How Equitable is Equity Investment in the UK?
There have been several reports recently on equity investment for startups and scaleups in the UK, so I’ve compiled a few headline findings to give you a flavour of the UK equity investment landscape.
Here is a very brief insight into where equity funding is going broadly addressing the question – How equitable is equity investment in the UK? It takes in equity investment for seed-stage businesses, equity investment spread by UK geography and the gender gap.
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Funding for seed-stage and deals below 500K
Funding for seed-stage companies and deals below £500K are both critical to nurturing our future growth businesses. Beauhurst recently reported on Equity investment into the UK in the first half of 2019 (H1 2019). It’s interesting to see that there were positive trends for both startups and deals below £500K.
Besides hitting a record high for H1 with “a 15% increase in the total amount of investment received by the UK’s startups and scaleups” it’s great to see that “the majority of the increase was at the seed-stage” given that a lack of seed funding has negative economic repercussions down the line. This looks like a reversal of the worrying trend highlighted by Beauhurst in ‘The Deal: Equity investment in the UK 2018’ where they reported that “Deals into companies at the seed-stage have fallen by 15% - to the same level as in 2014”.
Another characteristic of the quarter is that “After several years of a slow and steady decline in the proportion of deals below £500k, the first half of 2019 saw a small rise”.
What about geography – where is UK equity investment going?
In July 2019 the UK Government reported on ‘Equity Finance and the UK’ (BEIS Research Paper Number 069/1718). It throws into stark relief the variation in regions with London acting as a kind of vortex, sucking in the lion’s share of equity investment:
Compared to London “...the deal values in other regions are lower by up to 41%: East of England (-9% - but not significantly different from London), South East (-14%), Northern Ireland (-16% - but not significant), Scotland (-20%), Wales (-20%), South West (-25%), North West (-27%), East Midlands (-27%), West Midlands (-29%), Yorkshire and Humberside (-35%), North East (-41%)”.
“Overseas investors invest about 84% of their funds into companies located in London, East of England and South East.”
The report uses a method to estimate potential equity funding gaps and found that “regional ranking shows that overall Yorkshire and Humberside, the East Midlands, West Midlands and North West seem to receive much smaller amounts of equity investments than warranted by the quality of potential demand in these regions. In contrast, London and the North East receive relatively higher actual equity investments by value when compared to potential demand”.
But it’s a complex picture as it also found that “potential unmet demand for equity financing in the UK comes out in a range from £6.5bn to £12bn.
"The greatest additional demand in absolute terms seems to be in London (£1.9bn - £3.6bn), followed by the South East (£1bn - £1.8bn), the East of England and North West (£0.6bn - £0.86bn), and the South West (£0.5bn - £0.93bn). The West Midlands, Yorkshire and Humberside and East Midlands have a similar situation in that the potential ‘equity gap’ is approximately in the range £0.4bn - £0.7bn. Scotland follows closely after them (£0.3bn - £0.6bn). The lowest volumes of potential additional demand for equity funding seem to be in Wales (£0.16 - £0.3bn), the North East (£0.1bn - £0.17bn) and Northern Ireland (£0.06bn - £0.16bn)”.
Equity funding and the gender gap
Much has been written about the gender gap when it comes to funding. Women led businesses generally get a much smaller slice of the funding pie, both in terms of volume of deals and deal size:
“2013 was the only year in which the average amount raised was higher for female founders than their male counterparts - £1.35m compared to £1.25m”.
Recent findings in ‘High Growth in the South West’ (by Beauhurst) illustrate this gap.
“24% of high-growth companies in the South West have a female founder, the second highest rate in England after the North East.”
“So far in 2019, 20% of deals in the South West have gone to female founders - the highest on record - but they received just 4% of pounds invested. This figure increases to 13% if we discount OVO Energy’s megadeal.”
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