers has the biggest impact. In fact,
nine out of ten scaleups believe peer-
to-peer networks are vital sources of
help when growing their business.
The Supper Club, which we re-endorsed
in 2017, has championed peer group
networking and learning for the past
15 years. With the emerging sentiment
among our fastest-growing firms
that the UK could become a harder
environment in which to scale, it has
never been more important to make
sure the UK is 'match fit' for scaling up.
We all have a critical role to play.
Together, let's make Britain the best
place in the world to scale a business.
Irene Graham, CEO of the ScaleUp Institute underlines the importance of scaleups in
today's economy.
WE NEED MORE SCALEUPS
FOREWORD
Irene Graham, CEO
ScaleUp Institute
4
Contributors
Adam Blaskey,
The Clubhouse
theclubhouselondon.com
Member insightpage 16
Aftab Malhotra,
GrowthEnabler
growthenabler.com
Industry insightpage 32
Andrea Reynolds
Swoop
swoopfunding.com
Industry insightpages 11 & 35
Christopher Baker-Brian,
BBOXX
bboxx.co.uk
Member insightpage 31
Chris Hulatt
Octopus Group
octopusgroup.com
Partner insightpage 48
Duncan Cheatle,
The Supper Club
thesupperclub.com
Founder insightpage 47
Edward Keelan,
Octopus Investments
octopusinvestments.com
Partner insightpage 29
Henry Gladwyn,
BGF
bgf.co.uk
Partner insightpage 28
Irene Graham,
ScaleUp Institute
scaleupinstitute.org.uk
Forewordpage 2
Marcus Stuttard,
London Stock Exchange
lseg.com
Industry insightpage 42
Matt Katz,
Buzzacott
buzzacott.co.uk
Industry insightpage 19
Reece Chowdhry
RLC Ventures
rlc.ventures
Member insightpage 25
Sam Smith,
finnCap
finncap.com
Partner insightpage 43
Stephen Welton
BGF
bgf.co.uk
Partner insightpage 49
Stuart Andrews,
finnCap
finncap.com
Partner insightpage 41
Tom O'Hagan,
Virtual1
virtual1.com
Member insightpage 35
5
EXECUTIVE SUMMARY


06
DOING IT FOR YOURSELF


08
FREE MONEY



10


Enterprise grants


11


R&D Tax Credits


12
DAY TO DAY FINANCE


13

Working capital finance

14
DISRUPTIVE DEBT



17


Peer-to-peer lending

20


Venture debt


20
EXPLORING EQUITY


21


Private equity


22


Risk capital



24


Angels



26


Equity crowdfunding

27


Venture capital


30


Corporate VC


32


Growth capital


34


Family offices


36
AIM HIGH




38


Floating your business

39


The cost of IPO


40
CONCLUSION



44
POLICY RECOMMENDATIONS

46
OUR SUPPORTING PARTNERS

52
ABOUT THE SUPPER CLUB

54
Contents
Disclaimer: This publication has been prepared for the exclusive use and
benefit of the members of The Supper Club and other contacts of The Supper
Club and is for information purposes only. Unless we provide express prior
written consent, no part of this report should be reproduced, distributed, or
communicated to any third party. You must not rely on the information in
this publication as an alternative to advice from an appropriately qualified
professional. In no event shall The Supper Club or any of those contributing
to this publication be liable for any special, direct, indirect, consequential,
or incidental damages or any damages whatsoever, whether in an action of
contract, negligence, or other tort, arising out of or in connection with the
contents of this publication.
6
USE IT OR LOSE IT
From the rise of fintech and peer-to-
peer lending to R&D tax credits and the
Enterprise Investment Scheme, there
have never been more ways to fund
scale. But too few founders are taking
advantage of them.
According to the ScaleUp Institute's
latest survey of UK scaleup leaders,
there is a general reluctance to use
growth capital. Core bank finance
(loans, overdrafts and credit cards)
are still the most mentioned source
(39 per cent) and a quarter of scaleups
use leasing, money from friends and
family, or third-party loans.
Only 28 per cent report using equity
finance and a mere 13 per cent plan to
use it in the near future.
This might explain why there are
so few scaleups and high growth
small businesses (HGSBs), which are
generally defined as those with over 20
per cent annual average growth over a
three-year period, an annual turnover
of between 1 million and 20 million,
and more than 10 employees.
While access to talent and digital
infrastructure are frequently identified
as obstacles, scaleups need funding to
sustain and accelerate growth.
IN THE DECADE SINCE
THE 2008 CRISIS, THE
GOVERNMENT HAS
CREATED A BENIGN
ENVIRONMENT FOR THE
FINANCE INDUSTRY TO
INNOVATE FURIOUSLY.
BUT A RECESSION WILL
BRING INCREASED
REGULATION AND
TOO FEW FOUNDERS
ARE TAKING THE
OPPORTUNITIES
AVAILABLE TO THEM.
EXECUTIVE SUMMARY
Alex Evans,
Programme Director,
The Supper Club
7
We need scaleups to grow faster, and
we need vastly more startups to scale.
The figures are sobering. According
to the Octopus High Growth Small
Business (HGSB) report, despite
creating 3,000 new jobs each week and
contributing an astonishing 22 per cent
to the UK'S Gross Value Added (GVA),
HGSBs comprise less than one per cent
of companies in the UK.
That's a vast proportion of the UK's
economic potential concentrated in
the hands of relatively few firms and
it demonstrates the huge economic
incentive for Government to create
and support more HGSBs.
Poor uptake of finance among scaleups
is puzzlingand it's pivotal to the UK's
competitive edge.
What's behind this dearth of demand?
At The Supper Club's Foresight event,
The Future of Finance, low awareness
and limited understanding were
frequently cited as contributors to this
poor appetite for external funding.
Financial jargon was also highlighted
as a barrier to investment, with
founders having to educate
themselves about different kinds of
funding. It seems the finance industry,
while laudable in its efforts to create
a wealth of funding options, has done
a remarkably poor job of helping
business owners to understand them
particularly female founders.
Speaking at finnCap's Ambition Nation
event in March, Lesley Gregory,
Chairman of Memery Crystal, called
upon the funding industry to
demystify finance.
But psychological barriers are
paralysing many founders. Almost
60 per cent of those surveyed by the
ScaleUp Institute cite fear of losing
control or poor comprehension of
equity finance as obstacles to taking
the funding plunge.
The Supper Club has seen how peer
learning can help founders overcome
these barriers, with members sharing
their experiences of different funding
options to scaletheir average growth
is 34 per cent year on year.
We want to help all scaleups to
understand the impact the right
funding at the right time can have
on their growth. We also understand
that it's about more than money, and
members have valued the support that
should come with it.
Clearly, the funding landscape has
evolved faster than its perception. This
guide to raising finance is aimed at
closing that gap. It combines open and
honest insight from members of
The Supper Club each of whom
have used a broad range of external
financing with technical advice from
supporting partners who have helped
them.
It's a reminder that scaleups shouldn't
fear investment, but should expect
more from it. This is a rare moment
in British business history when high
growth entrepreneurs are so revered;
afforded so much Government
support, and investor appetite.
Scaleup leaders have more choice,
power and opportunity than ever. But
if you don't use it, you might not have
it for long.
"Entrepreneurs can have a tendency to hold themselves back during scale-up. We're good
at running a business; accessing capital is another skill. But there's only so far you can
go organically: without external investment, you can plateau. There is a fear of giving up
control that must be assuaged"
Shelley Hoppe, CEO, Southerly
8
DOING IT FOR
YOURSELF
Maximising your own revenue will generate
working capital and help you get better terms
from lenders and investors.
9
While this guide is primarily concerned
with the benefits of external funding,
it's crucial to first ensure your own
house is in order.
A business that washes its own face
will be an infinitely more attractive
investment for scaling.If you need help
financing the everyday operations of
your company, many members of The
Supper Club have implored peers to
first investigate other options, rather
than immediately reaching for working
capital finance.
To manage the perennial issue of late
payments they advise keeping a close
eye on the Cash Conversion Cycle
quicker money in from customers and
slower out to suppliers with incentives
to close the gap.
An oft-used phrase within the Club is
"cash is king, margin is emperor, and
it's margin that puts cash in the bank."
Many members believe that companies
should first focus their time and energy
on increasing profitability.
This point is echoed by member,
Stephen Sacks, who founded a new
venture called Funding Nav to help
scaling startups find cheap and even
free ways to fund growth.
Stephen finds that many young
businesses are too quick to seek
investmentwithout exploring the
possibility of raising working capital
through sales growth.
In theory, it's the business' customers
that should be doing the funding.
Often the reason owners require a
quick cash injection is because they
haven't been charging enough or
finding enough customers.
SELF GENERATED CAPITAL
Before considering any external funding, the key question any credible adviser will ask
is: 'has this business already optimised its own ability to generate incremental cash?'
"I know some businesses who have gone on
eight-month funding rounds, which seems
crazy when they could be improving net
margin organically"
Emma Wilson, founder, Harvest Digital
10
FREE MONEY
There are many sources of 'free cash' in grants
and credits but they remain largely untapped
because of low awareness and understanding of
how to access them.
11
Enterprise grants
Andrea Reynolds FCA explains the types of enterprise grants available and how
scaleups can increase their chances of qualifying.
Andrea Reynolds,
CEO
Swoop
Andrea Reynolds FCA is on the
Board of South East Midlands LEP,
a member of the Start-Up Advisory
board for Enterprise Ireland,
and provides access to finance
masterclasses under the European
Regional Development Fund in
partnership with Virgin.
She is also CEO of Swoop, a one-stop
shop for business finance with over
1,000 providers on its platform across
equity funds, family offices, angels,
grant agencies and loan providers in
the UK and Ireland.
Grant schemes vary in size and
complexity. Amounts range from as
low as 500 to 10 million. The higher
the amount, the more complex the
process. Most grant schemes open and
close several times over their lifetime,
so it's a challenge to keep up with what
is available and when. National and
European Funds are focused towards
research and innovation and improving
competitiveness. The main national UK
funding bodies are Innovate UK and
the recently formed UKRI. European
funding is also still available while the
UK remains a member of the EU.
The two main programmes Horizon
2020 and Eurostars both require
collaboration with other SMEs in other
EU countries. These national and EU
grants range from 25,000 to 10
million.
There are 38 Local Enterprise
Partnerships (LEPs) across England,
and each has their own grant
programme. An example is the
Growing Business Fund by New Anglia
LEP and Suffolk County Council. The
grant provides up to 500,000 in
funding and covers a maximum of
20 per cent of the overall cost of a
project. For example, if you apply for
400,000, you will need to find 1.6
million to cover a 2 million project.
The size and quality of grants vary
greatly between regions, so it's worth
contacting your LEP either directly or
via the Government Growth Hub in
your area. If you're exporting and your
bank or credit insurer can't help, you
may qualify for government-backed
finance or insurance from UK Export
Finance, the UK's export credit agency.
Typically, UKEF helps businesses
when the private sector finance and
insurance market is unable to provide
full support. Smaller companies may,
for example, have trouble securing
financial support in a situation where
an important contract proves too small
for private underwriters. UKEF offers
different products and services across
export finance and insurance.
12
R&D tax credits
Since being launched for small businesses in 2000, the research and development tax
relief has helped to boost UK innovation but is still chronically underused.
R&D tax credits work by allowing
claims against Corporation Tax
liabilities for money spent on
researching and developing innovative
products or services. Since 2014, this
can even mean a cash refund for loss-
making startups.
A total of 2.9 billion was claimed
in R&D tax credits by innovative UK
companies during 2015-16, according
to HMRC, with the average amount
of relief claimed via the SME scheme
increasing from 56,223 to 61,514.
There are two schemes: one for SMEs
and one for large companies. For the
former, the Government has extended
the standard definition of an SME
(under 250 employees) to include
companies with under 500 employees
and either an annual turnover of less
than 100 million or a balance sheet of
less than 86 million.
In 2015, a new, simplified process was
launchedthe Advance Assurance.
Under this scheme, open to small
companies turning over 2 million or
less and with fewer than 50 employees,
HMRC will allow claims without
inquiring into them further.
While HMRC can claw back this money
later if the relief has been claimed
for projects that don't qualify, it's a
big improvement on the previous
system, which was offputting to small
businesses and could take over a year
to process.
This is still a largely untapped source of
capital because founders either don't
know about it or if they qualify for it.
In October 2016, The Supper Club
called on HMRC to increase awareness
and understanding of this scheme in its
special report Britain Unlocked: A Tax
Code for Global Ambition.
HMRC updated its site in April 2018.
"R&D credits can be claimed in more areas
than you might think. It's always worth
claiming for failed projects written off
because they were obviously risky. And, you
can get the cash quicker than some other
sources of capitalas little as 12 weeks."
Stephen Sacks, founder, Funding Nav
To check if your
project qualifies, visit:
gov.uk/guidance/
corporation-tax-
research-and-
development-rd-relief.
According to
Forrester's 2016
research, whilst 80
per cent of companies
intended to innovate
in the next three
years, only 20 per
cent were intending
to make an R&D tax
credit claim.
13
DAY TO DAY
FINANCE
While better cashflow management can provide
some working capital, there are numerous
alternatives to debt and equity.
14
Stock finance
For those looking to explore a more
innovative investment vehicle, some
companies use stock finance as a
mechanism to release working capital.
Here, lenders purchase the goods from
the seller on behalf of the buyer or
business owner.
Invoice discounting
Another frequently-used working
capital solution is invoice discounting.
This releases funds from your unpaid
invoices to help manage cash flow,
while you maintain responsibility for
collection of payments. By receiving
cash as soon as a sales invoice is raised,
the business will find that its cash
flow and working capital position is
improved. The business will only pay
interest on the funds that it borrows,
in a similar way to an overdraft, which
makes it more flexible than debt
factoring.
Debt factoring
Debt factoring is a similar method to
ease invoicing woes. Here, companies
can sell their accounts receivable as a
complete transactionceding control
over collection altogether. This credit
control and collection service is an
additional benefit, enabling you to
focus your resources on other areas of
your businessparticularly useful for
smaller businesses.
Watch out:
While flexible and
relatively quick to
organise, stock finance
can be costly and
the security may be
difficult to assign.
Watch out:
Invoice discounting
may make it harder
to secure other more
conventional loans as
the lender will require
accounts receivable as
part of the collateral.
Watch out:
Your credit ratio could
be affected because
your book debts will
no longer be available
as security.
Working capital finance
A wide range of alternatives to traditional debt routes like overdrafts has emerged to
shepherd companies through inevitable teething troubles in early stages of growth.
Founders are no longer restricted
to overdrafts and business loans,
but these vehicles remain the most
common way to inject cash.
Where process optimisation and
increasing profitability is proving
difficult or where a cash injection is
needed sooner traditional debt is
still worth considering as it, too, has
evolved. New lenders such as ESF
Capital (part of Thin Cats) offers SMEs
secure loans between 100,000 and
5 million over a period of up to five
years. Larger banks, such as Santander,
have introduced flexible growth capital
loans suited to the scaleup's needs.
Secured loans
Secured loans, which require collateral
such as property or another tangible
asset, usually yield higher amounts
with lower interest rates than
unsecured loans as the lender can
repossess the collateral. A secured loan
is like a credit card, with no need to
provide collateral (some lenders may
ask for a personal guarantee).
Unsecured loans
Unsecured loans tend to have lower
limits and higher interest rates but are
quicker to secure. New players include
online portal, Caple, where applicants
input growth stats and forecasts for an
unsecured loan at rates of 611 per
cent.
15
Bridging finance
Bridging finance is another option.
Bridging loans became very popular
after the recession and, between
2011 and 2014, gross lending more
than doubled from 0.8 billion to 2.2
billion.
Quick and flexible, they can be
obtained in a matter of days, and
improve your negotiating position
as a cash buyer. However, interest
compounds every month the loan
remains unpaidand many default
because of high-interest charges.
Pension-led funding
Pension-led funding is still a relatively
unknown product within alternative
finance, but for some firms, it's
incredibly useful. If your business needs
a loan, it can borrow money from
the personal pension of one of the
directors and pay it back with interest.
Alternatively, the pension can invest
directly in the business. Although it's a
complex vehicle, there are significant
benefits for businesses in certain
situations, and it's well worth exploring
as an alternative route to business
finance.
Firstly, it allows you to borrow funds
from an existing pension within HMRC
rules. The turnaround is relatively
swift, with six to 10 weeks from quote
to drawdown and it promises more
security and independence than some
traditional forms of lending.
Asset finance
Asset finance works by paying in
instalments over a period, with the
asset used as security until the last
paymentwhen ownership transfers
to you. Asset finance can be used for
buying computer systems, specialist
machinery, property or vehicles. It has
grown in popularity, with 2016 marking
its sixth year of consecutive growth.
The advantages are improved cash-
flow and balance sheet strength in
exchange for an increase in monthly
operating costs over the life of the
lease or hire purchase agreement.
Watch out:
Bridging finance rates
are higher than other
forms of finance and
penalty interest rates
can be extremely
punitive.
Watch out:
Remember that you
can't claim capital
allowances on a
leased asset if the
lease period is less
than five years.
Watch out:
Be aware that any
business failures
could have a drastic
impact on your
retirement finances.
16
The funding spectrum
Adam Blaskey, a former banker,
developed high-end, central London
residential property projects under
the banner of Northbeach and
Northbeach Capital Partners for
over a decade. Having spent much
of his working life meeting in hotel
lobbies and coffee shops, he decided
to launch The Clubhouse in 2012. This
private business members club and
meeting space has since grown into
a network around London. Adam has
raised finance from a wide variety of
sources, from crowdfunding through
Seedrs and venture debt from the
British Business Bank to private
investors from his club's membership.
How have you raised investment and
what types of funding have you used?
When pitching for investment, you
need to present the problem you're
solving, your understanding of your
customer base, market potential,
your operating model, your revenue
streams, and a clear vision, mission,
and purpose. We've raised different
forms of funding, from equity to
convertible loans, venture debt
and asset finance. The first was an
SEIS equity round where we raised
150,000 from ten angel investors
and we've gone on from there with
different equity rounds.
What did you learn from raising
investment through crowdfunding?
We did a crowdfunding round on
Seedrs a couple of years ago to allow
some of our members to put their
money where their mouth is. They've
always been great fans and advocates
of what we do, and when we were
raising a bit of early-stage capital
before going for larger venture debt
or PE rounds, we wondered if our
members would support us which
they did. Crowdfunding was great for
profile raising and awareness but there
are better solutions for higher levels of
growth capital.
What has been the easiest source of
funding, and what do you wish you
had known before you started?
To date, most of our funding has come
from friends, family, connections, and
various introductions. My advice to
anyone raising money is to build in
enough comfort room in your model
and raise slightly more at the outset
so you don't have to worry about
cash flow as you're growing. You need
to have an optimistic plan which is
realistic at the same time.
What is the most valuable lesson you
have learned about raising finance?
The best lesson I've learned is that
there are lots of different sources of
funding available. On the one hand,
there is lots of money out there, but
getting that money committed and
invested in your business is not as easy
as it may seem. It takes a lot of hard
work. Remember that there are more
options than equity.
My recommendation would be to look
at everything from asset finance and
discounting to venture debt. I used
an adviser to help me find the right
option, as they can help you to explore
all options and answer the trickier
questions during the due diligence
process.
Adam Blaskey, founder and CEO of The Clubhouse, explains the range of funding
options he has used at different stages of scale.
MEMBER INSIGHT
Adam Blaskey,
founder,
The Clubhouse
17
DISRUPTIVE
DEBT
There is a raft of new lenders and debt solutions
challenging traditional lending terms to enable
businesses to scale without surrendering equity.
18
The term debt alone can send a chill
down the spine of some entrepreneurs
and many have been deterred by
conditions, financial covenants, hidden
costs and redemption penalties.
Mike Lander, founder of Ensoul and a
member of The Supper Club recalls his
experience of debt finance.
"Having borrowed over 7 million
between 2007 and 2009, I know only
too well the impact of having a bank
looking over your shoulder every
month, especially if you breach any of
your loan covenants.

You can quickly find that what
you thought was an arm's length
relationship with your bank with
you in complete control turns into a
situation whereby they have significant
and very real powers to force your
hand."
Banks are most interested in lending
over 2 million and tend to lend on
1.52 times consolidated earnings,
before interest, taxes, depreciation, and
amortization (EBITDA).
Because early-stage businesses are
higher risk with generally fewer assets,
they will often be asked for a personal
guarantee from the owners and
directors. This has deterred members
DEBT FINANCE IS
PREFERABLE FOR
FOUNDERS RELUCTANT
TO GIVE UP ANY
CONTROL OVER THEIR
BUSINESS, BUT IT
OFTEN COMES WITH
OTHER RESTRICTIONS
DEBT...
BUT NOT AS YOU KNOW IT
19
Matt Katz, Head of Corporate
Finance at Buzzacott, offers five
tips for avoiding or mitigating
personal guarantees
1. Align your borrowing with
a personal investment in
the businessbanks will be
more comfortable in waiving
a personal guarantee if an
entrepreneur is visibly investing
themselves but timing is
crucial. Banks often ignore
'historic' investments, no
matter how close to the loan
application they were made.
2. Build a good track record
before askingthe better
a bank knows you the less
likely it is to ask for a personal
guarantee.
3. Rule out a personal guarantee
agreement at the outset
this may restrict the pool of
potential banks but if you have
a good business you are still
likely to find a supportive bank.
4. Negotiate a limitationeither
to a timescale (12 months
for example), milestone (such
as the investment reaching
an agreed return) or size (a
guarantee limited at 25,000,
for instance, will in theory put
you 'on the line' but shouldn't
lose you your house).
5. Consider your lender
carefullymainstream banks
are unlikely to call upon the
guarantees as long as you have
'behaved' as an entrepreneur.
Smaller banks and other
lenders tend to enforce them
more frequently whatever the
circumstances.
REDUCING PERSONAL RISK
because a personal guarantee merges
your business and personal risk,
meaning that should your business be
unable to pay off the loan, your savings,
real estate and even valuables are on
the line.
And there are hidden threats to look
out for like Material Adverse Change
(MAC)a contingency provision often
found in venture finance contracts
and lending agreements. It grants the
lender a right to back out or call in
debt in the instance of a 'major adverse
change' in the company or even the
broader market.
The good news for borrowers is that
MACs can always be heavily negotiated
and because a material adverse
change is notoriously difficult to
establish are not commonly used to
default a borrower.
Indeed, recent case law restricted their
scope considerably: most significantly
ruling that the burden of proof is on
the lender to show that a MAC event
has occurred.
But the landscape is changingfast.
Challenger banks have prospered by
breaking these conventionsoffering
different lending options and assessing
risk by other factors like balance sheet,
customer base, and growth potential.
"Being able to make quicker
decisions based on data in a
more informed way is the biggest
disruption in lending because we
can lend more to entrepreneurs at
a cheaper cost"
Cristina Alba Ochoa, CFO, OakNorth
20
Four years on from Santander's
landmark partnership with Funding
Circle, peer-to-peer (P2P) lending is set
to disrupt business lending further.
Players including Zopa have now
gained full authorisation from the
Financial Conduct Authority to offer
innovative finance ISAs (IFISAs).
Peer-to-peer lending
P2P lending has grown dramatically since the financial crisis and innovation is set to
boost its uptake even further.
IFISAs allow individuals to use some
(or all) of their annual ISA investment
allowance to lend funds through P2P
lenders with tax-free interest and
capital gains.
These, it is predicted, could help unlock
an estimated 80 billion in cash ISAs
for small business growth.
Watch out:
If your credit score
isn't great, a higher
interest rate will cost
you more in the long
run so it's better to
improve your credit
before applying.
Available earlier and in larger amounts
than traditional bank loans, venture
loans tend not to ask for personal
guarantees.
OakNorth, which backed the Leon
restaurant chain, lends between
500,000 and 30 million at rates of
between 5 per cent and 10 per cent.
Co-founded by The Supper Club
member Joel Perlman, it has disrupted
business lending with faster decisions
backed by its ACORN platform. Its
impressive growth indicates that it has
uncovered an unmet need; achieving
unicorn status and 10.6 million profit
in just two years.
Silicon Valley Bank (SVB) was one of
the first to accelerate venture debt
Venture debt
Venture debt is becoming increasingly popular. These loans are provided by specialist
lenders to pre-profit SMEs with an established business model.
to the mainstream for early-stage
businesses. Other venture debt players
include Boost & Co and BMS Finance
funded by the British Business Bank
and offer loan rates between 11 and 15
per cent, depending on the risk of the
business.
Boost & Co lends throughout Europe
and favours industries such as software
services, internet, life sciences,
hardware, and cleantech, while BMS
Finance lends in the UK and Ireland.
Traditional banks are trying to disrupt
the challengers. Santander Growth
Capital Loans are available to UK
businesses with a turnover between
2.5 and 50 million, and 20 per cent
growth, at a rate of 10 per cent per year
plus 10 per cent fee at the end.
Watch out:
Venture debt
can come with
unattractive financial
covenants which
trigger defaults if
certain metrics aren't
met.
"UK banks don't understand tech companies and they're less tolerant of low or no profit.
By contrast, Silicon Valley Bank gets tech companies and their growth potential"
Steve Phillips, founder, Zappi
21
EXPLORING
EQUITY
Equity investment doubled in 2017, but are you
prepared to relinquish some control of your
business to achieve the next stage of growth?
22
According to data from Beauhurst,
8.27 billion was invested in SMEs in
2017 more than double the previous
year with firms at every stage of
development receiving more cash
than any period on record. The biggest
increase was at the growth stage, with
investment leaping from 2.4 billion in
2016 to 5.5 billion.
Although the number of high
growth firms hasn't risen in line with
the increase in funding available,
they continue to have a hugely
disproportionate impact on the
economy.
The third Octopus High Growth Small
Business (HGSB) report shows that,
despite comprising less than one per
cent of UK companies (22,074 out of
5.6 million), HGSBs created one in five
new jobs and contributed 22 per cent
of economic growth. So, if access, or
attitudes, to finance is a barrier, it's in
all our interests to remove it.
A common misconception amongst
founders is that equity investment
means ceding control. While it's not
unheard of for investors to restructure
leadership teams, they ultimately have
an interest in making your business
succeed.
The spectrum of private equity
investment is broad, from angels and
equity crowdfunding to venture and
growth capital. At the larger end,
private equity tends to invest for a
YOU MIGHT BE
STEADFAST ABOUT
AVOIDING DILUTION,
BUT AN EQUITY
INVESTOR CAN BRING
A LOT OF VALUE
AT BOARD LEVEL.
THEY CAN HELP YOU
FOCUS ON YOUR
GROWTH PLAN, BRING
VALUABLE BUSINESS
CONNECTIONS
AND KEEP YOU
ACCOUNTABLE TO
AGREED OBJECTIVES
PRIVATE EQUITY
23
majority stake in a mature, profitable
company while earlier stage investors
take minority stakes in younger
growing businesses.
Blackstone, which recently acquired
a majority stake in The Office Group
for 0.5 billion, is amongst the largest
private equity investors. ECI Partners
invests in management buyouts and
buy-ins for majority or minority equity
investments in midsized UK growth
companies, with deal sizes of 20
million to 150 million, while LDC
provides up to 100 million for buyouts
and development capital transactions
in UK unquoted companies.
BGF is the most active investor of
growth capital in the UK and Ireland
with more than 2.5 billion to invest (it
has backed 222 companies since 2011).
BGF specialises in minority stakes and
invests in a broad range of companies
across all sectors, from post-revenue
start-ups to more established
businesses with revenues up to 100
million, as well as listed firms.
Each type of investor can offer value
beyond capitalsharing relevant
skills and experience, introducing new
partners, sourcing the best advisers,
and helping to secure big clients.
Access to senior executives is another
key area of value, and differentiation,
with investment firms building more
entrepreneurial talent networks to
support investees.
"It's important that you look
for investors who provide
'Money Plus'. They need to
be able to give you sound
advice, introduce you to
potential clients, or help
drive the business in the
right direction"
Suzanna Chaplin, MD, ESBConnect
Alistair Brew, Investor at BGF
"Chemistry is important. The
founder should feel that the
investor has empathy with
their vision for the business.
Hopefully, the entrepreneur,
in turn, understands that a
little more structure as it
grows is going to help with
that journey."
Watch out:
Corporate finance
advisers warn that
funds of 1 million
could cost you 3
million over the
lifetime of the
investment.
24
The range of options for equity
investment is vast. For early stages
of growth, a burgeoning fund
management industry has grown
around the Enterprise Investment
Scheme (EIS) and Venture Capital
Trusts (VCT).
Investors can offset part of the cost of
their investment in a small or medium-
sized business against their income
tax and qualify for exemption from
Capital Gains Tax on the sale of the
shares. According to corporate finance
partners and members, EIS and VCT
tend to look for smaller multiples of
five to seven times ROI within five
years. Focusing more on sales than
profit initially, investors look for 'J'
curve businesses where the investment
builds on a foundation for growth.
The Seed Enterprise Investment
Scheme (SEIS) comes with 50 per cent
relief but it's capped at 150,000 to
the company. SEIS has been credited
for the start-up boom of recent years,
but raising finance is a lengthy and
time-consuming process and 150,000
will be used up quicklywith founders
having to get follow-on EIS funding.
It also encourages founders to deal
with investors too early in the scaleup
lifecycle when they could find other
ways of raising working capital.
EIS and VCT offer income tax relief of
30 per cent to investors who subscribe
for shares in qualifying companies. In
April 2018, under the new Finance Bill,
the annual investment limit doubled
from 1 million to 2 million, and from
5 million to 10 million for 'knowledge
intensive' companies. Entrepreneurs
can also choose whether their firm's
10-year eligibility for EIS is measured
from the date of their first commercial
sale, or the date from which their
annual turnover first exceeds 200,000.
This will boost already growing
investment through these schemes.
VCTs raised 728 million in 2017/2018
compared to 542m for 2016/2017.
Octopus is the UK's largest VCT
manager with more than 900 million
invested on behalf of 30,000 investors
since the scheme was launched.
Risk capital
Tax reliefs to compensate for riskier investment in small private companies has been a
game changer for SMEs and the UK economy.
Watch out:
It can take longer to
secure this funding
than you expect: get
the best lawyer you
can afford to highlight
the things to look out
for and help you avoid
awkward provisions
in shareholder
agreements.
2,360 companies
raised a total of
180m
of funds under the
SEIS scheme
In 2015-16
3,470 companies
raised a total of
1,888m
of funds under the
EIS scheme
"VCT is a good source of patient
capital but it takes a long time
to get approval. Rules have been
tightened to prevent abuse, but
we nearly didn't qualify because
our business started as a hobby.
This needs to be taken into
account so it doesn't disqualify
other scaling businesses"
Simon Hay, Co-founder, Firefly
25
Risk capital to scale
Reece Chowdhry has helped grow LandlordInvest into a multi-million-pound business
in two years and is the founder of RLC Ventures.
MEMBER INSIGHT
What are the advantages and
disadvantages of risk capital?
We used SEIS and EIS to support
cash flow in the early stages of
LandlordInvest. The tax breaks are a
big advantage of SEIS for an investor,
but it can attract the wrong type
of investor if they are just trying to
mitigate their tax bill.
Debt is quicker to secure with far less
documentation. It can take two to
three months to process SEIS. But,
like a lot of businesses, LandlordInvest
wouldn't have got funding without
SEIS.
Greater awareness of investment
opportunities in early-stage businesses
and an increase in risk appetite from
investors has brought more money into
the small business community.
It provided the lifeblood for
LandlordInvest and the working
capital for key hires. The value beyond
capital has been strategic introductions
from investors, access to senior talent,
and getting some amazing investors
on board. The rigour from investor
expectations around due diligence also
helped us professionalise the business.
Access to advice when you need it
is invaluable. RLC Ventures set up
a WhatsApp group for investors so
entrepreneurs can reach out to us
24/7. I would have benefited from this
pastoral care in the early stages and
implemented it in my own business.
Were there any challenges?
Time and legals were the biggest
lessons. It always takes longer to secure
funding than you expect, and you
need the best lawyer you can afford
to highlight the things to look out
for. They can help you avoid awkward
provisions in shareholder agreements
that can come back to haunt you.
LandlordInvest was approached by
some investors who over-promised
and under-delivered. I would be more
patient, wait for better investors, and
be clearer about expectations. You
can't rely on a handshake so document
everything in the right format to make
it legally binding.
What advice would you give other
founders looking for investment?
Understand where you are in the
funding lifecycle: you can raise seed
capital through friends and family.
Also, don't fall into the trap of solely
focusing on funding instead of growing
your business. Get someone to find
funding for you so you can continue
making your business even more
attractive for investment.
What needs to change in the current
legislation?
You should be able to invest in startups
with your ISA savings. There is an
estimated 259 billion in UK cash
ISAs and this could be optimised for
seed-stage investment in growing
businesses.
It should be much easier to navigate
and process S/EIS and there is still a
poor understanding of tax- efficient
schemes. There is little or no awareness
of SITR (Social Investment Tax Relief)
and it's such a good scheme that could
boost social impact.
Reece Chowdhry,
founder, RLC
Ventures
RLC Ventures invests
in startups; providing
seed-stage capital
for fintech, proptech,
sports tech, and tech
for good causes.
26
An angel investor uses their own
capital to fund the growth of a small
business at an early stage, often
contributing their advice and business
experience.
EIS and VCT tax breaks have swelled
the angel community, and the level of
involvement of angel investors varies
dramatically. Those who have built and
sold their own businesses will generally
feel a closer affinity to the founder.
"When looking for a good angel
investor, the single most important
factor is personal fit," says Andrea
Reynolds, CEO of Swoop. "Do they
understand the market you serve? Do
you both have a good chemistry?"
An interest in your business and
proven connections within your
market will make for a healthier and
more impactful relationship. It's fair
to expect a process with any investor,
that each meeting is getting you both
towards a decision. There should be a
step forward every two weeks at most."
Andrea warns against time wasters. "Be
wary of angel investors that put you
through endless due diligence as they
either get cold feet, never intended
to invest, are hobbyists, or it's a delay
tactic for the business to become so
cash stretched they can get a better
deal.
Keep an eye out for other red flags
alsoparticularly term drivers who
offer, say, 500,000 to spark the round
and then, as it gains momentum, start
to reduce personal investment while
seeking to gain shares or a position
within your company."
Angels
Angel investment fills a vital gap in the early stages of scale, with budding businesses
using this stepping stone finance before they transition into venture capital.
Investors will expect the founder
to pitch the opportunity, but it's
a good idea to have a financial
director in the pitch to talk about
the numbers.
When compiling your pitch deck,
make sure it includes the following
points:
1. The problem you're solving
2. What is unique/differentiated
about your solution
3. Market size and growth
potential
4. Key competitors and your
differentiators
5. Customer segments and
geographies
6. Growth plan and roadmap
7. Top line P&L and financial
projections
8. Leadership / Management
team
9.
Investment required, how it
will be deployed and the exit
timeframe/valuation
10. Other ways the VC can support
scale
TACTICAL TIPS
YOUR INVESTOR PITCH
27
The UK industry is regulated by the
FCA, highly competitive, and growing.
Despite a dip in deal numbers in 2016,
the crowdfunding boom returned
last yearattributable to its inherent
ease to both list and invest. As a
bonus, those seeking investment also
gain profile from a highly marketed
platform and confidence in the founder
and their business from a broad range
of advocates. For those looking to
invest, all of the research and due
diligence is taken care ofpeople can
either opt in or out.
Advice from members who have
sought investment through
crowdfunding is to participate as an
investor first to understand the process
from both sides. Look for the most
active platform for the best chance of
generating interest.
They also advise creating PR and
marketing collateral for your company,
product or concept and use this as part
of your application. As with any form
of investment, you need to be able to
answer any question about why you
need it and how you will deploy it. So,
do your homework on the financials as
people will ask probing questions.
Equity crowdfunding platforms
vary, with different fee models and
structures for raising capital. Many
have a lead investor for each funding
round and an expert panel to offer
analysis and guidance to both investors
and investees.
Some platforms take an equity stake
and arrangement fee for hosting
a pitch. As a benchmark, equity
crowdfunding fees range from 5 to
7.5 per cent of a successful raise, but
members warn to look out for other
payment processing fees. Indeed, some
platforms have begun to take a cut of
investor profits. Remember that if you
do manage to negotiate a better deal,
you should ensure that this agreement
also covers future rounds.
While valuations are primarily led by
the founder, some platforms have
an in-house investment team who
will mediate valuations. Others can
choose not to list you if they feel it's
too overvalued. Platforms usually let
the market decide if valuations are fair,
but everything should be supported by
evidence.
While it's an intensely competitive
industry, Crowdcube, Seedrs,
SyndicateRoom and Venture Founders
dominate by deal volume and size.
According to Beauhurst, Crowdcube
was the top-ranked platform by the
amount of investment facilitated,
whilst Seedrs participated in more
deals. According to Off3r, a comparison
site that lets retail investors compare
investment options, Seedrs took the
largest deal in 2017, raising 6 million
in one campaignfor itself.
Equity crowdfunding
Crowdfunding has democratised equity investment. Now a key part of the finance mix,
it bridges the gap between friends and family and angel or VC investment.
Watch out:
Equity crowdfunding
boosts the profile of
a business but failure
is just as public and
30-40 per cent of
companies do not
reach their target.
"Crowdfunding has democratised equity
investment and brought more private capital
into small businesses. We must give credit
to the regulators for allowing innovation to
flourish"
Stephen Welton, CEO, BGF
28
Investing growth capital
Henry Gladwyn, an investor at BGF's ventures team, offers insight into how to pitch
for investment and what investors in earlier stage companies look for.
Henry Gladwyn,
investor,
BGF Ventures
What kinds of businesses do investors
look for?
In contrast to private equity (PE)
which looks for later stage, viable and
profitable businesses with lower but
steady growth venture capital (VC)
expects at least 50 per cent growth per
year and over 80 per cent margin from
SaaS businesses.
In Europe, VC has almost exclusively
invested in SaaS and marketplace
businesses, but BGF looks at
businesses across a range of sectors
from MedTech to extreme-sports
brands.
Currently, there is a lot of money
looking for investment and the more
established the fund the more it needs
to invest.
That means PE funds are risking up to
invest in earlier stages of growth and
VC is considering lower growth.
How should earlier-stage business
owners pitch for investment?
While PE investors are more interested
in the numbers, earlier stage
investors are more interested in the
growth story and how it can support
accelerated growth.
So, present the problem you're solving,
why you will dominate the market, and
for how long.
The most important numbers relate
to the size of market and opportunity.
The predictability of your business is
a strong element when pitching, so
think about all possible challenges.
Earlier-stage investors are looking at
the idea and the management team.
As a founder, you need to inspire
confidence in your ability to lead and
deliver growth, with a solid leadership
team including a strong FD or CFO.
Often, the decision to invest is made by
the Deal Lead who you will speak to at
the pitching stage. They will feedback
to an internal committee and come up
with questions that structure the due
diligence process.
What board level input do investors
expect?
BGF will often help companies appoint
a chair or non-exec on your board
(if you don't already have one) as
a bridge between the investor and
management team.
A NED should typically spend two days
a month on the business, one for board
and one for the board pack.
The NED should be right for your stage
of scale, so if they aren't right for the
next phase you should rotate them out
to bring in someone more qualified.
A good NED should be motivated by a
genuine interest in your business and
it's potential, so they are more likely to
invest rather than look for fees.
How can founders get the best
valuations for their business?
The market will set the valuation, not
the business owner so you need to be
realistic about your growth potential.
The downside of excessively high
valuations is having to deliver against
unrealistic growth targets.
PARTNER INSIGHT
29
Value beyond investment
Investors should offer long-term
support and funding to build up a
strong relationship with management
and become a trusted partner to the
business.
Our team invests from the Octopus
Apollo VCT, which is a sector agnostic
fund specialising in providing patient
capital of between 2 million and
10 million, often through multiple
funding rounds, to commercialised
businesses with annual revenue in
excess of 1 million. Investments are
structured through minority stakes
(10 to 30 per cent) and flexible debt to
minimise dilution.
Fast-growing businesses can get
too caught up in the running of
the business and this was the case
with SCM World, as CEO and The
Supper Club member Oliver Sloane
explains: "When Octopus joined the
board, they helped us focus on how
we could make the business more
scalable and less dependent on the
founders. Together we identified
the most effective KPIs to measure
and use to drive strategic decisions.
We also formalised processes
for managing customer contract
renewals, to improve retention, and
we reconfigured and augmented the
senior leadership team to position the
business for rapid future growth."

Once integrated into the business,
the investor's skills, experience and
expertise can bring strategic value
to the board and help them execute
key decisions. Having invested in
well over 100 companies, we're able
to introduce portfolio companies
to one another or outside agencies
that can help them. When we first
invested in Care & Independence, it
was effectively four small companies
acting independently. Working with
Chairman Peter Toland, we introduced
branding and marketing consultants
to bring these companies together
to create one clear brand and a fresh
face for the company.
When there was a downturn in
the oil and gas sector in 2015, TSC
Inspection Systems came under
some pressure. Due to the speed in
which the market turned, customers
naturally paused before signing new
contracts and this put both strategic
and financial pressure on the business.
"Octopus helped by providing
emergency funding," explains CEO
Chris Walters. "They also created a
new incentivisation scheme for the
management team, assisted with
a business improvement plan, and
helped us identify an appropriate
long-term owner for the business."
This bought time to work together
on finding a suitable owner for the
business best able to benefit from the
technology and invest for growth.
It's important to understand the time
horizons of your investment partner.
Fundraising can take up a significant
amount of time and founders don't
want to be thinking about how they
are going to finance their business
every three years. We supported
Clifford Thames' rapid growth with
four funding rounds over eight years,
while helping it to develop new
products and explore new areas of the
market. This took time to bed in, so
our patient capital allowed it to make
long-term strategic decisions.
Edward Keelan, a growth capital investor at Octopus Investments, explains how
investors can make a positive impact on businesses beyond just providing finance.
Edward Keelan,
growth capital
investor, Octopus
Investments
PARTNER INSIGHT
30
VCs invest in companies at an early
stage of development who need cash
for talent and technology, accelerating
scale and increasing market share.
Fundraising can be very distracting, so
members recommend getting an MD
or COO who can run and manage the
business on your behalf, and a good FD
or CFO who can get your accounts in
order.
They also advise that you tidy up your
accounts and get clarity on how your
key metrics are calculated at least a
year before going out to pitch.
If you don't have a management team
in place, have a plan for building one
as a VC will expect to see it. They will
want a chairman on the board to act as
the intermediary between the founder
and investor, so try to recruit one
before pitching for investment or try
to influence the recruitment decision
to get a chairman who understands
entrepreneurial businesses and
founders.
A chairman will add structure and
accountability to board meetings,
make them more impactful, focused
on decision making and less of a
reporting function. Before looking for
VC, members advise that you draft
a three-to-five-year plan of what
the business would look like with an
injection of VC funds and the impact it
will have on growth.
A good corporate finance adviser who
understands your objectives will have
a better idea of the funding landscape
and what differentiates each VC.
Try to find a VC that truly understands
your proposition and market. Members
advise talking to other members or
founders that have worked with the VC
you are considering to glean feedback.
Ask the VC to model out an exit with
you to set expectations for both
parties.
Due diligence works both ways,
and VCs will look for any red flags
in your business. They may contact
current and churned clients; so if
you have any disgruntled customers,
manage them before you enter
into the investment process. They
may also insist on psychometric
tests on the management team to
understand how they work, how they
like to communicate, and what their
strengths and weaknesses are.
To maintain the best ongoing
relationship with investors, maintain
regular communication and avoid
keeping bad news from them as it will
always come to light. Some members
send investors a quarterly newsletter
outlining updates, successes, new
additions, and plans. One member
created a Futures Board where
representatives from each department
present ideas and updates to the
founders and VC investors to highlight
new areas of growth.
Venture capital
Venture capital (VC) is designed to nurture high potential businesses and prepare
them for the next growth phase.
Watch out:
Speak to businesses
that have gone into
liquidation after
raising with the fund
as well as those who
have been successful
(if the fund doesn't
offer up names, this
could be a red flag).
Watch out:
US-style VC is looking
for unicorns that will
provide the returns
for the rest of the
portfolio, so be wary
of those inclined to
focus their attention
on the two or three
most promising and
less on the others.
"Equity is all about timing. You don't want to
give too much too early. But, take it too late
and it holds backs growth meaning a lower
valuation"
Simon Hay, Co-founder, Firefly
31
Working with VC
Christopher Baker-Brian co-founded
BBOXX in March 2010 to design,
build and distribute electrification
solutions for developing economies
across Africa and Asia. In 2013, after
developing its growth plan, BBOXX
secured their first round of series A
funding in the summer of 2013 and
raised a series C round of $20 million
in August 2016. In February 2018,
BBOXX announced a partnership
with Bamboo Capital Partners on the
pioneering BEAM platform.
This will initially deploy $50 million in
equity for distributed energy service
companies (DESCOs) to provide off-
grid energy to consumers in Africa
and Asia. BBOXX now employs over
550 people across three continents.
What value beyond capital did you
gain from your VC investor?
It really helped us to improve our
financial reporting for growth in
the early days; but at every stage
we have learned something new,
from technical assistance around
product development to financing our
customers.
I would definitely advise looking for
smart money with knowledge behind
it. We got a lot of support from our VC
on our finance model. They were able
to provide someone who specialised
in running microfinance which was
critical for us.
What other areas of support would
have been beneficial?
We had to learn some big lessons on
our own, like how to manage growth
across three continents and scale
to over 500 people. We would have
benefited from someone who had not
only done it but had done so more
recently and in a similar industry.
Investors can help you find non-
executive directors from their network
and we had one good and one bad
experience.
The bad one came from a consultancy
background and his knowledge was
out of date, like a lot of NEDs.
We need people with up to date
knowledge of technology and trends
as well as experience of scale;
preferably those who have built their
own businesses.
Were there any unexpected
challenges that other business
owners should be wary of?
We underestimated the financial
reporting cycle and how honest and
open you should be. We were used
to managing cash flow but had to
learn how to present our accounts for
investment.
Christopher Baker-Brian, co-founder of BBOXX, recounts his first VC investor
experience and reflects on how his expectations matched up with reality.
"The normal economics about how you price
businesses and how you value businesses
don't apply in this hyper-growth, global scale
enterprise buy and build.
They're more focused on top-line revenue
growth and your addressable market"
Dan Scarfe, CEO and founder, New Signature UK
Christopher Baker-
Brian, co-founder,
BBOXX
MEMBER INSIGHT
32
Typically, CVCs have a mandate to
'seek out disruptive innovations and
business models' that have high growth
potential within their industry.
The net lifetime value (LTV) of a single
investment is determined not only by
the rate of return via an exit or follow-
on round but also its business impact.
High-performance CVCs win by
discovering startups and scaleups
with innovative business models and
proficient leadershipproven to thrive
in diverse markets. And, of course,
strong products that can not only
scale but also be leveraged inside the
corporate itself.
With that in mind, there is no one-
size-fits-all answer. Whether investing
for a financial ROI or with the intent
to integrate the technology/solution/
innovation back into the core business,
leading CVCs are clear on their purpose
from the outset.
As ever, CVCs rely on their personal
network, company brand, events
and intelligence tools, to refine and
automate this scouting process.
We frequently find that there's a lot of
merit in the old clich 'if you don't ask,
you don't get'. And so, once a startup
sees a fit with a CVC's investment
priorities, then reaching out to them
directly is clearly of value.
This is where hustle and persistence
pay off. It's always better to deal with
an individual, as opposed to a generic
contact address. As with VCs, many
CVCs only deal with referrals. This is
where Dale Carnegie's guidance on
winning friends and influencing people
comes into its own.
Referrals, as ever, are often far
stronger than cold outreach, but
notoriously difficult to get hold of.
Leveraging trusted partners, events
and/or scouting agents certainly helps
advance the possibility of a meaningful
referral. Ultimately, in the eyes of
the CVC, a referral accelerates the
qualification process.
CVCs are often at the mercy of internal
corporate processesmeaning they
are significantly slower to act. Look at
their track record.
The CVC fund size, current portfolio,
exit ratio, and success stories
determine whether the CVC is both
suitable as a partner and if it can add
meaningful value; beyond just financial.
As ever, startups ought to evaluate
what the corporate can bring to the
table; both in terms of funding, but also
opportunities and growth guidance.
Corporates are investing heavily in
digital innovation. Growth is being
enabled by building digital ecosystems,
creating new products and driving
new revenue streams. This is best
executed when disruptive startups and
scaleups are aligned to actual business
problems. Be it partnering, procuring
or investingeverything is on the table
and being pursued.
Beyond capital, CVCs provide business
expertise, access to new markets and
customers, technology skills and talent,
leadership mentoring, global reach and
infrastructure, and of course, a strong
brand endorsement.
Corporate venture capital
GrowthEnabler's Aftab Malhotra explains why corporate venturing is on the rise and
the value exchange for scaling businesses.
Watch out:
Your company could
be overvalued by the
CVC, which can deter
potential co-investors
and make it difficult
to raise subsequent
financing rounds at a
higher valuation.
Aftab Malhotra,
co-founder and
chief growth officer,
GrowthEnabler
33
CVC funding in 2014 was
$18bn from 140 CVCs
compared to
$32bn and 248 CVCs
in 2017
Source: GrowthEnabler
Over
1.78m
tech startups are founded
globally every year
Source: Global
Entrepreneurship Monitor
Churn of FTSE100
has seen
76 companies
disappear
inside 3 decades
(1984-2012)


Source: Imperial College
Influencing trends for CVCs
Source: Yale University: S&P 500 Life
Expectancy Time-series Study
AVERAGE LIFESPAN OF
S&P500 IS DECLINING:
67years
to
15 years
34
As venture debt has evolved to attract
later stage scaleups, private equity has
innovated to appeal to earlier stage
high growth businesses.
Typically, private equity funds invest
in more established companies with
the aim of reducing inefficiencies
and driving scale through increased
margins and new sources of revenue
growth.
There is now a broader spectrum of
equity, with growth investors like BGF
and Octopus specialising in minority
stakes so management retains control
while benefiting from experienced
investors and non-execs at board level.
This equity investment is also more
patient, investing up to 10 years.
BGF specialises in minority stakes,
where management is still in control,
and takes a long-term equity stake, up
to 10 years if necessary, and invests
between 1 million and 10 million for
between 1040 per cent equity. The
Octopus Apollo VCT invests between
2 and 10 million through minority
stakes (10 to 30 per cent) with flexible
debt to minimise dilution.
Growth capital is generally taken by
those that are more mature than VC
funded companies that are profit-
making but aren't able to generate
enough cash to fund acquisitions,
new product development, sales and
marketing initiatives, or offices in new
territories.
In addition to investment, growth
capital provides validation of your
model and the backing of a large
fund which has helped members to
secure big client contracts and recruit
senior talent.
Advice from members is to ensure the
growth plan is achievable, so don't
over-promise and under-deliver.
"If you start to fall behind plan because
you've overpromised, that can get
tricky," says Alastair Stewart, CEO of
etc.venues.
"Get some thick ice underneath you,
so that when the inevitable things that
go wrong try to crack the ice it's not so
thin that you fall straight through."
Members also recommend that
you look at the stage of the fund's
investment cycle, both for follow-on
funding and to determine if they are
likely to push for an exit sooner than
you planned.
Growth capital
A need to adapt to the demands of scaleups has driven innovation in private equity
with minority stakes overcoming traditional barriers.
"Raising money can help you to scale faster.
Having sourced investment, and now an
investor myself, I look for people who know
what they want and why they need it. It
inspires more confidence if you're looking
beyond the investment and asking for sector
experience, contacts, access to talent, or
chairman support"
Jamie Waller, founder, Firestarters
35
Taking growth capital
Tom O'Hagan is founder and CEO of
Virtual1, which delivers cloud and
connectivity services exclusively
to the wholesale market and runs
the fifth largest network in the
UK covering 180 towns and cities.
In 2016, it secured 10 million of
growth capital investment to invest in
additional network infrastructure and
support longer-term growth plans.

Why did you take growth capital?
I got to the point that I couldn't fulfil
my growth ambitions without it. I was
able to grow the business organically
for a long time, always re-investing,
but there was a pivot point around
20 million when we needed external
funding to meet our ambitions. It was
too big for the banks, so we looked at
growth capital investment.

How did you prepare?
Steve Scott, a former COO of
Bridgehouse Capital who was already
a NED and mentor, had experience
with external investment and
between us, we prepared the pack
and shortlisted investors. We already
had good structure, governance and
financial reporting, with a Deloitte
audit and monthly board meetings
even when we were only five people. I
wanted to prepare the business to be
fit for purpose but it's also just good
housekeeping.
What were the main challenges?
You need the right senior leadership
team around you and the right
management team below them. It has
taken years to build and we're working
on the middle management layer
now. I initially brought over people
from a large global carrier I worked at
and have since recruited from other
carriers, people with good corporate
experience. We've been successful in
attracting entrepreneurial people who
are frustrated at big companies, giving
them the freedom and pace of a scale
up to make an impact.
How did you choose your investor?
We met a lot of potential funders, but
we chose BGF because of its minority
stake proposition and its patient
capital approach. Unlike some of the
PE investors we spoke to, with BGF
we felt reassured that we wouldn't be
forced to make an exit before we were
ready. They also brought a wealth of
board-level talent and we have really
valued their advice. I took time to
research investors and talked to BGF a
lot before taking investment. We got to
know themit was good for them to
see us delivering over that time; it built
confidence and helped with valuation.
Any unexpected benefits?
It's enabled us to win larger customers.
We sell to the big carriers and there
is a perceived risk for them in working
with an owner-managed business. The
backing of an investor with 2.5 billion
gives us more gravitas and reassures
bigger clients.
Any other advice?
Be clear about why you're using the
investment and make sure the investor
is aligned. Don't do it just to take
money off the table.
Tom O'Hagan, founder and CEO of Virtual1, talks about his experience with growth
capital and provides tips on how to reap the benefits and avoid the hazards.
Tom O'Hagan,
founder and CEO,
Virtual1
Virtual1 has featured
in The Sunday Times
Tech Track 100 for
three consecutive
years and now
employs over 100
people with over 27
million in sales in
2017/18.
MEMBER INSIGHT
36
The primary goal of a family office is to
invest wealth prudently and extend it
beyond generations. The goal is to be
the last money in and to continually
invest in the success of the company
strategically and financially.
This type of direct investing means that
management and sound governance
are high priorities, which is why many
family offices require a seat on the
board. They also leverage the family
office network to provide strategic
advice, market intelligence, and other
benefits.
Family office investment strategies
differ according to the interests
and knowledge of the High Net
Worth Individual (HNWI). Some are
interested in disruptive innovation
and will support high-risk early stage
investments. Others prefer to wait
and invest at the growth stage where
revenues are over 1 million. In these
cases, many are drawn to businesses
they can understandsuch as food,
drink, fashion, or retail.
Finding the right balance between
giving the business owner room to
grow and the need for transparency
that family offices require is critical in
making these partnerships successful.
Family office investment also has the
added benefit of being patient capital
as they do not have external raise
demands or IRR targets within the
lifecycle of a fund.
Family offices are notoriously secretive,
and they use this secrecy to sort the
wheat from the chaff. Deals are sourced
by leveraging proprietary networks,
colleagues, business executives and
professional advisers or from referrals
from other family offices.
Finding a credible person, such as a
capital raiser, to introduce you to family
offices can be a real door opener.
Another good strategy is to build a
profile in reputable publications or
within academia so that there is a
reference point for the initial contact.
Family offices
Andrea Reynolds FCA explains why family offices offer scaleups a lucrative and secure
source of investment, what they look for in investees, and how to find them.
Watch out:
Family offices make a
commitment to align
with the entrepreneur
at a deep level, so be
prepared for more
input and scrutiny
than other funding
options.
"High-net-worths and family offices are looking for more niche investments, and the
number of institutional investors looking at private companies has grown from 100 to
over 300. New pension regulation has given people more control over what they invest in"
Sam Smith, founder and CEO, finnCap
Andrea Reynolds,
CEO
Swoop
37
38
AIM HIGH
Floating your business on the Alternative
Investment Market (AIM) can provide access to
larger pools of growth capital and an enhanced
profilebut public scrutiny can be distracting so
it's not for the faint-hearted.
39
AIM has helped make companies like
Hotel Chocolat, ASOS, and Fever Tree
into household names while providing
the capital to help them grow
internationally.
As debt and equity funding has
increased, scaling businesses have
tended to float later for larger sums.
The average market capitalisation of
an AIM company has grown from 58
million in 2008 to 104 million in 2017;
the average raise at IPO has grown
from 34 million in 2007 to 50 million
in 2017; and, in 2016, 5.02 billion was
raised through IPOs and follow-on
funding.
A float is not recommended if you're
looking for an early exit. In addition
to accessing huge pools of growth
capital, founders float for longer-term
investment that enables them to build
the value of the company through new
growth phases. It also greatly enhances
profile to build a global brand, which
helps to attract clients, partners,
suppliers, and talent.
However, it is an opportunity to reward
early supporters of the business.
"Being listed provides a company with
liquidity in its shares, enabling a full
or partial exit for early investors, and
enabling them to use their shares as
consideration in any M&A," says Stuart
Andrews, Head of Corporate Finance
at finnCap, who serves on the AIM
Advisory Board.
To float on AIM, you must have a
Nominated Advisor (NOMAD) and a
NOMAD must be retained at all times
while a company is on market. They
will guide you throughout the flotation
process, undertake due diligence to
ensure your company qualifies for
AIM and will draft the AIM admission
document. They can provide an IPO
readiness check, set up meetings with
test institutions to gauge interest and
organise pre-IPO roadshows to meet
investors around the country (a full list
of approved NOMADs can be found at
londonstockexchange.com/exchange/
companies-and-advisors/aim/for-
companies/nomad-search.html).
A NOMAD will look at the strength of
your management team, which is an
important part of the story for IPO.
Recruiting a big-name chairman, NED
or CEO can enhance your story and
inspire confidence; but remember that
you and your senior team will need to
impress as you will answer to several
shareholders.
The growth story is important in an
IPO. As the main spokesperson, the
founder will need to be clear on the
brand, the growth journey, and the
long-term vision; and prepared to
answer questions from Bloomberg,
CNBC and international press as you
prepare to float.
However, members and partners warn
that the story shouldn't inflate the
valuation beyond what is achievable,
and it's better to under-promise and
over-deliver.
Ultimately, the main expectation
of the market and investors is that
you achieve the objectives you set
for your business. A board that has
successfully completed funding rounds,
acquisitions, or international expansion
will reassure investors.
FLOATING YOUR BUSINESS
AIM was launched in 1995 to offer smaller companies the chance to raise money from
institutional investors on the London Stock Exchange (LSE). Over 3,700 companies
have since listed on AIM and raised over 104 billion in capital.
Watch out:
Getting the financials
wrong can be costly,
and damage investor
confidence, so an
experienced FD or
CFO is a must.
40
Under AIM Rules, brokers and NOMADs
must be retained at all times and will
be paid an annual fee. A broker will
advise on the pricing of shares and
provide ongoing advice on market and
trading-related matters. Broker fees
will be 3.5 to 5 per cent of the money
raised (paid on results) and 2.5 to 3.5
per cent of further raises.
Initial set up fees include admission to
AIM, which ranges from 8,700 for a
market cap of 5 million to 97,500 for
250 million and above. You will need
to pay a lawyer for legal due diligence
on your business, verifying ownership
of assets, and negotiating the terms of
the placing agreement. You will also
need to pay an accountant for financial
reporting procedures, working capital,
tax and share incentive schemes as
well as advice on the flotation process.
A PR firm is optional but can help to
craft your story for IPO, develop your
institutional roadshow presentation,
produce your press releases and
regulatory announcements, and
maintain media interest after
flotation.
AIM admission fee calculator:
londonstockexchange.com/exchange/
companies-and-advisors/main-market/
listing-fees/aim-fees-calculator.html.
AIM flotation guide:
londonstockexchange.com/companies-
and-advisors/aim/aim/a-guide-for-
entrepreneurs.pdf
The cost of IPO
IPO, even on the Alternative Investment Market, isn't cheapthe overall costs of
floating are likely to be 9 to 10 per cent of the money raised.
2017
104m
2007
58m
2007
34m
(source: AIM)
Average Market Capitalisation of AIM Companies
Average Money Raised at IPO by AIM Companies
2017
50m
41
How to IPO
The top three reasons IPOs succeed
1. Focused management, strong
board, and good presentation

It is imperative that the
management team is well
prepared, has a balance of
strengths, skills and experience,
and that this comes across in the
investor presentations. The equity
story should flow logically, be well
practised, and carefully fashioned
in light of all potential questions
that could be asked by investors.
2. Valuation realism

The shareholders of a company
looking to IPO must be aware that
their own valuation expectations
of the business will likely be quite
different to the view of the stock
market. Advisers should provide
clear valuation guidance from the
start of the IPO process and any
variations should be discussed
with the Board at the earliest
opportunity. A concerted test
marketing programme can provide
an early indication of a valuation
range for a business, as well as
collecting useful feedback ahead of
the formal roadshow.
3. Clear planning

Companies who come to market
need to be very clear on not only
their reasons for undertaking an
IPO but also their future plans.
Most importantly, they should
provide a plan of how they will
deploy any funds raised to ensure a
high return on capital for investors.
The top three reasons IPOs fail
1. Valuation

The most common reason for an
IPO not completing is a valuation
discrepancy between that set by
institutional investors and the
company's expectations. Very
often the price at which funds are
raised, and the subsequent dilution
to existing shareholders, can be
too steep for a company to
proceed.
2. Misreading of market/timing

IPOs are more susceptible
to market timing and wider,
macroeconomic factors than any
other equity market transaction.

It's important for the board to be
kept appraised by their advisers as
to the current market dynamics
and investor trends to assess
whether it is a suitable time for
them to float.
3. Poor management team

An unimpressive and poorly
composed management team,
even of an exciting business,
may be enough of a red flag for
investors not to participate in an
IPO.

Similarly, if the skills of the
management team do not
come across clearly enough in
presentations to investors, this
may result in a failure to generate
the interest that the business
deserves.
Stuart Andrews, Head of Corporate Finance at finnCap, has led several of its largest
fundraisings to date including transformational placing and acquisitions for CityFibre,
Proactis and Ideagen. He shares his insight on how to successfully IPO.
Stuart Andrews, Head
of Corporate Finance,
finnCap
PARTNER INSIGHT
42
Why IPO?
Clearly, one of the key reasons that
businesses consider an IPO, whether
it's on AIM or any of the markets, is
access to capital.
AIM really does provide that in buckets.
In the 23 years since it was launched,
over 108 billion has been raised
which, for a growth market, we're very
proud of. What we're equally proud
of is the fact that about 65 per cent
of that money has been raised by AIM
companies after they were admitted to
the marketby raising further capital
rounds. Many other growth markets
support companies that IPO, but don't
have that depth of follow-on capital
that now exists behind AIM.
This year, we do see a continuation of
that trend. 2 billion pounds has been
raised so far this year; 1.8 billion of
that had been raised by companies
on the market. Similarly, last year, of
the 7 billion raised, 5 billion was
through further issues. AIM absolutely
provides that long-term repeat access
to capital, at a very, very competitive
rate.
But there are many other benefits
of IPO, some of which are lesser
known. Many companies, having gone
through the IPO process, report being
better structured with an enriched
management team with a tighter grip
over the business and a greater ability
to forecast and plan the future.
Indeed, many essential processes of
an IPO help the business as a whole.
Honing the core equity or growth
story, for example, not only attracts
investors but brings a company's
proposition into crisper focus, making
it easier to explain to employees,
suppliers and prospects.
What's more, IPO brings companies
a much higher profile, and, with that,
credibility. Knowing that a firm has
access to long-term capital can make
them a more compelling business
partner than their private company
peers.
I've heard of companies that have been
able to secure contracts as an AIM
company that they couldn't secure as
a private business. And, once you've
got a publicly traded share, you can
use those shares to make acquisitions
or incentivise members of your staff
with share options that are valued on a
real-time basis.
A common misconception is that, by
going public, somehow founders and
the management team might lose
control over the day-to-day running of
the business.
The reality for many companies is that
having a wide register of investors
which can either build their stake
or reduce it patiently through the
markets, can be a more attractive
option than having to formally sell or
possibly take a strategic investor that
also has a seat on the board.
Quite often a founder will come
through an IPO process and say: "We
feel like it's de-risked our personal life."
It can enable a founder to take a bit of
capital off the table, so they've been
able to pay off the mortgage, or put a
bit of money in the bank. But, they've
still held a gripon the development
and future growth of the business.
Marcus Stuttard, CEO of AIM, explains the many reasons founder companies turn
to the public markets, including AIM itself, and describes ways an IPO can benefit
businesses beyond just capital.
Marcus Stuttard, CEO
AIM
INDUSTRY INSIGHT
43
The funding bonanza
Sam established finnCap in 2007
having orchestrated the buy-out of a
small broking subsidiary of a private
client stockbroking firm. Today,
finnCap is ranked as the number one
Nominated Adviser and Broker to AIM
companies.
Investment in venture-stage firms
increased significantly in 2017. This is
a trend that will continue, partly
thanks to the Chancellor's welcome
decision to double the limit on EIS
investment.
Last year's Autumn Budget focused on
helping entrepreneurial knowledge-
intensive companies, offering a
direct response to the UK's 'scaleup'
challenge specifically that there
have not been sufficient funds for
Series A and B investments into these
companies going from first revenues to
scaleup and growth. Recent changes to
VCT rules will result in further growth
in tax-driven funds, all seeking great
investment opportunities in the private
capital landscape. In 2016, there was
an 18 per cent increase on the previous
year in capital deployed in EIS/VCT
mandates: this is not a one-off, but a
trend.
When it comes to the growth stage,
we've also seen more 'megadeals'
(those worth over 50 million) than
ever before in the private capital
space, with appetite from institutional
investors showing no sign of slowing.
According to Beauhurst research, 29
'megadeals' were seen in 2017four
times as many as in 2016. In 2011,
there were 173 institutional investors
deploying private capital; in 2017, it
was a record 315 institutions.
This bodes well for the future of the
UK's scaleup ecosystem, and for the
economy as a whole. The key factor
driving increased private capital
investments has been record low-
interest rates globally over the past
decade. This has encouraged both
private and institutional investors to
look further afield for yield, moving
into private investment opportunities
where they previously would have
looked only at public stocks.
The increased intersection and
coalescence of major economies mean
that private capital will be raised and
deployed cross-border: over 40 per
cent of capital raised by European
private equity in 2017 came from
investors outside of Europe, while
a third of investments made into
companies were cross-border. Neither
PE and VC as asset classes show any
signs of slowing down and continue
to enjoy immense success on the
fundraising trail, which could drive
valuations higher.
This is very good news for today's
scaling businesses because there is
plenty of funding available. VCs and
PE houses are sitting on a lot of dry
powder, looking for great SMEs in
which to invest. The pool of capital
available to scaling private businesses
has deepened significantly; VC and
PE are no longer the de facto choice
for high-growth companies seeking
funding.
The question now is not so much about
making sure that you have access to
enough capital, but rather that you
have access to the right kind of capital
best suited to your equity story.
Sam Smith is the only female Chief Executive of a City broking firm. Here, she
describes the changing investor landscape for private company fundraising, and what
this means for scaling businesses.
Sam Smith, CEO
finnCap
PARTNER INSIGHT
44
SCALEUP FUNDING:
A NEW ERA
There has never been a wider range of
options across the funding lifecycle of
an entrepreneurfrom friends, angels,
family offices and fund managers,
to debt and equity solutions, IPOs
and most recently ITOs (Initial
Token Offers). Sources of finance
once considered 'alternative' are now
mainstream.
Having been disrupted, the more
established financial institutions are
adapting to compete. Barclays created
a 200 million venture debt fund for
high-growth businesses and scaleups
and, most recently, TSB backed by its
parent company, Sabadell launched
a new 100 million VC fund to tap into
earlier stage businesses.
Trade bodies like the EISA, BVCA, AIC
and specialist research firm, Intelligent
Partnership, have increased awareness
of EIS, SEIS and VCT to financial
advisers and wealth managers;
bringing more high-net-worth
individuals and family offices into SME
investment.
While EIS and VCT have helped
startups to scale, there are still
significant funding gaps, particularly
for later stage 'series B' investing. "Only
about 10 to 12 funds in Europe [are]
capable of writing cheques for 10
20 million," notes Alex Macpherson
THE FUNDING
LANDSCAPE IS EVOLVING
TO MEET THE NEEDS OF
A MORE DEMANDING
AND INCREASINGLY
DISCERNING SCALEUP
COMMUNITY WHO WANT
VALUE BEYOND CAPITAL.
CONCLUSION
45
Chairman of Octopus Ventures,
suggesting that the Government
should mandate public sector pension
funds to allocate one per cent of their
assets to venture capital investment.
Momentum is building. But we need
bigger funds that can write bigger
cheques to grow bigger scaleups.
Rarely a week goes by without
impassioned calls to Westminster,
pleading support for our burgeoning
scaleups. It has now appointed a
scaleup minister and task force. At the
same time, the Government's own
Patient Capital Review is encouraging a
longer-term attitude to investment.
What's more, as the ScaleUp Institute's
Irene Graham points out, scaleups are
not just looking for cash: "they want
smart money which brings knowledge,
skills and market connections with it".
The UK funding industry is often
compared to the US, where finance
seems to be more abundant, less risk
averse, and prepared to wait up to eight
years for a return on investment. But,
unlike the US, the UK has a different
barrier: fear.
Fear of funding, fear of giving up
control, fear of being tied to terms
and conditions. If exploring the future
of finance has taught us anything,
it is that the funding landscape has
changed but most scaleups don't
understand how and why it matters to
them.
Choice, as they say, is a prison, and
scaleup founders need help to navigate
a more complex funding landscape
and understand how the industry has
evolved to offer more support beyond
capital.
This guide from The Supper Club,
supported by BGF, finnCap, and
Octopus Investments, is designed to
help business owners allay these fears
and see the opportunities as they truly
are.
With hundreds of sources of finance
now available for ambitiously scaling
UK businesses, access to capital
shouldn't be an obstacle at any stage
of growth.
We want to encourage founders to
expect more from the finance
industry and take maximum advantage
while the market is stacked in their
favour.
We wish to extend our sincere thanks
to our partners and to all of our
members who have shared their insight
to help business owners make more
informed funding decisions.
Irene Graham, CEO, ScaleUp Institute
"Scaleups are not just looking for cash: they want smart money which brings knowledge,
skills and market connections with it"
46
BUILDING A
SCALEUP NATION
POLICY RECOMMENDATIONS
DESPITE RECORD EQUITY
INVESTMENT IN 2017, THE
UK IS STILL RELIANT ON
FOREIGN FUNDS FOR THE
MEGA DEALS WHILE A
VAST POOL OF POTENTIAL
FUNDING REMAINS
UNTAPPED.
LEADERS FROM THE
SUPPER CLUB AND
THE SUPPORTING
PARTNERS OF THIS GUIDE
OUTLINE THEIR POLICY
RECOMMENDATIONS FOR
UNLOCKING GROWTH
CAPITAL AND GIVING
BRITAIN A COMPETITIVE
EDGE IN THE GLOBAL
ECONOMY.
47
Since the 1970s, UK PLC has grown
from fewer than a million businesses
to over 5.7 million, with more than
638,000 new companies founded in
2017 alone.
This increased rate of business creation
hides a more worrying fact: four-fifths
of businesses have no staff at all and
fewer than five per cent have more
than 10.
So why does this matter? Because very
few grow significantly and the number
of businesses with more than 250 staff
has actually fallen by nearly 10 per cent
since the turn of the century. There
were only 35,210 UK scaleups in 2016
according to the ScaleUp Institute.
It's vital we recognise the contribution
this rare breed contribute to the
economynot only in net new job
creation but an increasing proportion
of the taxes that pay for our public
services. But taxation and tax reliefs
can hamper growth and encourage the
wrong behaviour in founders.
In our 2016 report, Britain Unlocked:
A Tax Code for Global Ambition,
The Supper Club made several
recommendations to remove obstacles
to growth during the tax lifecycle
of an entrepreneur. These included
raising awareness of tax reliefs like
R&D Tax Credits and simplifying the
system for paying taxes and claiming
reliefs. While VCT and EIS have been
successful in incentivising investment
in smaller companies, few businesses
follow a textbook model from startup
to growth with many developing later
so the seven-year rule discriminates
against them.
It also called for greater flexibility in
the payment of taxes such as PAYE,
VAT and NI to support cash flow
during crucial periods of growth and
to encourage more micro and small
businesses to recruit to scale.
The UK tax code stretches to more
than 20,000 pages but, despite its
thoroughness, is not fit for purpose for
scaling British businesses.
Duncan Cheatle, Chairman,
The Supper Club
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There is currently 315 billion held
in Stocks and Shares ISAs, so if just 1
per cent of this capital were invested
in small, unlisted companies, it would
unleash huge growth potential for
HGSBs.
As investors tend to retain assets in
their ISA indefinitely, such a reform
would make it one of the most patient
forms of capital. The change would
allow funds to be invested in earlier-
stage smaller companies as well as in
AIM and FTSE listed companies.
The Government's decision to enable
AIM shares to be held within an ISA has
been a significant success story.
Since the rules changed in 2013,
Octopus has raised and deployed
500 million into AIM companies with
a growth mandate, comprising both
new ISA investments and the transfer
of existing ISA portfolios that would
previously have been invested in large
FTSE listed companies or cash.
Currently, investors can make loans
from their ISAs to unlisted companies
through the new Innovative Finance
ISA. However, this often results in
investors taking equity-type risk (as
early-stage companies are poorly
capitalised with few assets) without
having any potential to qualify for the
incremental upsides attached to equity
investments.
Enabling unquoted companies to
be held in an ISA would also provide
an additional source of financing for
companies that have exceeded the VCT
investment limits. One of our greatest
challenges in the UK is how we help
more businesses to scale up not just
start up.
The legislation required to achieve the
proposed change to ISAs would be
straightforward to implement. Some of
the existing anti-avoidance legislation
employed for Self-Invested Personal
Pensions (SIPPs) could be borrowed to
prevent special-purpose vehicles from
qualifying.
We believe there is a real opportunity
for more investors to get behind the
next generation of UK business.
Chris Hulatt, Co-founder,
Octopus Group
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Currently, British businesses are
capped they do not have access to
the funding they need to fully scale up
and reach their potential. Worryingly,
the little funding we do have may stop
sooner than we think.
The European Investment Fund, which
accounts for more than a third of
investment in UK-based venture capital
funds, is already slowing its activity in
Britain and the tap could be turned off
when we finally leave the EU.
To fill this void, the UK needs its own
mega-fund that can compete with
Silicon Valley. Creating this does
not require wholesale changes to
the fundamentals of our economy,
but it does require political will. The
Conservatives' manifesto commitment
to a series of UK 'sovereign wealth
funds', named Future Britain Funds, is a
positive first step.
We already have the ingredients: local
pension funds are large groupings
of UK patient capital, but they are
organised in a disparate and largely
inefficient way and they lack scale.
However, these pots could be
consolidated into one mega-fund; not
only reducing their own administration
costs and burdensome overheads
but creating a pool large enough to
seriously back the most exciting British
businesses.
Pension pots, which are currently
dormant assets, would be pulled
together in a way that they could
sensibly support higher risk investment
strategies. A 'super aggregator' is a
model that has had enormous success
elsewhere, most notably in Canada.
Canadian pension funds are famed
for their ambitious investments,
particularly in British infrastructure,
while they also help ensure that
Canadian pensioners have a more
comfortable retirement.
At a time when we are thinking harder
than ever about how to pay for old
age, a pension pot super aggregator
offers an innovative, forward-thinking
solution to boosting UK SMEs and
answering some of our economy's
trickiest questions.
Stephen Welton,
CEO, BGF
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It's frustrating that while the UK boasts
one of the most versatile landscapes
for startups and one of the most
successful SME growth markets in
the world in the form of AIM, current
legislation can get in the way of our
ambitious companies. The SME sector
represents the beating heart of UK
PLC in terms of spearheading growth
and creating employment; as brokers
and advisors, there are certainly policy
changes that we could see supporting
our clients' aspirations.
First and foremost, there are
multitudinous regulatory initiatives
significantly increasing the cost,
complexity and timescale of SMEs
accessing the public markets as a
source of scaleup capital initiatives
including corporate governance, the
Market Abuse Regulation, revised AIM
rules, MiFID II, or FOS eligibility. We
would recommend reconsidering any
such regulation to ease the burden
on stretched founders, as well as
reconsidering recent investment rules
such as Product Governance, KIDs and
PRIIPs that actively militate against
retail customer involvement in SME
funding via public markets.
Meanwhile, we'd urge the Government
to ease regulation on investor
participation in crowdfunding and P2P
lending, which is partly to blame for
their very low level of SME funding
market penetration.
The combined effect of all these
restrictions is that the UK now has a
materially reduced level of competition
in the market for financing SME
growth companies. Again, we'd call
for competition policy initiatives that
address this.
We must introduce policy initiatives
that tackle the lack of information
on finding the right growth capital.
finnCap's Ambition Nation programme
speaks to SMEs nationwide about
encouraging growth, demystifying
investment and presenting wider
growth options. Ambition Nation has
also revealed the scant investment
made into female-led companies, a
problem historically compounded by
the restrictive nature and language of
the UK investment landscape.
We've found this knowledge gap
about scaleup investment really is at
the heart of diminished confidence
in UK SMEs to grow. With Ambition
Nation we're doing our bit; we'd urge
implementing wider policy initiatives
that can help our cause.
Sam Smith, founder and CEO,
finnCap
POLICY RECOMMENDATIONS
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BGF was set up in 2011 to offer growing
companies and ambitious entrepreneurs
with patient capital, strategic support and
a long-term funding partner. Today, we are
the UK and Ireland's most active investor in
small and medium-sized businesses.
With 2.5billion to invest, we support a range
of growing companies early stage, growth
stage and quoted across every region and
sector of the economy. And earlier this year,
we became the first investment firm to be
honoured for Innovation in the Queen's
Awards for Enterprise.
We make long-term equity capital
investments in return for a minority stake
in the companies we're backing. Initial
investments are typically between 1-10m
and we can provide significant follow-on
funding.
Our offer is a mix of equity and unsecured
debt that few others can match, with
potentially less dilution for shareholders,
and in some circumstances, we also provide
an element of equity release for existing
shareholders. We have a 150-strong team,
14 offices across the UK and Ireland and,
alongside our funding, BGF also offers
an unparalleled international network of
business leaders, sector experts, board-level
non-executives.
Collectively, the companies in our portfolio
employ close to 50,000 people. We want to
see more entrepreneurs using our capital
to scale-up their own business and be part
of the engine room of the UK economy
increasing large-scale growth as a result.
That's why we exist.
Our supporting partners
finnCap advises ambitious growth
companies, accesses capital and promotes
their stories across public and private
markets. We are modern entrepreneurs who
fuel faster growth by working collaboratively
with driven business leaders, realising their
aspirations at every stage of their journey.
Our expertise spans multiple sectors, public
and private markets and we are as ambitious
as the companies we work with. The market
recognises us as the largest advisor on the
LSE and No. 1 broker on AIM.
In a dynamic world, the funding landscape
changes constantly. We understand business
leaders demand smarter support in helping
create the right investment story to secure
the appropriate funding for accelerated
growth.
The boards of fast-growing businesses need
broader services that allow all potential
options to be considered and that empower
them to make the right choice.
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The Intermediate Capital team at Octopus
Investments manages the Apollo VCT which
targets commercialised UK businesses that
require funding for the next stage of organic
growth. The team has a wide range of deep
sector expertise and a proven track record
of backing dynamic management teams
through multiple rounds of funding. Our
funding solutions are bespoke and designed
to meet all stakeholder requirements. We
invest between 2 million and 10 million,
combining debt and equity to minimise
shareholder dilution. Our goal is to help
ambitious entrepreneurs achieve theirs,
providing strategic support as well as capital
to accelerate growth and achieve scale.
Octopus Investments, part of the Octopus
Group, is an award-winning, fast-growing
UK fund management business with leading
positions in tax-efficient investments, multi-
manager funds, and UK smaller company
financing. We can back companies through
their growth cycle from early stage to those
listed on AIM, providing investors with the
opportunity to benefit from our active
management and expertise. We manage
assets for retail investors and institutions
including pension funds, asset managers,
fund-of-funds and family offices. And we're
changing the world of investments for
the better by offering a straight-talking
approach to investing, exceptional customer
service and a range of products that aim to
do what they say they will.
Octopus Group is one of the UK's fastest
growing companies. We're building
businesses to transform markets and
customer expectations. We are experts in
investments, UK smaller companies, energy
and healthcare. We currently manage more
than 7.5 billion on behalf of our customers.
Octopus Investments, Octopus Energy,
Octopus Healthcare, Octopus Labs, Octopus
Property and Octopus Ventures are all part
of Octopus Group. Visit octopusgroup.com.
finnCap delivers certainty, making the
growth journey easier. Our clients receive the
power of a leading stockbroker combined
with a no-nonsense strategic advisor.
We know the whole investor spectrum and
provide considered, independent and trusted
advice that adds value.
Our team understands how to deliver on our
advice, and is ideally positioned to leverage
the right investment to power the next
stages of growth. This has enabled us to raise
over 2bn for our clients.
We promote your vision for growth by
creating a targeted investment story that
sells, and dedicating a focused team to you,
aligning our resources only behind the most
effective strategies.
finnCap provides smart solutions from
people with experience. We are here to help
drive your ambition and energise you and
your business to think big and go further.
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ENTREPRENEUR DRIVEN
The Supper Club is an exclusive
membership community of
inspirational founders and CEOs of
high growth businesses. Since 2003, we
have enabled members to realise their
growth ambitions. The average growth
of our members is 34 per cent year on
year average sales from 1m to 500m.
We support members through all
stages of the entrepreneur lifecycle,
from scale to sale and beyond. The
Supper Club is highly valued for the
quality and diversity of its membership,
event experiences and proactive
personal support.
We bring the right members together
at the right time to support each other
in their journeys by sharing the hard-
learned lessons along the way. We
help members find the knowledge and
connections they need to make better
decisions and spend their time more
wisely.
It's lonely at the top
Our members value opportunities
to socialise and share challenges
with peers, using The Supper Club as
therapy and a virtual board.
About The Supper Club
Our mission is to inspire an entrepreneurial mindset in all leaders because we believe
that where entrepreneurship thrives, so too does innovation, growth, and wealth
creation.
Applying a wealth of insight from
over 2,800 peer learning events, we
curate roundtables, chair panels, and
design workshops around practical,
entrepreneurial thinking.
Members share our ethos of Give
and Get to support each other with
open and honest advice in a relaxed,
informal, and trusted environment.
We have several membership options
for founders & CEOs, and programmes
for your senior managers. Our Directors
Days help managers of entrepreneur-
led firms to step up into more senior
leadership roles to enable founders to
become CEO or chairman in practice as
well as title.
We consider all applications on their
own merits and we meet all potential
members face to face to ensure a good
fit and a commitment to the Club's
values, culture and ethos.
If you would like to explore
membership of The Supper Club and
the ways it could help you and your
business, then get in touch by calling us
on 020 3697 0810 or by emailing
getintouch@thesupperclub.com.
Cecile Reinaud, founder, Seraphine
"Every time I have gone to an event, I have
come away with such an amazing positive
energy, a list of things to improve within the
business and networking contacts. I think it's
the best investment in time you can make"
Graham Painter, founder, Cream
"The Supper Club is the sum of many
valuable things but the most important
to me is the sharing of information, with a
peer group of founders and entrepreneurs
in a completely open, trusting and fun
environmenta revelation for me and a
revolution for my business"
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