One of the more astonishing features of the British economy over the last few months, and indeed the last turbulent few weeks, has been the robustness of the UK’s small business owners, particularly its growing army of high-growth tech entrepreneurs.
In the most challenging of environments leading up to the Brexit vote, the London Stock Exchange has been home to 30 IPOs raising £2.3bn of new capital, with 18 of those IPOs on our growth market, AIM. Six of those companies are UK technology-based and raised a total of £336m.
This is a fantastic feat and shows how far the UK has come in establishing itself as one of the world’s leading centres for the digital technology industry. And it is vital that we continue to grow our homegrown entrepreneurs regardless of the outcome of the referendum. These businesses are a crucial part of the new UK economy and must be supported.
The UK’s digital economy is strong and deep: there are now over 40,000 fast-growth digital tech companies around the country employing 1.5m people, the fastest growing sector of the economy with thousands of vacancies. It’s also a high value added sector; for each tech job there are eight others in the supply chain.
Out of Europe’s over 40 tech “unicorns” – young companies valued at a billion dollars – over 20 are based in Britain. They include the London-based FarFetch and Blippar, the Hut Group in the North West, and Edinburgh-based FanDuel and Skyscanner.
So what has changed to create such a golden spirit of digital innovation? As always, the reasons are complex. But there are three shifts in attitude that have contributed, among others, to make our tech scene so dynamic.
First, over the last few years there has been a striking shift in the UK’s cultural appetite towards risk-taking, a move which has created a more sustainable ecosystem within an expanding investment community with many new constituents.
Alongside the more traditional venture capital houses, there has been a sharp rise in new crowdfunding and peer-to-peer lending platforms, such as Crowdcube and Seedrs, and seed funds like Seedcamp and Entrepreneur First.
Companies in Tech City UK’s Future Fifty later-stage growth programme have collectively raised £1.3bn in just over two years via 38 rounds of funding, like Deliveroo and Brandwatch, alongside an additional four IPOs, such as Just Eat and Zoopla, and nine acquisitions, such as Unruly (News Corp) and SwiftKey (Microsoft). Meanwhile, one new UK-based challenger bank, Mondo, recently made history, raising £1m in 96 seconds on a crowdfunding platform. The regulatory authorities, including the FCA, have also taken an encouraging approach to alternative finance.
There’s a new spirit in venture capital too. Nearly one-third of all European venture capital funding consistently comes to the UK. We now have the second highest levels of venture capital invested per capita in the world, after the US. In another shift, many new UK-based venture funds, such as Atomico, LocalGlobe and BGF Ventures, are run by ex-entrepreneurs who themselves built successful businesses, providing critical operational expertise and advice to their portfolio companies.
Second, the government has backed innovation and recalibrated our tax system so that equity has a fairer chance. This improves incentives for investors. For example, the abolition of stamp duty on shares invested in companies on AIM was a great success: overnight some £4bn of investment moved into high-growth firms, helping them invest in their businesses.
Recent figures show that businesses which raised capital on AIM – rather than borrowing from banks – created 731,000 jobs, paid £2.3bn in tax, and contributed £25bn to UK GDP alone.
So that we remain open for business and able to raise finance for talented entrepreneurs from all over the world to create jobs and growth here in the UK, now is the time to consider abolishing stamp duty on all listed shares.
The government has also done much to improve early-stage investment by introducing incentives under the SEIS and EIS schemes and more recently for Venture Capital Trusts. SEIS has enabled 3,900 companies to raise £338m in the last two years alone, while 5,950 companies raised £3.23bn under EIS.
Finally, today’s young startups are increasingly supported by a variety of organisations and programmes, such as Tech City UK, the London Stock Exchange and its ELITE programme, the London mayor’s International Business Programme and the Open Data Institute, among others.
At a recent Tech City UK summit hosted by the London Stock Exchange for Future Fifty Companies, we saw how productive these new networks are, with entrepreneurs from businesses such as House Trip, Unruly and Photobox, which have all recently been successfully acquired, sharing their experiences with their peers.
Of course, there is always more to do. The UK has 5.2m SMEs and 600,000 startups were registered last year alone. We need to do more to favour and recalibrate equity finance in the tax system. Raising equity is by far the best mechanism for companies to grow.
Look at the numbers. In Europe, 80 per cent of SME financing is dependent on banks, with just 20 per cent coming from equity financing. In the US, the exact opposite is true. Sixty per cent of all US SMEs raise capital by offering friends and family a stake in their business. No wonder the US was the quickest nation to recover from the Great Financial Crash.
It’s why London Stock Exchange and Tech City UK encourage young entrepreneurs and SME owners to seek new investment in their business from individual investors, the markets or crowdfunding rather than debt whenever they can. Valuation creation does not depend on leverage either. So entrepreneurs looking to exit their businesses are not helping themselves by loading their companies with debt.
But if we are to encourage these entrepreneurs to grow their firms – and to the scale of their US peers – we need to ensure that they can access the right form of growth finance to drive home this revolution and to be treated fairly. The tax treatment of equity versus debt should be looked at more carefully, so it’s a more level playing field.
We’re reaping the first harvest of the seeds sown over the last few years which the recent political ructions should not stamp out. This is truly an exciting time to be working in digital innovation. Just imagine what the next five years have in store.