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Briefing note : Growth Investment and LEPs
13/08/2010
Briefing note:
Growth Investment Network East Midlands www.ginem.co.uk
A not-for-profit organisation established to stimulate business growth in the region, funded by private sector member subscriptions with EMDA support.
OVERVIEW
Growth Investment was founded in 2004 by a number of Business Angel Networks, Regional Investment Funds and organisations active in supporting new and growing businesses. The aim was to work collectively to help the establishment and growth of businesses in the region, leading to economic growth and an increase in productive employment. This aim was to be achieved through:
- Encouraging individuals to invest in the region
- Helping potential growth businesses (including start ups) to make themselves “Investment Ready”
- Focussing on the Equity Gap of £0.1m to £2.5m where growing businesses find it hard to obtain finance.
The founders of Growth Investment believed in the existence of a considerable number of potential growth projects and private investors in the region, but that many simply did not know how to get started. By combining the skills and resources of professionals in the sector, we believed that more new businesses would be started, stimulating the economic well-being of the region.
In its short history, Growth Investment has succeeded in assisting with the development of the region. It continues to expand its activities and recent highlights include:
- Over the past 2 years £15m has been raised to fund growth businesses, in projects where two or more Growth Investment members have worked together;
- Over the same 2 years more than 300 local businesses have attended educational events organised by Growth Investment and
- During the past 12 months over 70 Individuals have participated in programmes designed to help them become Business Angels
Growth Investment was developed by industry professionals donating their time and expertise and funding the establishment of the organisation. EMDA initially assisted with the costs of infrastructure and subsequently has helped Growth Investment to finance its ongoing step changes.
In 2007 Growth Investment contracted an administrator to build on its early success. It now enters another growth phase, with increasing attendance at seminars and events that promote investment, entrepreneurship and business skills for the future prosperity of the region. Growth Investment will require new support, to replace the role of EMDA, in helping to fund its developing activities.
Growth Investment - The Organisation:
Today Growth Investment has a membership of over 40 organisations, including business angel networks, venture capital funds, banks, lawyers, accountants, Business Link, Connect Midlands and other providers of business support focussed on growing businesses.
The Growth Investment aim is to promote, stimulate and support investment in growth businesses in the East Midlands by:
i) Increasing the number of investors and thereby the value of private equity investment in the region’s businesses
ii) Encouraging better quality business plans from entrepreneurs that will attract the support of investors
Growth Investment “stirs the pot” amongst entrepreneurs, investors, banks and business support initiatives across the East Midlands. It is a “signposting organisation” that also runs business growth related events. It does not itself handle enquiries or particular queries but directs these to the appropriate members or sources of information. It is the members of Growth Investment that provide the co-ordinated practical support for businesses with growth potential.
A key part of the activities of Growth Investment is to link people together. Member organisations help by sponsoring:
- Events for businesses and budding entrepreneurs, led by nationally recognised figures, focusing on private equity. Over 300 businesses have attended these in the last 2 years and Growth Investment is extending this activity across the region.
- Angel Insight workshops and quarterly lunch meetings for people interested in becoming a business angel. Over 70 individuals have attended in the last year and many have begun to invest in businesses, individually or as part of groups that have met up at these events. We cover aspects of risk and reward, the management team, developing an intuitive approach through case studies, the legal process and the attractive EIS tax position.
The key message to attendees concerns changing the culture of the region into one of entrepreneurship, seeing the value of growth through private equity investment and enabling would-be new growth businesses to produce business plans that are immediately attractive to potential investors. High net worth individuals, often with funds to invest following the sale of their own business, are shown how to become a business angel, where they can use their expertise to support entrepreneurs and invest in future growth.
In recognising the potential role of Academia in business growth, Nottingham Business School have recently become our lead sponsor.
Growth Investment – The development:
In 2003 EMDA commissioned a survey of business angel investment in the region since new businesses, often supported by business angels, were seen as fundamental to economic growth. The unsavoury outcome was that the region had amongst the lowest level of value and number of business angel investments nationally.
Those involved in the region’s investment community got together and set up Growth Investment in 2004 as a web site to signpost regional business skills to would-be entrepreneurs and investors.
In 2007 there was a step change. In order to extend the impact of Growth Investment, funding was made available by EMDA to provide one person as contracted operational support, until this activity could become self sustaining.
Following an external evaluation in 2009, it was recommended that additional funding was made available by EMDA to provide resources to achieve extended targets and objectives. This next step change began in April 2010 with the immediate impact of the largest attendance of business owners at a single event and a new lead sponsor onboard.
Growth Investment – Success measures:
Counting only investments in projects where two or more Growth Investment members had worked together, over £15m additional funds have been invested in businesses in the region over the last 2 years, mostly in the £100k - £1m range. We are currently launching a programme to record all private equity investment deals in the region for the next Business Angel UK Market Report, commissioned by BIS and the British Business Angel Association (BBAA), and for publication in Insider magazine. Promoting these deals helps to convince entrepreneurs and investors that funding opportunities are available.
In addition to investors from within the region, thanks to the quality of the offering that we have stimulated, we are now attracting investors and funds from outside the region with interest in investing in East Midlands businesses.
In 2009 Growth Investment ran the national Investment Awareness Campaign in the East Midlands for the BBAA and achieved highest national attendee figures.
We have been recognised by the BBAA (and received a national award in 2010) as the only organisation of our type that engages all interested parties to work together to complete private equity investment deals. These parties include business angels, venture funds and banks. This is of growing importance in the period ahead when banks can be increasingly reluctant to lend. There is keen interest at BIS to expand business angel and early stage venture capital funding as indicated in the recent government green paper Financing a Private Sector Recovery (ref sects 3.48; 4.17; 4.21)
Many SMEs are unfamiliar with equity finance and are unlikely to be investment ready. Our ongoing success will be measured by the extent to which we improve their understanding of and capability to access private equity as part of a funding package.
Growth Investment - Positioning re LEPs:
Whilst covering the East Midlands region, the key area of activity for Growth Investment has been around Nottingham; Derby; Leicester; Loughborough and Northampton.
Government guidelines suggest that Access to Finance, Investment Readiness and Investor Readiness are to be led centrally. There will need to be local co-ordination and delivery.
This may be managed through Growth Hubs. We are considering how we might position Growth Investment across LEPs, possibly changing the boundaries of our operation.
In relation to LEPs, a recent enterprise support case study review of Growth Investment has been undertaken, commenting on public policy lessons: ICAEW case study.
Growth Investment – The need for the service and for public sector support:
The recent Annual Report on the Business Angel Market in the UK highlights the barriers for business angels in trying to tackle the “Equity Gap” (sub £2m or sub £5m, views on the upper end vary) in which the larger funds do not see financial viability to operate, but from which the employers of tomorrow will come. Private sector organisations are not able to meet the cost of supporting this early stage growth market. Significant issues include:
i) The cost of preparing potentially good businesses to be attractive for funding
ii) The deal completion costs associated with funding: professional advice, due diligence of the funders, legal documentation
iii) The cost of coaching and support for businesses with growth potential
iv) The difficulty of picking winners - 90% of investments produce no/low return (VCs have similar experience)
v) The time taken for investors to realise their investment on exit (few exits have been achieved in the current climate)
vi) The need for spreading the risk - the high potential returns are realised from just 5%-10% of investments. This calls for a business angel to have a well spread portfolio of typically around 10 businesses
vii) The need to connect business angels with opportunities - business angels are widely dispersed although more are beginning to act as part of a syndicate. They tend to invest within travelling distance of their home and often invest in businesses where they can add value through their expertise in the sector, route to market, contacts or financial control. Their involvement usually brings a new discipline to the management of the business.
Summary:
Growth Investment provides a specialist focus to increase funding of growth businesses. Our members are encouraged to work together to develop integrated financial packages that support existing and new businesses with highest growth potential.
In many cases recently, business angels have stepped in where the banks will not lend, although this is not part of the long term strategy. Once the capital of the business is stronger the banks often provide facilities alongside as part of a package.
The ongoing development of activities undertaken by Growth Investment cannot be fully sustained and funded by private sector subscriptions alone. We are proposing to discuss with LEPs and BIS how we might be structured and funded, possibly through the Regional Growth Funds, to continue to build on the success of Growth Investment in the future.
Steve Blount
Submitted by Growth Investment Chairman - Steve Blount - 10 August 2010