Developing a competitive knowledge-based economy usually requires two important elements namely entrepreneurs with ambitious businesses and a strong investor base that can provide the vital equity funding that can turbo boost the numbers of growing firms that can create wealth and employment
The degree to which these two factors impact on the different nations and regions of the 海角视频 is the subject of an excellent new report from the British Business Bank entitled “Regions and Nations Tracker: Small Business Finance Markets 2021”.
Drawing on information from data specialists Beauhurst, it shows that there have been nearly 15,000 private external equity deals small and medium sized enterprises (SMEs) across the 海角视频.
It proposes that at the heart of developing high growth businesses and a positive environment for investment is the relationship formed between the investor and the companies. This tends to mean that many investors tend to make equity investments locally.
With the majority of venture capital firms located in London and the South East of England, those of us working within the entrepreneurship ecosystem in South Wales have often joked that with one hour being the mythical distance that most venture capitalists will travel to invest in a company, it would mean that those looking for deals in Cardiff or Newport would turning their Porsches around in Swindon.
Yet, the report seems to suggest that there is a lot of truth in this assumption with the data showing that for 61% of investor-investee pairings undertaken between 2011 and 2020, the investor had an office within an hour of the recipient company's location.
Of course, this could be biased by the data for London where the one hour rule increased to 90% of pairings. Indeed, only 42% of investor-investee pairings outside of London were within an hour of each other although if this time to travel was increased to two hours, the proportion went up to 72%.
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Not surprisingly, here are geographical differences in terms of equity investment and almost six in 10 of the total pairings in the analysis fall into three ‘self-contained’ regions and nations - London, North East England and Scotland – where the closest office of the investor was in the same region or nation for at least two thirds of pairings.
Whilst this would be expected for London, it is also worth noting that the other two parts of the 海角视频 have also developed strong local investor bases which is probably due to their geography as much as demand from firms.
A further quarter of equity investment takes in those regions - the South West of England, South East of England, East Midlands and the East of England - where the majority of pairings involving an investor in London. Those which included both external and internal investors in their ecosystem - including Wales, West Midlands and Northern Ireland - had the lowest proportion of equity deals (18%).
In Wales, the study shows that the majority of deals were in businesses located in South Wales with Cardiff (37% of pairings) followed by Swansea (10%), Newport (7%) and Bridgend (5%).
Investors are similarly clustered in the capital city with Cardiff-based investors representing 33% of pairings involving Welsh businesses. Whilst the second largest is Wrexham with 15% of investors despite businesses in the area only featuring in 2% of pairings, this is driven by the location of the headquarters of the Development Bank of Wales (DBW) investing all over Wales rather than any local demand.
In fact, it could be argued that one of the major weaknesses in the Welsh entrepreneurial ecosystem is the presence of one big publicly-funded player (DBW) that crowds out the equity market and therefore is not attractive to other investors from outside of Wales to locate offices here. To some extent, that could be leading to the problem whereas the number of SME equity deals were 3.8% of the 海角视频 total, they amounted to only 0.9% of the total value of equity deals.
This suggests that whilst there is initial funding for ambitious businesses in Wales, the follow-on funding that is critical for further growth is not being provided within the Welsh economy. That is not unexpected as most venture capital businesses, quite naturally, want to be in at the beginning of the deals rather than picking up scraps in later rounds of funding.
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As the British Business Bank concludes, the success of 海角视频 equity ecosystems is dependent on investors with a strong local presence.
For Wales, a number of us have suggested that given the importance of the Bank’s regional funds in driving investors to locate and invest in underfunded equity ecosystems elsewhere in the 海角视频, then it should look to develop a Wales equity fund as a matter of urgency. This would begin to address the problem of follow-on funding that is preventing the further growth of businesses.
In addition, and with the imperative of levelling up being at the heart of the 海角视频 Government agenda for the foreseeable future, the development of a focused approach to encourage London-based venture capital businesses to establish a presence in the more peripheral economies such as Wales must be on the agenda of the British Business Bank as it seeks to strengthen the 海角视频 economy.