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Why are SMEs declining external investment, and is it a barrier to scale?

11:51, 6th February 2019
Francesca Morgan
Guest Contributor: The Supper Club Edition
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Small businesses accounted for 22 per cent of the UK’s economic growth in 2017 according to Octopus Investments High Growth Small Business Report. These SMEs, which comprise less than one per cent of UK companies, created one in five jobs in 2017 and hold a wealth of potential for our economy. When it comes to the future of the UK business landscape, it seems that the best things do come in smaller packages. 

With that in mind, it’s puzzling to see that many of these ambitious SMEs are turning down external investment. According to the ScaleUp Institute’s survey of UK scaleup leaders, there is a general reluctance to use growth capital. Only 28 per cent report using equity finance and a mere 13 per cent plan to use it in the near future. 

The way we work has been disrupted in recent years and subsequently so has the funding landscape. From the rise of fintech and peer-to-peer lending to R&D tax credits and the Enterprise Investment Scheme, businesses are spoilt for choice; so why aren't they utilising all their options?  

We spoke to members of The Supper Club about their experience of saying no to funding and what drove this decision. Lee Carlin, Co-Founder & Executive Director of The Intern Group decided to take a step back from external investment in favour of bootstrapping his company.

“This decision meant we had to adopt an organic and 'scrappy' entrepreneurial spirit, but it also meant we could focus on company values and alignment. We learned how to make money and grow the businesses, even during difficult periods.”

This brave decision paid off for Carlin who, without funding, grew the business to over $12m in annual revenue and achieved 60% year over year growth in program participants. “This proved to us that external investment wasn’t necessary.”

This attitude of taking full control of the business was echoed by Managing Director of Oakley Global Business Solutions, John Gladman: “I founded Oakley in 1999 with £25,000 and the determination to make it on my own. With no external funding, the first few years meant sacrifice, hard work and re-investment of any profits we did make back in to enable growth. While external finance would enable rapid scale, it doesn’t necessarily mean success. Scaling a business is more about the mindset of the entrepreneur in charge and having the right people to support that scale. Investment alone is not the key to scale or success.”

This rebellious spirit has driven these two business leaders to take a step back from external funding solutions, in favour of having full control of their businesses. It’s a gutsy move but one that ultimately has seen great results. 

For some SMEs, it seems more money really does mean more problems; David Lester Co-Founder and MD at CitrusHR didn’t want to lose focus with deep pockets.

“I have very nearly taken VC funding in two companies and pulled out both times. The first was a computer games company in the early 90s. We raised just under £50k from friends and family and expanded to the US, whereupon we were approached by plenty of VC funds. Most wanted to invest $5 million, when we were seeking $1m or $2m, and I did not think we could put the extra cash to sensible use, so it felt wrong to dilute the existing shareholders that much.”

Keeping things more modest had its benefits for Lester. The company used invoice finance instead and grew to $15 million in revenue, with strong profits before a successful exit 18 months after rejecting the VC offer. Later on in his career, Lester would turn down VC funding once more.

“My current company, citrusHR, withdrew from an offer of funding last year late in the proves, and for very different reasons—we couldn’t agree to terms for the Directors’ Service Agreements. There is a risk that this will hold back our growth somewhat, though we’re currently growing fast enough that I’m hoping it won’t.” 

Spencer Gore, CEO European Medical Group also spoke about the problem with managing agreements with external investments saying that: “We turned down an offer to buy us from the market leader in our industry this time last year. Having had an investment in my previous business (sold 20% to HNW individuals) I decided I didn’t want to go down this route again. Too much hassle managing, them. Certainly, don’t regret it and I think, growing organically keeps you really focused as you don’t always have money to throw around. Take a look at Jim Ratcliffe, richest man in the country and hasn’t had an investment. It can be done if you are patient and relentless.”

There are a number of reasons why some founders are taking a step away from external investment. If you’re looking at funding and want to know more about your options, we recommend talking to different founders who have been through the process to learn from their experiences or reading about their experiences in our Way To Growth guide.

This article was written by Emma-Jane Flynn, Managing Director of Peer to Peer platform and monthly contributor, The Supper Club. At the frontline of The Supper Club, Emma-Jane's purpose is to inspire an entrepreneurial mindset in all leaders, and she encourages the individual to realise growth ambitions by providing support throughout all stages of their journey.

Listen to The Supper Club episode "Navigating Entrepreneurial Spirits & The Power Of Community" on our Industry Experts Podcast, we speak to Emma-Jane and Founder Duncan Cheatle about how to best nurture an entrepreneurial spirit, scale-up a company, and the key leadership skills necessary for success.

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The information, investment views and recommendations in this article are provided for general information purposes only. Nothing in this article should be construed as a solicitation to buy or sell any financial product relating to any companies under discussion or to engage in or refrain from doing so or engaging in any other transaction. Any opinions or comments are made to the best of the knowledge and belief of the writer but no responsibility is accepted for actions based on such opinions or comments. Vox Markets may receive payment from companies mentioned for enhanced profiling or publication presence. The writer may or may not hold investments in the companies under discussion.

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