Oxford and Cambridge Universities have battled it out on the water, in the league tables, even on the cheerleading field. Recently, however, they've found themselves on the same team.
A new Barclays report addressing the future of UK scale-ups has brought together experts from Cambridge Judge and Oxford's Said Business Schools. The result is a set of tangible, actionable recommendations for founders, investors and government covering everything from developing a management team to refocusing investment metrics.
The number of UK startups is now not only well above the European average, but is hot on the US's heels, too. It's positive news for our entrepreneurial ecosystem, yet worth remembering that fewer than 3 per cent of startups both survive for a decade and enjoy a single year of high growth. As Sherry Coutu CBE points out: "The problem now is not the quantity of entrepreneurial activity, but the ability to turn that activity into high-growth scale-ups." If we can help create just 1 per cent more scale-ups, it could add £225bn to British GDP by 2034.
There is an urgent need for us to understand the mechanisms which drive company growth and the obstacles that hinder it. Three areas (covered briefly below) could have real impact, yet remain largely under-explored.
1. Narrowing the Venture Debt Gap
Europe's economies lack the big companies of Silicon Valley, and we are repeatedly informed that the root of this deficit is access to finance. Venture debt could help. An import from the US, it arrived on our shores in the late 1990s and has gone on to establish itself as an important - yet under-exploited - source of funding for new businesses. According to the study, 20 per cent of VC-backed companies in the US obtain venture debt at some point, compared to 8.4 per cent in the UK.
Despite its significant role in the entrepreneurial ecosystem, venture debt is subject to regulatory obstacles not faced by the VC sphere. For example, banks face relatively high costs of capital due to the fact that venture debt typically attracts a high-risk weight under Basel III. Prudential Regulation Authority "ring-fencing" requirements are problematic: small firms may fit within the ring-fence, but as they grow and make use of increasingly sophisticated financial products, they are likely to fall outside it. Further, data about venture debt remains sparse. The UK government can help, by resolving any regulatory uncertainty surrounding the lending of venture debt. Data on venture debt deals should also be gathered more systematically.
2. Aiming High
Yes, the Alternative Investment Market (Aim) has certain merits, but it is not without fault. New research from Nabarro, for example, has revealed that less than a quarter of UK tech entrepreneurs are planning to use Aim as an exit strategy. The low number and increasing age profile of VC-backed IPOs raises concerns about how suitable the UK stock market environment is for scale-ups.
In 2013, the London Stock Exchange (LSE) attempted to plug the gap between Aim (on which companies typically raise £4m and £15m) and the LSE's main market (designed for established companies) with a new High Growth Segment. Since inception, however, only two companies have been listed on the new market.
But arguably Aim's biggest shortcoming is that the market lacks a critical mass of buyers and sellers required to justify hiring analysts to disseminate the information needed to create liquidity in a stock. If we want our junior market to match the highly-successful NASDAQ (a similar market based in the US), the government should consider working with industry to attract foreign companies and investors, and work on novel solutions to improve the level of analyst coverage for scale-ups.
3. The Other Stock Market
Could waiting around for your favourite startup to go public soon be a thing of the past? If a more efficient marketplace for secondary shares was available, it might. Secondary transactions are mutually beneficial: they can provide liquidity for shareholders at a time when the issuer is not ready for an exit; and buyers gain access to an alternative investment class.
The market, however, is rife with risks. Buyers have limited information (private companies don't have to make the regular disclosures of audited financial data that are required of public companies); sellers face limited competition for their stock. And valuations are believed to be low, reflecting severe information and liquidity constraints.
What's needed is a more efficient marketplace for secondary shares, driving more efficient buyers towards this form of investment. One challenge will be the appropriate taxation of such a marketplace. Stuart Lucas, who co-founded online marketplace Asset Match, wants to see stamp duty on secondary purchases of unlisted shares removed, as is the case for Aim and ISDX. Like The Entrepreneurs Network, Lucas is calling for private, unlisted companies to be included in Isas and other tax wrappers (as we see with Aim-listed companies).
Further, he believes capital gains tax on secondary unlisted shares that align with the new Entrepreneurs' Relief should be set at 10 per cent, or exempt after three years. "We believe there are over 3,000 established UK companies with 500,000 shareholders and £300bn of locked-in equity. Recycling a portion of this would be a huge boost to the sector," he says.
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