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Supporting SMEs to be Investment Ready

Infographic showing people investing as a company's results show growth.

Small and medium-sized enterprises (SMEs) are the backbone of the UK economy, accounting for 99% of all businesses, and employ over 60% of the workforce. However, many new and established SMEs face challenges and barriers when it comes to accessing the necessary finance to grow and innovate.

Generally business finance falls under two headings: debt financing and equity financing or a combination of the two. The principal difference between the two is that unlike debt financing, equity financing carries no repayment obligation (albeit the investor is expecting a return on their investment) and debt financing does not require giving a proportion of the company ownership. Debt and/or equity funding could also be augmented by government grants offered by Innovate UK, other central government departments or local government.

When we talk about investment readiness, we are referring to preparedness for raising equity finance, and securing debt finance. Equity financing enables businesses to raise capital for investment and growth, in exchange for giving up partial ownership of the business. For early-stage businesses, with a limited trading record and ability to access and manage debt finance, equity is a key route to acquiring the capital for financing growth and innovation. Equity funding also has the further benefit of drawing in the skills and expertise of investors to support fledgling businesses’ growth.

The Funding Journey

In practice businesses on an equity journey may undertake a series of ‘raises,’ dependent on their growth trajectory and exit strategy. These stages are described below, as per the descriptions provided by the British Business Bank:

  • Pre seed stage – before a business has developed a product, they may require funding to develop this e.g. market research or developing a prototype. Pre-seed raises could be from a range of sources such as friends and family or angel investors
  • Seed – funding sought at this stage is about turning the business into a full, going concern, for instance product development or staff recruitment. Equity funding at this stage could come from a range of sources including angel investors, early-stage venture capital firms, and incubators or even equity crowdfunding
  • The Series A stage typically occurs when a start-up has developed a product and gained sufficient market development and a plan for longer term growth and profitability. Funding might be sought from venture capital, angel investors or institutional investors
  • Series B funding, following Series A is designed to significantly accelerate the business in terms of products and market. Here funding might typically come from venture capital or private equity
  • Series C funding suggests accelerated growth potential with an established business model and growing revenue stream. Series C funding might be used to support the business in areas like market positioning and acquisition. Series C funding is the preserve of venture capital firms, private equity firms, and sometimes corporate investors
  • Initial Public Offering involves companies offering a portion of their shares to the public for the first time and likely listing on the Stock Exchange.

The Equity Gap

Access to equity funding is a game-changer for businesses looking to accelerate their growth and is central to fostering fast-growing local and regional economies. Despite ongoing national and regional interventions to increase the supply of equity capital it is agreed that there is a significant ‘Equity Gap,’ in the UK economy (i.e. insufficient capital supplied to match demand from potential high growth and innovative businesses). This acts as a brake on the growth of smaller companies and national, regional and local economies. The government’s own Levelling Up White Paper suggested this gap was worth around £2.8bn per annum across the UK, and the gap is proportionately worse outside of London and largest in the East Midlands, Yorkshire and the Humber, and the West Midlands.

The Equity Gap naturally means that businesses seeking equity finance are facing an extremely competitive environment. In order to access the limited supply of capital in the marketplace then it is vital that businesses are investment ready and in as strong a position as possible to pitch to potential investors.

Exemplas and Investment Readiness

Exemplas has a team of expert investment readiness specialists who provide in-depth advisory support to Innovate UK Business Growth clients who are seeking to access finance to accelerate their business growth and scaling journey. Exemplas investment readiness team offer this service to innovative businesses in three regions. Support includes:

  • Assessment of the strengths and weaknesses of the businesses’ investment proposition using a benchmarking tool. This benchmarking provides a useful gap analysis and identifies areas that the business needs to focus on to become investment ready
  • Advisory support, to understand investment options (grant, loan, equity). Help develop investment proposition and collateral.  To help with refining and developing the businesses investment pitch including feedback and review
  • Training to develop critical collateral such as a business plan, pitch deck, financial model, and other documents and information required for funding.
  • Linking with relevant investor networking opportunities including arranging pitching events that enable businesses to pitch directly to a selection of curated investors.

Over the last year our investment readiness specialists have delivered direct support to 826 businesses to help them become investment ready in turn helping them raise equity totalling £106 million.

Our investment readiness experts have an in-depth understanding of the funding landscape. Given the competitive equity market.

Further reading:

small business finance

Navigating the funding journey