Pension funds and corporate VCs could transform SME funding over the next decade
On 28th March 2018, nearly a decade after the last financial crisis, The Supper Club convened its first Foresight panel of pioneers and thought leaders - to debate The Future of Finance and what will change the funding landscape over the next ten years.
Stephen Welton, CEO of BGF, set the scene with a brief tour through trends, changes and innovations that have defined the last ten years. “Back in 2008, there was widespread uncertainty about how the future of finance would unfold,” he said. “However, the UK’s tax policy - particularly as it relates to EIS - has led to record numbers of new businesses being formed and is, in many ways, the envy of the world. Crowdfunding has democratised equity investment and brought more private capital into small businesses. And we must give credit to the regulators for allowing innovation to flourish.”
While BGF has already deployed £1.5 billion of its £2.5 billion fund into 216 high growth companies, it’s average investment is £5.5 million. Stephen warned that, on the whole, the domestic funding market lacked scale. “It’s still a cottage industry,” he said. “There is still a lack of scale-up funding and only 31,000 scale-up businesses. If we’re serious about creating giants we need a bigger pool of capital.”
“There is £250 billion locked up in pension funds that, if deployed, could be contributing to the SME economy. We need to create SME investment as an asset class, not in single companies but in a pooled risk vehicle.”Stephen Welton, CEO of BGF
Cristina Alba Ochoa, CFO of challenger bank OakNorth, helped the business raise £250m from several investors last year at a $1.3bn valuation. “Some of our new investors have pension funds in their portfolios and that, coupled with their deep knowledge of investment in new technologies, has made up part of the investment that is enabling OakNorth to help SMEs grow,” she said.
Commenting on the key driver of demand in business lending, now and in the future, Cristina said it was ‘quicker decisions, flexible terms adapted to SME needs, and not forcing them to take a prescribed product’ – with larger financial institutions looking at new ways to deal with speed. “Big banks want to adapt technology like our ACORN machine platform; and are happy to do so in strategic partnerships and ventures for SMEs.”
Corporate venturing will grow over the next decade, according to Aftab Malhotra, Co-founder and Chief Growth Officer of GrowthEnabler. “There is enormous pressure on corporates to grow”, he said, adding that 76 FTSE 100 companies had gone in the last 30 years. “Corporate venturing enables them to invest in their own innovation while growing their future customers.”
Aftab quoted GrowthEnabler research that corporate venturing has grown from $18 billion in 2014 to $32 billion in 2017 and there are now 270 providers of Corporate Venture Capital (CVC) compared to 140 three years ago. “It’s two worlds harmonising by necessity, with start-ups and scale-ups gaining from visibility, advice, talent networks, as well as expertise in export, distribution, new product development, and strategy.”
Speed and new sources of investment were also key trends highlighted by Sam Smith, founder & CEO of finnCap, who explained how she had helped scaling entrepreneurs secure larger sums through a mix of debt and equity as well as private and institutional investors. “We’re helping founders get finance in days and weeks instead of months because there are so many different sources of funding,” she said.
“High net worths and family offices are looking for more niche investments, and the number of institutional investors looking at private companies has grown from 100 to 300. New pension regulation has given people more control over what they invest in.”Sam Smith, founder & CEO of finnCap
The new kid on the block is Bitcoin, of course, and it’s already starting to have an impact, according to business and technology journalist Jon Card. “It was financial calamity that brought on the current wave of fintech and loosened the banks grip on the way our world is financed,” he said. “Perhaps it’ll take another calamity to usher in crypto as the world’s currency and Blockchain the cornerstone of our civilisation.”
“The big fintech story of recent times is crypto-currency and the Blockchain. More money was raised by start-ups via ICOs than by early stage VCs last year - $5.6bn.”Jon Card, Business & Technology Journalist & Founder, Full Story Media
Everyone on the panel agreed that there is more money looking for investment than ever before, but is it creating the conditions for growth or another financial crisis?
“Leverage is rising in the finance system and that is a worry,” said Stephen Welton. “Corporate memories are short and record low interest rates have created incredibly good lending conditions; but a rising tide lifts all boats and not all the businesses have solid business models. There is an asset bubble, so everyone should be cautious and be clear on their objectives.”
“It’s not a question of if but when the bubble will burst,” added Cristina Alba Ochoa. “Businesses need to give themselves the buffer of capital, so they can ride it out.”
While crowdfunding and crypto have grown without regulation, this will change. “Everything will be regulated, and business owners will need advice on how to navigate a continually evolving landscape for funding,” Sam Smith concluded.
Brokers will have a key role to play, but high growth entrepreneurs attending the event called on the industry to do more to educate business owners about different funding options and how to use them. A new guide to raising finance, produced by The Supper Club and supported by BGF, finnCap and Octopus Investment, will be released at the end of April.