Explore the ScaleUp Annual Review 2020

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Insight: The Growth Capital Gap

Following this year’s Future of Growth Capital Report, we asked a number of its contributors for their views on the current and future outlook for growth capital.


  • Stephen Welton, Executive Chairman, BGF
  • Marcus Stuttard, Head of UK Primary Markets and AIM, London Stock Exchange
  • David Hughes, Chief Investment Officer, Foresight Group
  • Charlotte Crosswell, CEO, Innovate Finance
  • Sam Smith, CEO, finnCap Group

What have been the key trends in the market for growth capital? 

Stephen Welton

We have made a conscious effort to continue investing throughout 2020 and will end up making the same number of investments as 2019, or even higher. We have done more investing in life sciences; it’s a hard sector because of the length of the investment life cycle but there is an absolute need for risk capital there. We are at the early stages of a similar approach to investing in sustainability, such as energy efficiency, battery storage and alternative ways of living. There are significant funding gaps in these sectors with particularly little equity capital in the regions.

Our concern is that the overall pool of growth capital is not big enough. And this year we have seen a very mixed picture, with greater uncertainty, a recession, together with wide regional variations, all of which has led to less activity and more caution. It’s of great concern if investors take a more risk-off position and entrepreneurs lower their ambitions, which will have significant knock effects on long term GDP.

Sam Smith

First, and interestingly, we have seen accelerated transitions between Series A and Series B funding. Our view is that this is possibly because of pent-up demand as many funds have found it difficult to find the right businesses to invest in during the pandemic and lockdowns.

However, the second trend is that for those funds that do deploy capital, they are much more focused on the underlying profitability of the business they are investing in. 

And third, investors are also rightly increasingly scrutinising a company’s Environmental, Social and Governance (ESG) credentials. This reflects not only the changing priorities of many millennial investors, but also the extent to which companies with high ESG standards are well positioned to weather the pandemic. Indeed, we have produced a simple 15-factor ESG scorecard which companies (or investors) could use as a start in understanding how they score on key aspects, precisely because of the increased interest in and importance of ESG. 

David Hughes

There has been a funding gap since I started working at ICFC in the 1970s and a similar additional scale of funding gap has been created by the pandemic and lockdown. 

At Foresight we have remained active. Each year, we see around 2,000 investment opportunities nationally and will complete about 40 deals this year. In fundraising terms, 2020 should be similar to 2019 for the VCT industry. About £700m should be raised, so if companies qualify for VCT and EIS money, they stand a reasonable chance of raising it. However, we have noticed that EIS money has dried up during the year as private individuals have decided to wait rather than invest in EIS schemes.  Institutional investors have also remained cautious this year but we are now seeing some signs of change.

Charlotte Crosswell

We are seeing total money raised in H1 2020 as steady compared with H2 2019, however the number of deals are decreasing, which indicates larger companies at a later stage of growth are able to secure capital but smaller raises are being challenged.

Marcus Stuttard

From our perspective at the top of the funding ladder, there has been a positive flow of capital this year. More money has been raised on AIM than in 2019. Institutional and retail investors have continued to invest in growth companies. This year, 63% of European growth finance has been raised on AIM. The capital is there.

What are the challenges or opportunities in 2021? 

David Hughes

It is difficult to predict recovery with so much Covid-induced uncertainty but we are confident that things will improve in 2021 – it’s a case of when. There is so much pent-up demand out there.  When demand increases, some companies will not have enough capital to respond properly.

It all boils down to the quality of the management in each company. There are many good CEOs out there, thinking about innovation and growth, finding the right talent, using peer networks. There will be lots of opportunities for good companies with strong balance sheets. 

Marcus Stuttard

Much of the capital raised this year has not only been to shore up balance sheets but to prepare companies for the future and to put them in a strong position for growth. There are plenty of fantastic UK growth businesses who have been prudent and focused over the past few years so I think there will be some pleasant surprises on the horizon. 

The IPO of The Hut Group in October was a big moment, as it was the largest tech IPO on London Stock Exchange in five years. This creates confidence for companies and the market. This year, companies have felt reticent to talk about their good news, but it’s incumbent on all of us to shine a light on their stories.

Sam Smith

The ongoing uncertainty and disruption caused by the pandemic is of course a challenge for any business, but it does also present opportunities. Whilst Covid-19 has and will continue to hurt a lot of very good businesses that would otherwise have been completely viable, that does also mean that there is actually a lot of undeployed growth capital. Companies that can demonstrate they have come through the fire of the pandemic could, therefore, attract considerable investor interest. But the challenge remains that they will need to demonstrate clear paths to profitability and not just top line growth.

Charlotte Crosswell

The Fintech sector stands to benefit from the acceleration of financial services innovation from Covid-19. Sub-sectors such as payments and regtech are growing fast fulfilling consumer demand, in addition to capital markets solutions as banks seek digital transformation.

Will it be difficult for scaleups to raise growth finance in 2021?

Stephen Welton

For sure. This is an unprecedented recession; many companies will come out of it weaker on the back of poor trading, staff losses, deferred liabilities and increased indebtedness. Companies need working capital to rebuild as we come out of the recession and history shows us that it’s this lack of working capital that leads to insolvencies. Without support and greater business investment, the poor health of the economy will hit the very companies who are the growth engine of the economy.

Charlotte Crosswell

The uncertainty of the global economy still brings with it unknowns in 2021. For those companies with existing VCs on board the process has been easier by Zoom – but there are still multiple challenges for those companies looking for strategic investment or a Series A investment when they haven’t met investors previously. We are confident that some of the dry powder will be deployed, but this may be too late for those fintechs who were unfortunate with their timing. 

Sam Smith

The difficulty will first of all depend on the extent to which the sector a scaleup operates in is “pandemic-proof.” For example, many healthcare companies engaged in the fight against Covid-19 have successfully fundraised in recent months (including a number of fundraisings that finnCap Group arranged).

Also, just because venture and private equity are more discriminating and have often been focusing on their own portfolios, that doesn’t mean there aren’t other sources of capital. In particular, I think London’s junior AIM market has an opportunity to really help scale ups raise growth finance in 2021. 

Indeed, AIM is the traditional home of scaleup businesses, and in 2019 it delivered around two thirds of European growth market funding. What’s more, total money raised on AIM in the first five months of this year was £2.2bn. This compares to the £1.94bn raised on AIM over the same period last year, representing a growth in capital raising – all of which happened despite the terrible disruption of the pandemic.

David Hughes

In the current market, scaleups need as much help as they can get so we should relax some of the arbitrary and restrictive rules surrounding VCT and EIS – such as the seven-year rule on investment and the financial health requirement. In the current climate, there will be lots of companies coming to us because they need the capital but, through no fault of their own, we won’t be able to back them.

We will need to act immediately to avoid more business failures and job losses as working capital dries up. There needs to be greater financial support for the regions; we should build on the existing infrastructure to get funding to where it is needed – and fast.

Marcus Stuttard

There are some long-term challenges that will make it difficult. Education remains vital, so that scaleup businesses can understand the appropriate form of capital for their needs and where to look for it. The ScaleUp Institute has worked hard to ensure that this education activity takes place across all regions and it is something that we must continue to pursue. 

We must continue to look across the funding escalator. There has been a lot of focus on angels, VC and early-stage finance but there is a growing recognition that we must also focus on the role of pension funds for the later scaleup stages and how they can provide greater levels of domestic support to our scaleups on their long-term growth journey. We have the infrastructure, the capital, the financial expertise and great businesses – all the ingredients are there to deliver this.

As contributors to this year’s Future of Growth Capital Report, what are the next steps that should be taken to increase the supply of growth finance for scaleups?  

Charlotte Crosswell

The opportunity for the UK science and wider tech sector is still significant, but we must be able to support it with a wide range of capital to realise its full potential. We are seeing too many instances of companies choosing a trade sale instead of growing their businesses, as the growth and patient capital gap impacts the investment journey. Considering dedicated tech funds and unlocking institutional capital will be crucial over the next 12 months to support the demand for fintech products and solutions.

Stephen Welton

The number one focus should be giving greater flexibility to the DC pension funds which would have a profound and fundamental impact. This is the future savings industry of the UK, and the investment strategies that these schemes pursue are critical to the supply of growth capital. But at the moment these taps are closed with a narrow focus on fees leading to an even narrower investment strategy choking off the supply of risk capital where it is most needed, and where it will drive higher returns for pension fund members. That makes no sense; we must give the pension funds more flexibility. If just five per cent of their assets could be allocated into unlisted investments – and a large part of that would be growth capital – it would be transformational.

This does not require wholesale changes to the law but some smart thinking about regulation, an area in which the UK has always been a leader. I am more optimistic that these changes could happen in 2021 following the pandemic and because the case to do so is compelling.

Marcus Stuttard

It is really important to provide certainty around what already exists. We need to build on what we have got, from fiscal incentives such as EIS, VCTs and business property relief to bodies such as the British Business Bank, Innovate UK and the Catapults. 

There are particular sectors, such as healthcare and the green economy, in which the UK has great strengths and where there is real investor interest, so the Government’s in these sustainable sectors is very welcome.

David Hughes

To address the pandemic induced funding gap, the Government could usefully catalyse more private investment by providing some form of match funding and improving tax incentives for a limited period.  The payback would come from ultimate investment returns and economic multiplier effects resulting from greater PAYE, NI and VAT receipts.

Sustainable investing is gaining increasing importance and momentum amongst both institutional and retail investors.  To raise capital more easily, scale ups should have business models that are demonstrably sustainable and develop products and services that also meet their customers’ sustainability objectives.

Sam Smith

Given the scale of the economic challenge facing the country, it makes sense for every pool of capital to be utilised. Retail investors are among the most valuable because they focus their investments on small to mid-cap growth businesses. They are also keen to invest – UK stockbroking platforms reported a threefold increase in new retail investor account openings this year. 

So more needs to be done to give retail investors a chance to supply growth finance to scaleups. Harnessing the power of technology could be the way to do this, and one way in which this could be applied is in running a retail offer as part of an accelerated fundraise. A company such as Primary Bid, which has partnered with the London Stock Exchange, offers exactly this through its online platform, with no delay to the issuance timeline or impact on pricing. It is these types of innovations we need to help support scaleups realise their ambitions.


“As the UK’s economic development Bank, the British Business Bank remains fully committed to supporting high growth scale-up businesses across the country.

Funding prospective globally competitive companies in innovative areas such as Biotech, Deep tech, and resource efficiency, will help maintain the UK’s position as a world-class technology centre and provide the high-quality jobs and tax base necessary for economic success.

To do this, we need to provide the long-term patient capital that those businesses need. As the UK’s largest  domestic investor in Venture and venture growth capital, our interventions such as Enterprise Capital Funds and commercial subsidiary British Patient Capital are helping to provide the crucial funding for growth that will, ultimately, be the key to a thriving post-Covid-19 UK economy.

Our regional funds are also delivering substantial investment, helping to level up economic activity through more equal access to finance. If we are truly to help the UK economy to thrive, however, we need to go further, embracing the best talent regardless of gender, ethnicity, age, location, or other characteristics. We look forward to working with the Scaleup Institute and the wider market as we take forward this work so more businesses can find the scaleup finance they need to prosper and grow.”

Catherine Lewis La Torre, CEO, British Business Bank

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