THE FUTURE OF GROWTH CAPITAL REPORT WITH SUPPORT FROM INVESTORS, INDUSTRY AND THE BUSINESS ACTION COUNCIL AUGUST 2020 THE FUTURE OF GROWTH CAPITAL REPORT THE FUTURE OF GROWTH CAPITAL REPORT Deloitte Innovate Finance ScaleUp Institute CONTENTS Deloitte is a leading global provider Innovate Finance is the independent The ScaleUp Institute is a private of audit and assurance, consulting, industry body that represents sector-led, not-for-profit organisation financial advisory, risk advisory, and advances the global FinTech focused on collaborating with policy tax, and related services. With community in the UK. Our mission makers, corporates, finance players, more than 150 years of hard work is to accelerate the UK’s leading educators and government at a local and commitment to making a real role in the financial services sector and national level. 03 Foreword difference, our organisation has grown by directly supporting the next 06 Executive Summary in scale and diversity - approximately generation of technology-led Our mission is to help the UK to 10 1. Investor And Growth Finance Landscape 286,000 people in 150 countries and innovators. become the best place in the world 19 2. The Market Failures territories, providing these services to grow a business as well as start one, 22 3. The Gap Explained - yet our shared culture remains the Innovate Finance’s membership ranges and enable our existing high-growth 23 3.1 The Structural Growth Capital Gap Pre-Covid-19 same. Our organisation serves four from seed stage startups and global businesses to scale up even further. 27 3.2 The Cyclical Growth capital gap due to the Covid-19 crisis out of five Fortune Global 500® financial institutions to investors, 30 3.3 New challenges and opportunities going forward companies. professional services firms, and global Scaleup businesses are defined as 34 3.4 Scaling the economic significance of the Growth Capital Gap FinTech hubs. By bringing together companies which have increased 36 4. International Learnings and connecting the most forward- their turnover and/or employee 40 5. Recommendations In Depth thinking participants in financial numbers annually by more than 20 47 Next Steps services, Innovate Finance is helping per cent over a three- year period. 48 Contributors to the report create a global financial services Nationally, the latest 2018 data from sector that is more transparent, more ONS showed that there are 33,860 of sustainable and more inclusive. these businesses generating more than £1 trillion to the UK economy. The national number of scaleup companies has increased by more than one- third over the last five years. In parallel, we have a generation of scaling businesses who are growing at greater than five percent whose scaleup potential must be encouraged and fostered. Our thanks to our partners, supporters and contributors to this document. Publication date: August 2020 Available online at: https://growthcapital.report Data used in this report is taken from the IDBR datasets 2010-2017. The confidentiality of all data held on the IDBR is protected by the National Statistics Code of Practice and associated Protocols and by specific legislation. In accordance with these requirements, data presented is rounded to prevent disclosure. Differences may exist in totals across tables due to disclosure methods used. This work contains statistical data from ONS which is Crown Copyright. The use of the ONS statistical data in this work does not imply the endorsement of the ONS in relation to the interpretation or analysis of the statistical data. This work uses research datasets which may not exactly reproduce National Statistics aggregates. Report designed and produced by ScaleUp Institute. THE FUTURE OF GROWTH CAPITAL REPORT FOREWORD CHARLOTTE CROSSWELL IRENE GRAHAM CEO, INNOVATE FINANCE CEO, SCALEUP INSTITUTE The Growth Capital Gap is not a new issue. It predates the two most recent economic shocks we have faced in the 2008-9 recession and the COVID-19 pandemic. Many will be familiar with the struggles faced by promising, scaling businesses - both the new and the established. We fast-growing companies seeking to access the capital they should build on what is already in place and expand or realign need to achieve their potential. In our own careers, which current efforts to help those same innovative businesses. It have focused on making finance better through innovation will require a coordinated effort to bring forward the changes I am very pleased by the focus that this report provides on the importance of the UK developing deeper pools of in financial services and ensuring this innovation flourishes we recommend, encompassed by a new national strategy, patient capital that really allow the providers of finance to“ grow with the businesses in which they are investing for the with the right backing, we have seen first-hand how the issue providing us with a blueprint for a growth legacy on which to long term. Now more than ever we must address this problem and get it right at a National and regional level. has persisted. It has held too many innovative businesses build. back from achieving their true potential, and stymied wider economic growth as a result. Furthermore, this strategy will enable us to accelerate Colin Mayer, Peter Moores Professor of Management Studies, University of Oxford Saïd Business School the unlocking of institutional and corporate funding for In May 2020, building on the work of our two institutions, those businesses and to build on a network of national we were asked to lead working groups, on behalf of the development banks, with strengthened reach into local Business Action Council and the Recapitalisation Project, communities, that puts the British Business Bank and British to look at finding strategic finance solutions in support of Patient Capital at its centre. We are also calling for an our entrepreneurs and their businesses in the medium to expansion of Innovate UK’s role and scale to deliver, along longer term, looking beyond the current crisis. We have since with a more heightened focus on R&D by reassessing our engaged our wide ranging ecosystem of investors, banks, deployment of the OECD’s Frascati Manual and the creation businesses, government and industry, who have a key interest of a ‘Future Opportunity Fund’, to support emerging and in ensuring scale-up companies can rely on a redefined socially inclusive areas of our economy. infrastructure for accessing growth capital. As we look forward to the Comprehensive Spending Review, As the ScaleUp Institute has evidenced these businesses we hope this report can provide insight to policy makers on are an important part of our economic makeup for many reasons. They are innovative, diverse and productive. They the current challenges and an outline of the opportunities create high quality jobs, they are internationally focused and for collaboration between the private and public sectors on they span an array of sectors. Providing them with access the way forward. to growth capital would accelerate a bigger ecosystem of We are truly grateful to everyone who has given their scale-up companies, creating more jobs, and more economic thoughts, insights and expertise to aid our research. Our growth across the UK. We must seize the huge opportunity thanks go in particular to the excellent team at Deloitte, that the UK can gain by backing these companies. led by Richard Kibble, for the resource, contribution and Today’s challenge of fuelling a sustainable economic collaboration upon it. recovery, and with a new relationship with the EU on the We look forward to progressing the recommendations with horizon, means it is now the time to make bold moves to government and private sector stakeholders. We see this invest in tomorrow’s successful businesses through greater report as a tool and a convening point to support the desire collaboration between the public and private sector. across industry and government to - together - build back ‘The Future of Growth Capital’ report lays out a plan for better with a robust, national blueprint for growth. The how the UK can respond to Covid-19 and better back its private sector across finance and industry stands ready. 4 5 THE FUTURE OF GROWTH CAPITAL REPORT For decades the UK has sought, bit by bit, to move the includes demand-side constraints, limiting the awareness, dial in addressing the structural growth capital gap. It is sophistication and willingness of management to the use now imperative for us to be bold and make the quantum of external capital to drive growth. The result is that the leap needed to ‘bounce back’ and address - in this new UK economy is not benefiting from the dynamic growth decade - the significant opportunity that innovative that scaling companies can deliver across many sectors scaling businesses represent for the UK and lay to rest the and regions. Layered on top of this, we now have the unresolved challenges these companies face when they additional cyclical challenge presented by Covid-19, which EXECUTIVE SUMMARY seek to grow. means we face the risk of significant, long-term impact and going even further backwards in the OECD scaleup The importance of small and medium sized businesses to rankings. the health of the UK economy and its citizens’ prosperity is well-known, however SMEs are not homogenous. Based upon contemporary analysis, and wider assessment Within this large grouping of small businesses there exists of historical reports, we estimate the UK long-term a rich and diverse collection of fast-growing, productive and innovative enterprises. These scaleup companies Structural gap to be equal £5 billion - £10 billion every have great potential to expand rapidly, to create new year. Whilst not a new problem it is one we have taken products and solutions, to create new jobs, and to improve a relatively gradual, incremental approach to addressing livelihoods.