How One Fairness Investor Is In search of To Appeal to Exhausting-To-Attain SMEs

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

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

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

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

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

Based eleven years in the past, BGF prides itself on being an SME-friendly investor. In offering affected person capital to help long-term initiatives, it usually takes a minority stake within the companies it backs. It has additionally gone out of its method to be accessible, having made a degree of opening places of work throughout the U.Ok. somewhat than specializing in a couple of established entrepreneurial hubs. Final yr it invested a file £600 million, up 55 % from the yr earlier than.  

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

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

A Query Of Belief

Whereas BGF makes investments on the belief that entrepreneurs will in the end work in direction of some type of exit, Gregory says there isn’t a brief time period strain. Founders can work to their very own timelines and money in when the time is correct for them. Underpinned by this philosophy, the agency has positioned itself as a supply of affected person capital. An investor that can give its portfolio corporations time to develop their merchandise.

All this sounds extremely benevolent – minority stake funding with no strain for an exit – however how does it work in apply? In spite of everything, BGF is in the end in search of to safe returns for its shareholders and that in the end requires a degree when all events can promote up and transfer on.   

Gregory says  BGF invests off its personal steadiness sheets and isn’t topic to the fund cycle that dictates the practices of many VCs. This implies its timelines are extra versatile. Nonetheless, he acknowledges that exit stays the endgame.  “As a minority shareholder, we are able to’t pressure an exit. Nonetheless, we’ve got to imagine the entrepreneurs we work with do wish to exit sooner or later.”  

So a certain quantity of belief is required and Gregory says a whole lot of effort goes into constructing a relationship with founders earlier than investments are made. Submit funding, it gives value-add help to assist its corporations develop. It is going to, for instance, assist with the appointment of non sexceutive administrators via a nationwide expertise community.  

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

A Totally different Mindset  

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

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

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

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

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

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