Published: Feb 20, 2024
Focus:
Insights
VCTs have played a significant role in shaping the funding landscape for smaller UK businesses since their introduction in 1995. Now a critical source of growth capital for earlier stage companies, VCTs have provided billions of pounds of investment to thousands of small and medium-sized enterprises (SMEs) which otherwise may have struggled to raise funding from traditional sources. SMEs are the lifeblood of the UK economy, accounting for 61% of the employment, and around half of turnover, in the UK private sector (Source: Department for Business, Energy and Industrial Strategy).
A recent study by the Venture Capital Trust Association (VCTA), of which Maven is a founding member, cited that 35% of VCT-backed business leaders saw insufficient capital as the biggest growth barrier, and this rose to 55% among those with annual revenue of less than £1 million. Without the necessary funding, SMEs with high-growth potential will be unable to invest in new products or technology, in order to seize opportunities, and compete on both a national and global level.
VCTs as Key Players in UK Funding Landscape
Alongside other government-backed programmes like the Enterprise Investment Scheme (EIS), VCTs provide generous tax reliefs to attract private investors. The tax incentives reflect the higher risk associated with investing in smaller, less established companies, and ensure the flow of finance to this segment of the market where capital constraints are often seen as a major barrier to growth.
Investment in earlier stage businesses requires expertise and an understanding of the specific requirements and challenges involved in growing a business. In evaluating and managing investments in smaller companies, VCT managers will scrutinise traditional metrics like company valuations and profitability, but importantly they will also look at elements such as product innovation, the potential for market disruption and growth potential. This approach is crucial for SMEs, which are often at the start of their development journey and have not had the opportunity to build a track record.
VCTs provide a unique funding option that is helping to bridge a key finance gap and has also prompted other countries such as France and Ireland to introduce similar initiatives.
Strategic Guidance Beyond Capital: The Value Proposition of VCTs
A crucial component in the success of VCTs to date, is that they provide more than just capital to small businesses. Experienced VCT manages also offer strategic guidance and business advice, helping nurture ambitious entrepreneurs and management teams through the critical start-up and scale-up business growth phases.
VCT managers take a longer term, more holistic approach when it comes to investing and recognise that the businesses they back may require hands-on support and guidance.
Active portfolio management therefore plays a pivotal role in supporting growth, helping a business to professionalise and driving value creation. Introducing disciplines and best practice are vital to the transition of a smaller company into a larger and more valuable enterprise, particularly as it embarks on major strategic initiatives such as developing new product lines, identifying potential acquisitions, or internationalising its operations.
For some SME business leaders the early growth phase will provide a number of new strategic challenges, such as moving into new markets, driving operating efficiencies or pivoting the business model. VCT managers, therefore, aim to build strong, collaborative working relationships with each management team, using their significant experience to provide direct input if required to help small businesses navigate the barriers to growth.
Innovative Solutions: Success Stories of VCT-backed Companies
VCTs have helped some well-known companies find their feet, providing the vital capital and support required in the critical early stages of a business’s genesis. Zoopla, Gousto, Secret Escapes, Five Guys and Virgin Wines are just some of the now established names who benefitted from funding from VCTs.
According to the same research undertaken by the VCTA, VCT-backed companies were responsible for total sales of over £18 billion in 2022 and currently employ over 92,000, and 51% of those companies are likely to sell their products and services overseas, compared to just 10% of UK SMEs overall.
Pura is an eco-friendly baby care brand, launched to market in 2020. Since receiving VCT investment, Pura has achieved significant growth, with annualised revenues increasing from £1.5 million to a forecast level of £14 million in 2024. The VCT funding has supported the business to launch its innovative range of sustainable products with blue chip retailers, including 450+ and 500+ stores with Asda and Tesco respectively, as well as Spar, Superdrug Online, Costco, Ocado and Amazon UK. In 2023, Pura launched in the US across 1,000 Walmart stores and through Amazon US. Pura also achieved B Corp status, demonstrating that it meets high standards of social and environmental performance, as well as transparency and accountability.
“Our success in such a short time has demonstrated that we have a scalable business model with strong growth potential”, says Guy Fennell, CEO and Founder. “VCT investment and expertise has helped us expand and develop our market offering to make it easier for more parents to make a positive change and switch to products that are good for the planet and their baby.”
VCTs back ambitious companies across a range of the UK’s most vibrant sectors, not just consumer brands. Technology is one of those industries.
Recruitment technology specialist, Bright Network, has developed an innovative digital platform to provide employers with a data-driven approach to identify and recruit exceptional UK graduate talent. The VCT investment was used to help further develop its technology and student engagement strategy. Bright Network has since disrupted the industry and established a leading market position, including its first overseas presence in Germany, with its platform membership network having expanded almost sixfold to now serving more than 900,000 engaged graduates. Annual revenues have grown to more than £11 million, alongside building an impressive portfolio of repeat business from blue chip clients, where it works with over 300 partner firms, including Amazon, Bloomberg, Google and Vodafone.
“VCT funding has helped to propel Bright Network through our latest stage of growth and supported our ambition of becoming the UK’s leading graduate careers platform”, says James Uffindell, CEO and Founder. “Maven has provided key insight, from challenging and validating management strategy at board level, to more tactical day-to-day support. They understand the importance of longer term thinking and proper investment to support the business leaders they back.”
Supporting Economic Growth: How VCTs Contribute
The rise in interest rates over the past 18 months has brought a significant increase in the cost of capital for businesses, hitting SMEs particularly hard, leading to higher costs and impacting profitability.
A benefit of VCT funding is that it provides patient, evergreen equity financing which does not require the business to make regular interest payments. This helps to avoid impacting cash flow and is important during market downturns when funding from other sources becomes much harder to access.
The UK economic landscape remains challenging, sometimes requiring businesses to be open to change and to innovate. This is where smaller businesses excel over their larger counterparts, as their scale allows them to be agile in pivoting or evolving business models to keep growing. It is these types of companies that are in the sweet spot for VCT investors as they are at the forefront of new, disruptive technologies and the development of innovative products and services to meet evolving business and consumer demands. It is the growth of companies like these which will be key to UK economic recovery.
Analysis by the Centre for Economics Business Research forecasts that the number of SMEs in the UK will increase by 342,000 by 2025, with their aggregate turnover projected to increase by £160 billion and outperform the expected growth for larger businesses in the same period.
With SMEs set to continue playing a significant role in driving UK economic growth, VCTs will provide much-needed capital, while high growth businesses will benefit from the market insight and strategic guidance of VCT managers with long experience of supporting emerging businesses as they scale.
