MDX-backed research discovers start up businesses struggling to get crucial equity finance

Middlesex University and the Enterprise Research Centre at Warwick University found under half of businesses applying receive equity finance

Start-up businesses are facing severe issues obtaining equity finance from investors which they desperately need to kick-start their ventures based on new research co-led by Middlesex University.

A survey of more than 700 UK potential high growth start-ups, carried out by the Enterprise Research Centre (ERC) at Warwick University in collaboration with MDX, found that less than one in six received any equity finance during the last year.

Equity finance, where venture owners cede a share of their business in return for investor funding to develop and grow their business, serves as an important alternative to bank debt finance, which is typically not available to research and development (known R&D) ventures that are pre-revenue and therefore lack a trading track record.

The report is timely given the British Business Bank’s Small Business Equity Tracker 2024 demonstrates a 48% decline in annual equity investment in 2023.

Investment markets in early-stage businesses are set to become even tougher due to ‘the worsening economic climate with rising inflation and interest rates, compounded by increasing international market frictions which restrict trade and limit access to skilled labour and financial investment’, the report noted.

The ERC/MDX survey of 727 UK start-ups, of which 25.6% and 17.9% of the leaderships team overall included women and ethnic minorities respectively, found that around one third had sought equity finance during the past year (2022-23), but under half of these were receiving any finance with the average amount of their finance being only two-fifths of their application requirement, and typically after multiple (five or more) applications.

The report stated that the business journey to accessing equity finance, which most frequently comes from business angels, venture capitalists and crowd funders, is often ‘long and difficult’. The lack of equity funding to these ventures will hold back UK business growth in key sectors such as climate and health.

The report’s recommendations for UK policymakers include:

• Continue to provide the Seed Enterprise Investment Scheme (SEIS) tax break, but adjust this to support longer horizon research and development businesses
• Enhance public-private co-financing, ensuring that the loss of former European Union investment funds, post Brexit, are replaced
• Ensure Innovate UK programmes like Business Growth should extend across the UK’s regions
• More support could be provided to developing and establishing regional university group early-stage seed funds, like Northern Gritstone and Midlands Mindforge
• Government should look to multinational financing solutions, including working with Republic of Ireland and also seeking a return to closer working with the European Investment Fund.

Robyn Owen, Professor of Entrepreneurship and Sustainable Finance who co-led the research, said: “The research is important because the effective financing of early-stage business ventures is notoriously difficult, given their high risk of failure. Yet, for a flourishing economy, the UK needs to fund these potentially game-changing new innovative ventures which can transform industry, create high quality jobs and address global concerns such as climate change and healthcare.”

“Our report into start up financing sends clear messages to the new UK Government and support agencies like Innovate UK, the British Business Bank, Research England and the devolved nations to support more university-industry research and development collaborations to fund solutions to global challenges such as health and the environment.”

Professor Robyn Owen is the co-director of the Centre for Enterprise, Environment and Development Research (CEEDR) at Middlesex University.

Download the full report and read an extended blog from Prof Owen on the Enterprise Research Centre website.

Photo by Microsoft 365 on Unsplash