SMEF0058

Written evidence submitted by UK Business Angels Association

Response on behalf of UK Business Angels Association: Full Version:

UKBAA is pleased to have the opportunity to respond to Government Treasury Select Committee Inquiry to examine the accessibility of finance and lending to SMEs.

About UKBAA:

UKBAA is the trade body for Angel and early stage investment established in 2012 covering England, Wales, Scotland and Northern Ireland.  We are a private company limited by guarantee and operate as a not-for-profit organisation. Our community includes over 18,000 angel investors across the UK and our membership consists of 86 Angel networks, 12 online platforms, 600 individual Angel investors, 28 early stage funds and VC funds; nearly 30 Accelerators and 40 Associates, including professional advisers, lawyers; academics; other finance providers; and key stakeholders.

Our role is to build and support the growth of an effective angel and early stage finance ecosystem across the UK and to address areas where capacity is weak, providing education and support; connecting investors to quality sources of deal flow and connecting the investment supply chain from start up to scale-up .We also seek to address core challenges and gaps in the market such as addressing regional angel capacity imbalances and increasing angel investment in diversity, also to address key underserved sectors. We are working closely with Government and key stakeholders across the UK to ensure an effective policy and regulatory environment to support and grow the angel investment base.

See below:

• PART 1 :Summary of UBAA Responses to the Inquiry
• PART 2: Detailed Information supporting UKBAA responses

PART 1: Summary of UKBAA Responses to the Inquiry

Industry issues 

What are the key challenges Small Medium-sized Enterprises (SMEs) face when seeking finance?

There are gaps at key stages across the funding supply chain and which present risks to small businesses throughout their growth life cycle. These key challenges and gaps Include the following:

A fragmented landscape of equity available across the regions:

• For growth potential SMEs in many regions across the UK, there are huge gaps in the availability of access to equity finance. Beauhurst statistics for equity investments for 2022,  demonstrate an increase in the level of equity funds going to businesses in London and the South East, with 72% of all investments made and with London taking  a share of  just over 50% of all investment deals and 69% of total investment[1] Notably,  57% of Angel investment is still focused on the London and Golden triangle  areas with a continuing fragmented level of Angel and early stage investment capacity across the UK regions.[2].

Lack of Access to Knowledge and information on access to Finance:

• A key factor affecting SMEs’ capacity to find the finance they need to survive, build and grow is the lack of access to knowledge and awareness of their finance options or how to access the right finance for their needs which especially affects SMEs in the regions and from underrepresented groups. 

Gap between Angel Investment and Series A.

•          Venture capital deals have continued to increase in size over the past 4 years and specifically since 2021 when VC average deal size  increased significantly at over £5m whilst valuations were at an average of £8m.[3] Whilst there has been a reduction in the size and number of these very high value deals in the first 2 quarters of 2023. This results in the need for Angel Investors to play a much longer term role in funding and nurturing small businesses, requiring Angel investors to provide multiple  rounds of investment to enable their investee businesses to achieve Series A and  requiring SMEs to continue to seek further rounds of Angel and early stage investment to maintain their business and continue to survive and grow

Gap for long term growth and Scale-Up Funding

• For SMEs there remains a continuing challenge to find equity investment for long term growth. And this was further underlined during the global economic downturn with long term established stage funding declining specifically in the second half of 2022 and first quarter of 2023, falling 85% compared to q1 2022.[4]   ( See below Finance to support SMEs Scaling beyond VC)

Through which channels do SMEs find the most success when seeking Funding and why?

The following channels offer the best success to access funding:

• Warm Referrals: For SMEs wishing to seek equity finance for their business, this frequently requires trusted  or warm referrals  or “introducers” . The Investing in Women Code Report 2023 identified that 56% of were led companies accessed investment through warm referrals[5], whilst SMEs in the regions and businesses led by Women  or SMEs from black and ethnic minority communities or from other underrepresented backgrounds frequently have challenges in accessing these referral channels or trusted sources.
• Investors themselves  are frequently a major source of warm referrals and introductions. The Investing in Women Code report 2023 identified that Angel groups and VCs with a higher proportion of its investment team among Women or Black and ethnic minorities,  had a higher proportion of diverse SMEs in the pipeline with increased levels of investment into diverse businesses.
• Accelerators and Incubators provide a vital channel for SMEs seeking finance, generally enabling direct interface with investors as mentors and early investors , enabling them to be introduced to further sources of funding or investment.
• Networking and pitching events: are also important opportunities for SMEs to interact and directly engage with investors such as UKBAA TechInvest programme[6].

What Role can financial Innovation play in SME finance? Is there more government and the regulators can do to improve access to finance through innovative firms?

• Innovation in Fintech has provided new and transformative services from payments and banking to regtech and insurtech and directly supporting SME access to finance and services. The Fintech Sector raised record levels of investment in 2021 at the height of the equity market post pandemic recovery some decline by end of 2022.[7] During this period Fintech has embraced even further technological developments to bring new services using blockchain and AI to create new financial services for SMEs through B2C and B2B companies.
• We support the recommendations of the Kalifa report[8] to strengthen the Fintech sector to support innovative small businesses to enable them to effectively scale here in the UK. SMEs operating innovative fintech solutions should not be constrained from accessing the investment they need due to overregulation that limits their opportunity to grow and scale effectively. We support the FCA’s regulatory Sandbox and Innovation Pathways.

How Accessible is finance for SMEs of different sizes?

SMEs experience challenges at all stages of growth determined not just by size but  geographic location, sector, structure. SMEs require access to a range of different sources of finance often requiring a combination of solutions to support their needs. As already indicated, there are funding gaps at start-up, early growth and later stage . The work of British Business Bank is important here in offering solutions across both debt and equity according to company size and structure. One of the most worrying aspects is the  number of SMEs who are permanently non seekers of external finance as shown by the BBB  Finance Survey 2022 which identified that 61% of SMEs did not seek any form of external finance showing an increase of 20% from 2021.[9]

Is Finance available to allow SMEs to Scale-up from Venture capital?

• For SMEs there remains a continuing challenge to find equity investment for long term growth. This has been further underlined during the global economic downturn, with long term established stage funding  declining specifically in the second half of 2022 and first quarter of 2023, falling 85% compared to q1 2022 and a further .[10]

• British Patient Capital has been fundamental in driving growth in fund sizes in late stage and growth funds in the UK, attracting further international investment  providing a cornerstone of public equity funding. However, we must also ensure  that we are continuing to make UK an attractive environment for international investors and not over regulate or restrict the opportunities for international funds to back scaling UK businesses.

• The lack of investment by the Pension Funds into Venture capital here in the UK has to date been a barrier to funding support to SMEs in our key growth sectors . We welcome the important new proposals announced by the Chancellor in his recent Mansion House Speech and the commitment expressed by  a number of leading Pension Funds to deploy and aggregate funds to support high growth potential businesses across the UK. We also support the opportunity offered by the Long Term Investment for Technology and Science LIFTS to enable the existing funds to crowd in UK Institutional investment especially the DC Pension schemes. 
• There are also important issues to be addressed to strengthen our Capital markets here in the UK. We support the recommendations of the recent review by UK Finance and EY to ensure that the UK remains a top tier global capital markets centre and destination of choice for international investment and  for SME listing on our public markets. [11] There is a pressing need for the rapid implementation of the changes recommended to strengthen the UK’s public markets as set out by Lord Hill.

Is securing access to SME finance particularly challenging for women, people from ethnic minorities, from certain social classes, or any other group? If so, what should be done about it?

• Securing access to finance is especially challenging for businesses led by women, or by founders from  black and ethnic minority communities , whilst there are many other barriers  including  location, educational  background, income, age . These intersectional issues have created systemic challenges for many SMEs in accessing the investment they need.

• UKBAA is a founding signatory and partner of the Investing in Women Code, alongside BBB, BVCA and UK Finance.  The latest IWC report launched in June 2023[12] revealed a more challenging picture:

•          only15% of total number of deals made in all female teams

•          28% of total deals in mixed teams  

•          All female teams received only 7% of total investment and Mixed teams 19%

•          = 26% total investment went to businesses with a female founder

•          74% into all male teams

• A key factor affecting access to investment is the lack of diversity in Investment across the UK and which impacts across the whole venture supply chain. UKBAA ‘s latest research with  Beauhurst in identified that only 14% (5000) out of 37,000 Angels in the UK were women with 60% of Women Angel investment focused in London and South East.  

• UKBAA has established the Women Angel Investment Task force and Women backing Women campaign[13] to empower many more women to angel invest in women founders across the UK,  with a view to increasing the number of women investors to 30% by 2030.

• UKBAA’s ethnicity data gathered from the Angel groups signatories to the IWC code revealed  that 60% of the businesses receiving angel investment in 2022 were white all male founders and who secured 79% of the total angel investment allocated by the angel groups[14].

• There is also a lack of ethnic diversity in the Angel investment base that directly impacts the opportunity for ethnic minority founders to access investment. The BBB-UKBAA Angel market research identified that 11% of the existing Angel community are from ethnic minorities.[15]

• We recognise the vital importance of sharing good practice to influence investor behaviour. UKBAA has developed a new Best Practice Guidance for Angel investment in Diversity. [16]  and commend the recent report published by BBB “Finding What works” identifying key areas of good practice and practical steps  that VC investors  are pursuing to increase investment in diverse founders[17].

Government Policy Issues:

Should the Government do more to enhance SME Access to Finance. And if so , what?

We need to ensure an effective policy and regulatory environment for SME finance and avoid the need for unnecessary regulatory change to ensure this does not impact on the effectiveness and capacity of angel and wider private investment in SME growth and innovation.   Relevant measures include:

• Provide Greater certainty on the future of EIS: There is a need for Government to confirm that its intentions to continue EIS and SEIS post 2025 and permanently abolish the sunset clause to provide long term certainty to private investors and entrepreneurs seeking investment.

• Retain SEIS enhancements and support a national awareness campaign:  Following the confirmation in the Chancellor’s budget in November 2022 of important enhancements to the SEIS scheme, there is also an urgent need to support the work of UKBAA , BVCA, EISA and other key players in the ecosystem to develop a major nation-wide campaign, especially in the regions outside London, to raise awareness of the schemes among both investors and entrepreneurs and notably targeting women and those from diverse backgrounds.

• Ensure that the new FCA requirements for Investment promotions and HMT framework do not diminish the pool of angel and early stage investors: It is essential to ensure that the new requirements in relation to investment  promotions do not impose unnecessary burdens that diminish the capacity of Angel groups to recruit and mobilise angel investment  in SMEs, or that create additional costs and barriers and delays for businesses to access to investment. We reconfirm our view provided to HMT that restrictions are to be avoided that add extensive new responsibilities to Angel groups, or erode the attractiveness of the UK as a thriving entrepreneurial finance ecosystem.

• Review R&D tax reliefs scheme to support innovation across SMEs at all stages of growth: It is vital to ensure that the revamped scheme does not diminish the research opportunities of small businesses through the concern to reduce abuse and should not be limited to a scheme which favours larger businesses.  Whilst we welcome the higher rates of R&D tax reliefs being available to support research-intensive small businesses, we recommend that R&D tax reliefs should not be cut to other SMEs and should be used to stimulate further innovation.

• Ensure that Pension funds invest in SME growth across all stages and geographies: We endorse the proposals set out in the Chancellor’s Mansion House Speech in July 2023 when he announced an ambitious package of measures to unlock UK Pension Funds and the commitment achieved with many of the UK’s largest Defined Contribution (DC) pension providers. Government needs to ensure that this important new funding is effectively mobilised to support SMEs at different stages of growth, in different UK regions and also reach the many growth potential businesses led by women and black and ethnic minority founders and from other diverse backgrounds.

How Useful is the British Business Bank?

• We believe that the BBB plays a vital role in channelling public funding to support SME growth across the UK, addressing the needs of  small businesses at all growth  stages and offering a range of finance solutions from loans, debt and equity and leveraging and stimulating the power of private investment,  not only from the UK, but internationally.
• We recognise its importance in addressing market failures across the UK, including in relation to investment in the regions, sectors and diversity and driving good practice and changing  investment behaviour into key areas such as environmental sustainability /net zero and ESG and providing insights and research data across the SME funding landscape. BBB also plays a vital role in building regional ecosystems though its regional network.

• Role of BBB Finance Hub: As one of the key industry partners across the supply chain of finance to SMEs, UKBAA  supported the  development of the Finance Hub launched in 2018 . The Finance Hub model brings together a wide range of industry partners across the whole spectrum of finance from start up to scale up and enabling access to first-hand experience  and content. Its strength also lies in providing  bespoke and targeted support to SME decision making on which source of finance to approach and which is frequently is one of the greatest challenges for SMEs.  Whilst there are other finance hubs and information sources, the BBB Finance Hub remains relevant and useful.

What more could be done by BBB:

Whilst the BBB is clearly playing a very valuable role in SME finance , there are opportunities  to further enhance and reinforce its role.

• Increasing its role in supporting Regional Angel capacity building: We draw attention to the opportunity to further build on the £250m Regional Angels Programme RAP operated by BBI to review its existing parameters and establish and implement new structures to allocate co-investment funds to support the growth and build the capacity of less experienced angel groups to increase investment to early-stage female led and diverse businesses in the regions. We also recommend that additional £150m RAP funds should be allocated to BBI in the next budget to increase the capacity of further less experienced groups focused on diversity and increasing long term angel capacity in the regions. 

• Enhancing BBB’s role in supporting long term Growth Funding and Mobilisation of Pension Funds: The Bank has a vital role  to play in the mobilisation and deployment of Pension Funds in support of the important commitment gained by the Chancellor by leading DC Pension funds and  to channel these funds towards equity investment opportunities across the UK into growth potential businesses from early stage through to scale ups.

• We also recommend that BBB should be established as a permanent structure to fulfil its core role in deploying public sector funding into SMEs and ensuring its long term  potential in leveraging and stimulating private sector finance  for long term growth and sustainability. 

PART 2

Further Detailed Information on UKBAA Responses

Background on Angel Investment:

• Angel investment is the most significant source of equity for start-up businesses seeking to start, build and scale their early business ideas and is a fundamental first link in the equity supply chain. According to the Scale-UP Institute, 60% of Scale-Up businesses in the UK have received Angel Investment as a core part of their scale-up journey.[18]

• Whilst there is no exact data on the size of the market since it is made of private investors, using their own spare financial capacity, with many deals unannounced, data from Beauhurst reveals that there are over 30,000 Angel investors across the UK with portfolios of 2 or more companies and shows that Angel investment currently amounts to approximately £1.5bn per annum into small businesses at their early stages of growth. Whilst total deals where Angel investors have been present amounts to well over £2.04bn annually [19].

• Angel investors bring between £100k- £1.5m, as first round deals when operating as a syndicate, but individuals tend to invest between £10-50k per deal, with £40k being the norm, although some new angels in a syndicate may invest smaller amounts initially. 

• However, what is more important about Angels is that in addition to vital early stage capital, they also bring business experience, skills, knowledge, strategic advice, market contacts and introductions to support the early nurturing of these small businesses with Angels acting as a clear pathway to further funding rounds, customers and talent. UKBAA’s recent survey of its Angel Investment community [20] has highlighted that 74% of investors provide direct support to their portfolio businesses. Including strategic support through Board roles.

• Whilst a significant number of Angel investors do operate alone, Angel investment across the UK is largely done in syndication which enables investors to share their experience and skills in deal origination and due diligence, to pool their risks, as well as to enable multiple funding rounds to be provided to support the companies through their early growth and progress toward Venture Capital and more significant growth.  Angel Investment is patient capital, with investments frequently taking 12 years to achieve growth and positive outcome such as an acquisition or IPO.

• If we look at the supply chain, Angels work extensively with other parts of the venture supply chain. Angel investors frequently co-invest with other sources and over 50% of Angel syndicated deals may include other forms of finance including other Angel syndicates, VC Funds, VCT, BBB Regional funds, Crowdfunding, Innovate UK grants and other regional grants and also loan funds where appropriate.[21] 

Industry issues 

What are the key challenges Small Medium-sized Enterprises (SMEs) face when seeking finance?

Tthere are gaps at key stages across the funding supply chain and which present risks to small businesses throughout their growth life cycle. These key challenges and gaps Include the following:

A fragmented landscape of equity across the regions:

• For growth potential SMEs in many regions across the UK, there are huge gaps in the availability of equity finance based on their existing location. Despite extensive efforts across the equity supply chain and the important public funding being made available through the British Business Bank, equity investment continues to be largely focused on London and the Southeast[22]  

• Beauhurst statistics for equity investments for 2022,  demonstrate an increase in the level of  equity funds going to businesses in London and the South East, with 72% of all investments  made and with London taking  a share of  just over 50% of all investment deals and 69% of total investment , whilst key areas  of opportunity such as the North east secured  only 2.8% of total  deals in 2022 and the West and East midlands and Wales also  on a similar level.[23] Notably,  57% of Angel investment is still focused on the London and Golden triangle  areas with a continuing fragmented level of Angel and early stage investment capacity across the UK regions.[24]Whilst latest data from Beauhurst Q1 2023, identified that there was some improvement in the level of equity going to the regions, SMEs in London and  the South east still receive  68% of total deals [25] .

•          The BBB Angel market Report 2020 also identified that just over half of all UK angel investors (56% ) are living in London and the South East. As a comparison, at the opposite end of the scale for England, the Northeast, North West and East Midlands each recorded 2% of total angel investment. Lower still, Wales and Northern Ireland only had 1% each of angels, when Scotland is included, the devolved nations only account for 18% of our angel population.

•          This is underlined when comparing this with HMRC location on investment data for EIS/SEIS, London hosts the largest share of investors using the EIS and SEIS schemes. 38% of those whose location is known resided in the capital in 2018/19. It is also the most prominent region for EIS and SEIS activity with firms in the capital securing an even higher percentage of investment (49%). [26]

•          This leaves most regions around UK, where substantial communities of high growth potential small businesses are located, unable to access the investment they need to build and grow their business from start up through to scale-up.   We know that the ecosystem is built by investors co-investing and sharing intelligence and deal flow locally. With the investment population disproportionately clustered within London and the South East region, this directly impacts the opportunity for businesses in key regional clusters to access investment to support and grow their business.  These thin markets also have been shown to affect demand among businesses for investment where intelligence and knowledge is not shared about how to effectively access investment to support their growth, thus potentially further weakening supply of available investment.

•          We also know from the BBB Regions and Nations SME Tracker report[27] that distance matters  to investors  and that investors especially Angels invest in their local economies  with 82% of equity investment found to be invested within two hours distance  and 61% within one hours distance. For many small business founders and owners there is a lack of opportunity to meet and interact at an early stage with investors prior to pitching in a formal setting

Lack of Access to Knowledge and information on access to Finance:

• “Thin markets” result in lack of access to knowledge on SME finance.  A key factor affecting SMEs’ capacity to find the  finance they need to survive, build and grow is the lack of access to knowledge and awareness  which results from a lack of finance capacity in the regions and for SMEs from underrepresented groups.  This further impacts the situation for small businesses in terms of understanding their finance options and where to find the right finance for their needs. This demonstrates the need for the provision of relevant information on finance source and how to access them as set out through the BBB Finance Hub (see response to the specific Inquiry question on this below.
• This lack of access to knowledge  networks also underlines the importance of building effective  finance ecosystems, especially in the regions where these are lacking. This requires direct action to connect SMEs to all of the key finance providers according to their growth needs and  notably to build strong connections between these players within local and regional ecosystems. The work of the British Business Bank Regional network teams is a strong example of actions to build these ecosystems and to provide both information, awareness and access for SMEs and which should be further reinforced and continued .  

Gap between Angel Investment and Series A.

•          The availability of equity for small businesses was especially affected by the economic  downturn  experienced in the second half of 2022, making it even more challenging for small businesses to access the equity investment they needed. This resulted in an overall decline in the level of Equity  investments made  in 2022 by 16% in value and 11% by number of deals [28] with deal volume continuing to decline  in 2023.  The  global economic downturn had a strong impact on the Angel market where individuals are using their own  money to invest in small businesses and who were personally affected by the economic challenges.  This resulted in the Angel  slowing down in the number of investments being made by 22% with a 33% decline in the number of investments being made by Angel groups in Q1 2023 compared to Q1 2022 and an even greater impact  for SMEs in the regions where angel investment capacity is weak.

•          As already indicated, Venture capital deals have continued to increase in size over the past 4 years and specifically since 2021 when the Venture market recovered with average deal size  increasing significantly at over £5m whilst valuations were at an average of £8m and with 2022 continuing deal sizes with over 30 deals investing over £50m.[29] Whilst there has been a reduction in the size and number of these very high value deals in the first 2 quarters of 2023, this does not prevent the trend of VC deals from continuing to  rise, making ever growing gap for SMEs moving to access Series A to further grow and build their business.

•          This results in the need for Angel Investors to play a much longer term role in funding and nurturing small businesses, requiring Angel investors to provide multiple  rounds of investment to enable their investee businesses to achieve Series A. This is seriously straining the capacity of the Angel market to fill this ever-growing equity gap and notably in  the regions where Angel investment is less developed as noted above. For SMEs this is ahuge challenges requiring them to continue to seek further rounds of Angel and early stage investment to maintain their business and continue to survive and grow.

•          Seed stage funding rounds, (under £500k), have been showing a continuing decline since 2020 whilst showing a slight increase in 2022. However, the overall proportion of seed stage deals (sub £500k) against venture and growth has continued to decline to now only 38%  of total equity deals . Whilst The proportion of fundraisings at these smaller ticket sizes has been falling quarter-on-quarter since Q3 2020, when they made up 44% of deals.

•          A further key feature is the number of deals that are being made in SMEs seeking equity for the first time which has been decreasing markedly with the number of follow-on rounds in 2021[30], overtaking the number of first time deals for the first time . By q1 2023, the number of first time delas  has fallen by 27% 2022. This situation is very worrying since it means that start-ups seeking first time investment  or seeking less than £500k  have even greater challenges to find investment.

Sector Specific Gaps in Funding:

• There are gaps in the availability of finance for SMEs operating in a number of important sectors across the UK, including such areas as manufacturing and  hardware, creative industries and specifically non tech related sectors, including hospitality and food and drink where SMEs have specific challenges in attracting equity investment .

• Equity investment is significantly focused on technology  with over 70% of investment going to  tech. Latest data from Beauhurst q1 2023 and BBB Equity Tracker 2022-23 show that equity investment is focused on key areas of tech such as AI, Blockchain and SaaS, with Clean tech and  Agritech attracting strong investment, although Fintech had shown some decrease in investment compared to 2022.

• There are major issues of information asymmetry for investors since Angels especially tend to invest in what they know and understand  and the sectors that are heavily profiled in terms of exits and returns . This means that many key areas where SMEs fail to attract the attention of investors and do not get taken forward for consideration since Angel lack experience or information on the growth potential or success stories of businesses in other non tech or non-high profile sectors.  There is an overall lack of information or case studies of successful growth and exits for many areas or sectors that result in failing to attract the levels of investment they need.

• A key example is Creative Industries where research carried out by UKBAA together with Scale-Up institute revealed that only 14% of Angel investment goes to creative industries, and principally to games, video, animation and screen focused industries, with some sub sectors such as independent music attracting even lower levels of investment. The businesses that had attracted investment, also mainly gained much lower levels of investment. Key reasons that were given by investors were concerns of lack of commercial viability, lack of capacity to scale, lack of knowledge on the sector lack of access to market intelligence or information on growth and returns .

• At the same time, there is an important need to significantly increase investment into high growth priority sectors  in the UK to ensure that private sector capital can be leveraged alongside public sector funding. The Government has put forward £22bn into the work of UKRI to ensure the successful exploitation of science technology and innovation in the UK and it will be essential to ensure that private investment and especially Angel and early stage investors are on board to multiply the level of funding available for the successful commercialisation of research across the UK .

• However, there remains a lack of knowledge and understanding of the investment opportunities offered by key areas of science , technology and innovation among  a considerable  part of the angel and early stage investor community. Within our Angel community there is a strong interest to back innovation and there are strong experienced players with the capacity and science and industry backgrounds to identify, evaluate and invest in core priority areas of science innovation and technology, many based in the London Cambridge Oxford triangle.  This knowledge gap hinders investors from adequately assessing the technical and financial viability of key technologies and knowledge-based companies. Due to this complexity, many investors often prefer less risky investments, despite the wider benefits associated with investing in innovation. Since Angel investment affects the whole supply chain of investment, if Angels do not back key areas of technology, this seriously impedes  access to Series A and growth capital for SME in these key areas of science and technology.

• Innovate UK plays an important role in bringing grants and loans to SMEs focusing on key growth sectors and the Future Economy core sectors. These  de risk and leverage  private sector investment offering undiluted co-investment to attract equity investment alongside these high risk innovating SMEs. We also endorse the new Innovate UK Investor partnerships programme which has recruited over 80 VCs  experienced Angel groups to coinvest alongside their innovation grants to SMEs. 

• However there is further scope for BBB to develop dedicated Co-investment funds to further leverage Angel and early stage investment to encourage and catalyse the deployment of vital equity funds to early stage SMEs in other core growth sectors within the framework of the Regional Angels Programme, or as a standalone Breakthrough Angel Co-investment fund to ensure early scaling of IP and Innovation.

• We see the opportunity to develop a programme of education and capacity building for the Angel and venture investment working with key industry and experts from S&TI  community to provide knowledge and understanding of latest developments in science and technology and supporting due diligence and access to key experts and peer networks.

• Develop more sector specific  knowledge to increase investment in SMEs form core growth sectors such as Life Science, building on the successful pilot of UKBAA together with the Scale-Up Institute which developed  a sector specific training programme under the DCMS Creative Scale -Up Programme called Invest in Creative [31]offering access to education modules, peer to peer learning, deep dives into core subsectors.  This programme could be adapted to address investing in core priority innovations such as those identified under the Innovation Strategy and UKRI action plan.

• There is also a strong role for Universities, especially in the areas where the Angel and Investment community is less developed outside the London Oxford Cambridge Golden Triangle. Universities should be encouraged to act as regional knowledge hubs providing access and engagement for investors into key scientific and research projects and programmes providing ,expert insights and knowledge to investors as well as supporting due diligence to effectively evaluate investment opportunities and developing expert angel communities through Alumni and wider industry links.

Through which channels do SMEs find the most success when seeking Funding and why?

As already indicated, Angel investment is the most significant source for Investment for SMEs seeking equity investment in the start up and early stages of growth and  the bedrock for the whole equity supply chain.  Whilst it is very difficult to accurately quantify the level of Angel investment since they are private investors, investing their own money, using EIS/SEIS as a proxy measure, drawing on Beauhurst data on announced deals (610 in 2022) Angel investors bring approximately £1.5bn annually to SMEs in the UK. However,  latest data from the Investing I Women Code 2023 reveals that 70% of investments made by Angel groups or syndicates leverage additional co-investment  amounting to a ratio of between 1:2 and 1:4 alongside Angel deals, making this a substantial level of investment available to Angel-backed SMEs. [32]

The SMEs that are backed by Angels receive not only vital risk capital,  but through Business angels have access to business experience, strategic advice, hands on support with key elements of the business  from access to markets to  support with hiring and building the team, introductions to customers, buyers and suppliers, support access to  other forms of finance and not stage investment. UKBAA’s survey of our Angel community reveals that Angels spend over 20 hours per week in support of their investee businesses, actively assisting up to 7 businesses within their portfolio.  Accessing Angel investment  directly influences their potential to go on to access further VC and other finance sources including bank debt and grants. The Scale Up Institute identified that over 60% of scale-ups have received  Angel investment in their early growth stage[33].

• Warm Referrals: For SMEs wishing to seek equity finance for their business, this frequently requires trusted  or warm referrals  or “introducers” to open the door to the right investors. As already mentioned SMEs in the regions and businesses led by Women  or SMEs from black and ethnic minority communities or from other underrepresented backgrounds  frequently have challenges in accessing these referrals channels or trusted sources. The  latest report issued by the Investing In[34]Women Code  (June 2023), revealed the significance of warm referrals. • 54% of proposals received from all-female teams were from known or trusted sources (warm referrals) Referrals for male counterparts (57%) while 41% of mixed gender teams applying were warm leads.  42% of female deals that came with warm introductions passed initial screening, compared to only 10% of cold approaches, revealing the significance of access to networks, or intermediaries and the challenges for founders who do not have access to these networks. The Investing In Women Code signatories have been taking specific actions to increase their access to deal flow from a wider range of sources, including having  ‘scouts’ and dedicated investor relationship managers to seek out potential SME dealflow going beyond the usual sources.  Many are also operating “Open Office Hours“ to enable  SMEs to approach investors in a more informal setting and pre pitching for investment, accessing advice and mentorship.

• Investors are frequently a major source of warm referrals and introductions. This can directly affect the quality and source of the SMEs who can access investment. A key issue  identified in the Investing in Women  report and good practice guidelines is the co-relationship between the level of diversity  in the Angel group or VC fund investment team and the  level of diversity of the deal flow.  Angel groups and VCs with a higher proportion of Women or from Black and ethnic minorities involved in the investment process,  had a significantly higher number of  diverse SMEs in the pipeline and increased levels of diverse businesses going on to access to investment. The IW report identified that Angel groups with  over 15% female investors invested in double the level female led business than the all-male Angel groups.  This indicates the importance of the work being done by BBB, BVCA, UKBAA and UKFinance in promoting greater diversity among finance providers, notably the work of Diversity VC; Level 20; and the UKBAA Women Angel Investment Task Force and “Women Backing Women Campaign”[35]

• Accelerators and Incubators also provide a vital channel for SMEs seeking finance, operated by private sector, public sector, corporates , universities , some sector specific, or regional, or thematic   Those accepted on these programmes gain intensive support in building and growing their business, also investment readiness training, but generally enable direct interface with investors as mentors and early investors , enabling them to be introduced to further sources of funding or investment.

• Networking and pitching events: these are also important opportunities for SMEs to interact and engage with investors. These can be organised by public or private sector organisations and can be effective for SMEs seeking to get to know the investment market and understanding how to approach investors .  .Some of these are open and  promoted on social media, whilst others can be based on application or competition and which again can be limited to those SMEs who have access to these professional or knowledge networks or relevant business networks.   A key example is the TechInvest Programme that we organised at UKBAA initially with Mayor of London (2016-20)[36] and then with BBB 2022-3. These offered an open application for SMEs reaching out through an extensive network of local community organisations seeking between £250-£4m equity investment and was based on open application and assessment by a panel of judges, offering  one on one pitch presentation skills to the selected applicants and enabling them to  present their business to over 100 investors in each session resulting in 60% going on to access investment. Over 35% were women and 27% from ethnic minority backgrounds

• Angel Hubs established by UKBAA in partnership with key regional partners have been shown to provide an important local interface for SMEs seeking Angel Investment, offering both informal engagement with individuals and local Angel syndicates , access to mentorship and advice from Angels and also to pitching and showcasing opportunities. UKBAA has established Angel Hubs in Bristol,  Cambridge, Leeds, Manchester (2), Newcastle, Belfast and others are in development.[37]

• Investment Platforms: the availability of platforms enabling SMEs to promote their investment and to identify investors, includes not only  crowdfunding platforms such as Crowdcube or Seedrs, but also angel led platforms that enable entrepreneurs to showcase and aggregate investment. These have increased since the pandemic when  digital showcases for investors became a core necessity  for the market to function  Equity crowd funding has been identified as one of the most active investment sources  , but  this frequently requires the SME to carry our extensive fundraising from investors prior to being eligible to  promote a deal on the platform and can be time consuming and expensive. Other platforms act more as aggregators and showcases and non- transactional such as the UKBAA Dealshare platform[38] which enables  SMEs that have already attracted  at least 20% of the deal from angels, or VC investors to showcase the deal in a non-transactional  model and close the investment more easily and rapidly from other early stage funds or angels. Whilst Obu Invest [39]has also more recently set up a platform to enable female founders to  showcase and attract female investors to back their business and aggregate investments       

What Role can financial Innovation play in SME finance? Is there more government and the regulators can do to improve access to finance through innovative firms?

Innovation in Fintech has provided new and transformative services from payments and banking to regtech and insurtech and directly supporting  SME access to finance and services.

• We have already witnessed the important role that innovation in Fintech has played in transforming access to equity finance through the launch of crowdfunding  post the financial crisis in 2011-12 through companies such as Crowdcube and Seedrs ( the first regulated crowdfunding platform) and which was aimed at democratising private investment in SMEs enabling g thousands more individuals to identify the opportunity to invest with an extremely small  starting level, combined with opportunities offered for peer to  peer lending with Pioneers such Funding Circle and also ThinCats. Further developments included Syndicate Room enabling investors to invest alongside Angel led syndicated deals and bringing considerable further firepower to angel groups.   At UKBAA we have supported the growth of crowdfunding and further online investment platforms in adding value to the angel and early stage market, opening access to SMEs not only to   equity and lending, but also donating  and enabling customer validation . At UKBAA we see these as important components in the supply chain of finance for SMEs and bringing important new opportunities to individuals to become investors starting at very small levels and with some going on to Angel invest in more direct ways.  These new structures have also brought them important innovations in creating structures for online transactions enabling investors to support  significant numbers of investors to participate in a deal, whilst pioneering Nominee structures and Advanced Subscriptions.

• Many Angel investors use online platforms to source deals and this has been further underlined during the pandemic when most angel investment became digitised and using online pitching/showcasing and due diligence. These platforms  grew to considerable significance during 202-21  , making it possible for SMEs to continue to attract and achieve  finance and investment when face to face investment relationships had become impossible and the mix of online and face to face investment has continued  post pandemic, especially enabling SME to reach a much wider audience of potential investors not only in their region but much more widely across the UK and also attracting more investors from  outside the UK to see and invest in UK SMEs. Many of the leading investment platforms have also attracted substantial levels of Angel and VC investment  who have recognised the innovation and growth potential of these innovative financial models.

• Alongside these equity platforms we have also seen the rise in innovative challenger banks, offering new financial services to SMEs, especially very small businesses  and which grew in significance during the pandemic. These have also attracted significant investment from Angel Investors and VCs. Monzo, Atom Bank, Starling are key examples of raising  significant  levels of UK Public funding and Equity and International investment in 2021-22, whilst Revolut has raised the most significant sum, raising over £1.2bn in total.

• Further key areas of innovation have been seen in payments and exchange markets developed and operated by platforms such as TransferWise (now Wise) which have brought new efficiencies and  speed to SME financial transactions and access to funds through companies like Curve, Onfido, Checkout.com, Assetz Capital. All of these Fintech companies named above have attracted Angel investment in their early stages,  going on to attract VC, international investment and some through public markets.

• The Fintech Sector raised record levels of investment in 2021 at the height of the equity market post pandemic recovery and in 2022 raised nearly £3bn in the first quarter demonstrating the importance of the sector, although there was some decline by end of 2022[40] During this period Fintech has embraced even further technological developments to bring new services using blockchain and AI to create new financial services for SMEs through B2C and B2B companies.

• At the same time there have been important developments in “Fintech for good”, which have directly addressed the access needs for SMEs many of whom could not access formal banking or lending facilities, enabling SMEs to address issues of credit, lending, payroll , saving etc . These fintech services have been vital for SMEs from underrepresented groups and especially sole employers and those in very early stages of starting and building a business. Angel and VC investors have recognised the potential of these innovative fintech companies  and many are achieving  high growth.

Is there more government and the regulators can do to improve access to finance through innovative firms?

As detailed above the UK remains the most attractive destination for financial technology investment in Europe, and is globally second only to the United States. 

• We support the  recommendations of the Kalifa report [41]to strengthen the Fintech sector to support innovative small businesses to enable them to effectively scale here  in the UK .It is important that regulatory scrutiny aligns with the need to enable innovative products and services to grow and thrive whilst recognising the need to protect consumers many of which are small businesses. 

• Whilst we recognise that  there are many checks and balances that need to be carried out by the FCA to review new fin tech firms and protect SME customers we need to set firm foundations in place on which Fintech business can grow. We are also concerned that SMEs operating innovative fintech solutions are not constrained from accessing the investment they need due to overregulation that constrains their opportunity to grow and scale effectively. We support the FCA’s regulatory Sandbox and Innovation Pathways to help innovative fintech firms eventually, for example, applying for banking licence.

• We also recognise that Crypto and Blockchain pose specific regulatory and potential security challenges since they provide specific risks for  users .We look forward to the results of the work of  the Treasury-led Financial Market Infrastructure or FMI sandbox to test whether and how legislation needs to be amended to adapt to a future with innovations such as Distributed Ledger Technology and tokenisation.

How Accessible is finance for SMEs of different sizes?

There are challenges for SMEs at all stages of growth. We have documented above the challenges for SMEs at the start up and early stage to Series A.

• There are a range of characteristics that determine the needs of businesse not just size but  geographic location, sector, structure. Only a relatively small  proportion of businesses are suitable for Equity investment and SMEs require access to a range of different sources of finance often requiring a combination of solutions to support their needs. The work of British Business Bank is important here is  offering solutions across both debt and equity according to company size and structure.
• At the same time,  there is an important role for the provision of  relevant advice to enable businesses to understand the appropriate forms of finance to support their needs to be accessible at the local level – role of LEPs and Combined Authorities (Growth Hubs and Business Advisory Services)  and through local business networks  such as the Chambers of Commerce and FSB), also through online source such as the BBB Finance Hub ( see further comments below)  and through intermediaries.  
• One of the most worrying aspects is the  number of SMEs who  are permanently non seekers of external finance . We are especially  concerned  by the results of the British Business Bank  Finance Survey 2022 which identified  that 61% of SMEs did not seek any form of external finance showing an increase of  20% from 2021.[42]

Is  Finance available to allow SMEs to Scale-up from Venture capital?

• For SMEs there remains a continuing challenge to find equity investment for long term growth. And this has been further underlined during the global economic downturn with long term established stage funding  declining specifically in the second half of 2022 and first quarter of 2023, falling 85% compared to q1 2022 and a further .[43]  

• The key challenges were identified through the Future of Growth Capital Report[44] led by Scale Up Institute and Innovate Finance and to which UKBAA contributed. The report identified a structural funding gap pre -existing to the pandemic of   up to £10bn annually across the supply chain and a cyclical gap of around £7.5bn per annum which was manifested with  lack of investment in the first phases of the pandemic  and which has not  been overtaken by the thriving levels of venture  funding investments that we have seen in 2021 . There remain many other parts of the equity supply chain remain weak, as shown above in relation to angel and early stage investment.

•          It is at the later stage of VC investing that there has traditionally perceived to be a scale up gap, with UK companies reaching series B, C and growth rounds often looking for larger investments from the US and other sources. This is because UK funds lack the size to make these investments, which often require the largest rounds to create large-scale, independent, businesses. British Patient Capital has been fundamental in driving growth in fund sizes in late stage and growth funds in the UK, and the mission of BPC should not be diluted, so it can focus on providing more scale up capital for UK companies.

•          Even with the important role played by Government Patient Capital funding provided to BPC since 2018, with the further £3bn allocated in the last budget, the UK maintains a “scale up” gap for UK growth funds.  This results in UK companies often looking overseas for expansion and growth capital, so we must ensure venture and growth capital funds have sufficient scale and expertise to invest in innovative companies so that they remain and grow in the UK.  The role of BPC in attracting further international investment  providing a cornerstone of public equity funding is vital, but we must also ensure  that we are continuing to make UK an attract environment for International investment and not over regulate or restrict the opportunities for  international  funds. We are heartened by the key funds such as Sequoia Capital seeing the opportunity to headquarter in the UK.

•          There are vital opportunities for the provision of funding to support SMEs in key growth sectors to  further build and successfully grow their businesses here in the UK, rather than   overseas.  In relation to Life Sciences,  we are extremely supportive of the  support being offered through the BBB Life Sciences Funds and the LIFTs programme. However, the level of  equity investment  in Life Sciences  declined last year in the face of global economic challenges  and remains  lower in Q1 2023 compared to AI and Blockchain[45].

•          The lack of investment by the Pension Funds into Venture capital here in the UK has been a barrier to funding support to SMEs in our key growth sectors such as Life Science and we look forward to the outcomes of proposals being made to support the next phase of the  BBB LIFTS programme through the Pension Funds.  We also welcome the important new proposals announced by the Chancellor in his recent Mansion House Speech and the commitment expressed by  a number of leading Pension Funds to deploy and aggregate funds to support high growth potential  businesses  across the UK and our core growth sectors , providing a vital injection to  the Venture capital markets.( see also role of BBB below)

• There are also important  issues to be addressed to strengthen our Capital markets here in the UK.  We welcome the City of London proposals to develop an ambitious new £50bn Future Growth Fund to  boost our position of leadership for the UK to significantly increase  investment  into  our growth sectors, including fintech, life science and green technologies, including ther opportunity offered for Consolidation of smaller defined contribution (DC) pension schemes, tackling structural issues on the size and scale of DC pension pots, and creating economies of scale which would enable greater risk diversification.

•          We also support the need for  the rapid implementation of the UK’s capital markets as set out by Lord Hill. Many Angel-backed and VC backed businesses have the potential to go on to an IPO. The role of  the  London Stock exchange  main markets and AIM needs to be strengthened  by the important changes to ensure that  UK high growth successfully  scaling companies  will continue to list in the UK,  attracting significant sums of private capital and  addressing the issues of liquidity in the market.   The UK can do more to further simplify and streamline operational processes that are placed on publicly-traded companies, and pursue measures to improve information flows in the market. The UK has an opportunity to redefine how it showcases itself to global market participants and replace negative sentiment around founders and corporate success.

•          We also support the findings of the recent review by UK Finance and EY that the UK remains a top tier global capital markets centre, but our position is being challenged and further action needs to be taken, ensuring collective and harmonised approach to reverse adverse trends and reinforce the UK as a destination of choice for international investment and listing on our public markets [46]

Is securing access to SME finance particularly challenging for women, people from ethnic minorities, from certain social classes, or any other group? If so what should be done about it?

• Securing access to finance is especially challenging  for businesses led by women or by  founders from  black and ethnic minority communities,  or by disabled founders and with many other factors, including  location, educational  background, income, age etc. These intersectional issues  have created systemic challenges for many SMEs in accessing the investment  they need and also highlighted in BBB’s “Alone Together, Entrepreneurship and Diversity ” report [47]

• UKBAA is a founding signatory and partner of the Investing in Women Code, alongside BBB, BVCA and UK Finance ,established  under the initiatives recommended, as a result of the Alison Review into female Entrepreneurship. The code is aimed at increasing transparency in the level of investments into female founders by providing annual gender-related data on equity and debt investments and specifically to stimulate the adoption of good. To date we have 204 signatories from finance providers including  banks and VC funds and Angel groups have signed the code, including 30  angel groups.  The latest IWC report launched in June 2023[48] revealed the following:

• All female teams asked  for considerably less at average of £184k whilst mixed gender asked for more per deal in 2022 at nearly 2m av. (cf £ 1.1in 2021).All Male teams asked for av. £700k in 2022 (cf 800k in 2021)

•          0nly 15% of total number of deals made in all female teams with 28% of total deals in mixed teams  

•          In terms of amount of investment captured: All female teams received only  7% of total investment Mixed teams  19% = 26% total investment went to businesses with a female founder

•          74% into all male teams nearly £40m (cf 66% in 2021)

This can also be compared to the latest BBB SME Equity Tracker 2022 Report (May 2023)[49]

• In 2022, 27% of all equity deals went to teams with at least one female founder.
• All-female founder teams received 9% of all equity deals in 2022, while only receiving 2% of total investment.
• All-male teams, received £2.0 bn in deal value across 1787 deals and 73% of all deals
• In 2022, all-female teams made up 12% of all seed stage deals, and only 4% of all seed stage funding

• A key factor affecting access to investment is the lack of diversity in Angel Investment across the UK and which impacts across the whole venture supply chain. UKBAA collaborated with Beauhurst in 2022 to identify the number and level of women angel investors across the UK and what impact  women  investors were making. The Women Angel Insights report launched in September 2022[50] identified that of the 37,000 identified angel investors across the UK only 14% (5,000) are women, with less than 0.7% with a portfolio of over 12 companies, so representing a very nascent community.  60% of Women Angel investment is focused in London and South East, so with far fewer women angel investing in the regions.    Women have over 25% of their investment in women founders with some investing  only in women founders. Yet we identified that women have invested in deals worth over £2bn in 4,000 businesses over the past 10 years creating 10,000 jobs thus recognising the considerable impact women angel investment could make in the level of investment for women founders.

• This has resulted in UKBAA establishing the Women Angel Investment Task force and Women backing Women campaign[51]. We are organising awareness and educational events to empower many more women to angel invest in women founders across the UK regions and nations,  with a view to increasing this to 30% women investors.

• In relation to investment in black and ethnic minority led businesses,  we also recognise the lack of ethnic diversity in the Angel investment base that directly impacts the opportunity for ethnic minority founders to access investment. The BBB-UKBAA Angel market research identified that 11% of the existing Angel community are from ethnic minorities also underlined by 58% of diverse investors being based in London.[52]

• The research done by Extend Ventures on Diversity in investment[53]  and the recent BBB Report on Entrepreneurship (“Alone Together”,)[54] shows the significance of intersectional issues. Women entrepreneurs and founders from black and ethnic minorities are specifically affected in regions where there are low levels of Angel Investment available. This makes the challenge to get onto the first rung of the ladder of equity investment even harder for these start ups.

• UKBAA recently gathered ethnicity data from the Angel groups signatories to the IWC code, alongside BBB. This was a voluntary additional exercise  in pilot phase and was in response to the recommendations of the CRED Working Party on Access to finance. Whilst this has only been a pilot, we have identified strong  willingness and transparency among our investment community to provide data on the ethnicity of their pipeline and investments. The The data revealed  that 60% of the businesses receiving angel investment in 2022 were white all male founders and who secured 79% of the total angel investment allocated by the angel groups[55].

•                   We recognise the vital importance of sharing good practice to influence investor behaviour. UKBAA has developed a new Best Practice Guidance for Angel investment in Diversity. [56]  This has drawn on the perspectives ideas and existing good practice among our investors including from the existing black and ethnic investment community. We also commend the recent report published by BBB “Finding What works” identifying key areas of good practice and practical steps  that VC investors  are pursuing to increase investment in diverse founders[57].

• We have  also seen the formation of a number of female founder focused Angel groups across the UK many of which  have very high proportions of women angel investors  or are all female groups, making  100% of all their investments  in  women led businesses, including Angel Academe; Alma Angels; HERmesa; Women Angels of the North also in Scotland: MINT Ventures and Investing Women Women Angels of Wales and Awaken Angels in NI. At the same a number of groups have also emerged  focusing on Angel and early stage VC investment for black and ethnic minority founders,  including Cornerstone Partners  (who have now raised a new £20m Fund to back black founders); Community Growth Ventures; 10X Angels; Diaspora Angels.

What more can be done?

• Provide direct Government funding and resources to substantially expand the reach of the Investing in Women Code to include the majority of UK VC and Angel investors as well as debt providers and as means to sustainably change the investment behaviour and levels of investment in female founders and co-founders. At the same time to extend the role and remit of  the IWC code to include Investing in Ethnic Minority founders and gathering  ethnicity-level investment data and promoting good practices among finance providers to report annually.

• Provide direct public funding support to the UKBAA national campaign under the Women Backing Women campaign to raise awareness, recruit and educate and mobilise many more women to become Angel investors and in parallel to encourage and facilitate individuals from ethnic minorities or other diverse backgrounds to become Angel investors. This would lead to the mobilisation of  all key players across business, investment and  entrepreneurship alongside key ecosystem players at national and local level to change the existing levels of investment in diverse founders.

• Consider the allocation of an additional targeted funding pot of at least £150m to BBB/BBI into the Regional Angels Programme to specifically co-invest and leverage the investment potential of nascent and less experienced Angel investment groups from diverse backgrounds and groups with a core focus on backing diverse founders across the UK regions and devolved nations.  This funding should include additional capacity resources to these groups to build their pool of investor and long term sustainability 

Government Policy Issues:

Should the Government do more to enhance SME Access to Finance. And if so , what?

We recognise the important role that Government has played in increasing Access to finance.

We also wish to draw attention to the need to avoid unnecessary regulatory change to ensure this does not impact on the effectiveness and capacity of angel and wider private  investment to SME growth and innovation.   Relevant measures include:

Provide Greater certainty on the future of EIS:

• Our recent survey of the UKBAA Angel investment showed Angel Investors are using the EIS Scheme for an average of 83% of their investments whilst 87% said that it enabled them to put more of their personal capital into early  stage businesses, whilst 90% of investors who were new to Angel investing, (in last 12-18 months), said that EIS was vital to them deciding to start Angel investing in early stage high risk businesses, rather than revenue generating businesses or other asset classes. However, there is a need to for Government to provide  more certainty and detail on its intentions regarding the EIS post 2025 . 
• The sunset clause should be permanently abolished to allow a political consensus for a longer term strategic framework to be developed for EIS, ensuring that it meets Governments objectives to support private investment in backing early stage risk focused businesses and supporting scaling-up. We also believe that there is also an opportunity to review the potential  of the  Knowledge Intensive Businesses EIS scheme to create additional incentives to support investment into innovation and key growth sectors,  but not to the detriment of the existing EIS scheme,

SEIS enhancements and create national awareness 

• We were pleased to have confirmation in the Chancellor’s budget in November 2022 of  important enhancements to the scheme enabling many more entrepreneurs to access this important first  level of risk capital and increasing the level of annual investment that angels and other private investors can commit form their  personal financial capacity. This will enable more women founders and those from black and ethnic minorities and other underrepresented groups who take longer to build and establish their business to access the opportunities offered by SEIS scheme and  leverage the power of more angel investors, notably to  attract more women investors  and build  a more diverse  investment base to support entrepreneurs here in the UK

• There is also a need to build further awareness and take-up especially in the regions and among key target groups: we hope that HMT and HMRC  could support the work of UKBAA , BVCA EISA and other key players in the ecosystem to develop a major nation-wide campaign to raises awareness of the schemes.

Ensuring that the new FCA requirements for Investment promotions and HMT framework do not diminish the pool of angel and early stage investors

• Angel Investment is largely operated under the FSMA exemption framework which enables Angel groups across the UK to provide a range of services including: Access to pitch presentation and entrepreneur showcases; access to educational events and online resources; professional development including peer mentoring; social networking.

• A number of Angel groups have become authorised under the FCA regulatory framework, generally where the Angel group has raised a side car fund , either under EIS, or may have raised a fund through public co-investment funds such as the BBI Regional Angels Programme. UKBAA took part in the 2022 consultation by HMT into definition and operation of the framework for self-certification investors as HNW or Sophisticated. UKBAA also responded to the 2022 FCA consultation on promotion to private investors of risk investments .

• It is essential to ensure that the new requirements in relation to investment promotions do not impose unnecessary burdens that diminish the capacity of Angel groups to recruit and mobilise angel investment at a time when there is such a pressing need to build the pool of angel investment to back innovating small businesses across the UK regions. Any changes must be evidence-led, proportionate and balanced, whilst any negative effects of excluding a wide range of persons from bringing investment to small businesses here in the UK, or that create additional costs and barriers and delays to access to investment for businesses seeking to access equity capital, should be avoided.

• We still await the results of the consultation with HMT on High Net Worth HNW and Sophisticated investors. We reconfirm our view provided to HMT that restrictions are to be avoided that add extensive new responsibilities to Angel groups or erode the attractiveness of the UK as a thriving entrepreneurial finance ecosystem for the growth and support for early stage, scaling and high growth, innovating  entrepreneurs from across the globe, or that undermine the contribution of Angel and early stage investment to support the productivity and competitiveness of the UK economy.

Review R&D tax reliefs scheme to support innovation across SMEs at all stages of growth

• It is vital to  ensure that the revamped scheme does not diminish the research opportunities of small businesses through the concern to reduce abuse by a specific group, or through the need for efficiency to combine the existing scheme with the RDEC.  The R&D scheme underpins the capability of small businesses to invest in R&D and should not be limited to a scheme which favours larger businesses.  Whilst we welcome the  R&D tax reliefs being available to support research  intensive small businesses, we recommend that R&D tax reliefs  should not be cut to other SMEs  and should  reflect the important role that  non-technology focused innovation plays among small businesses across other sectors ( creative industries; hospitality; retail, logistics  etc) at a time when we need more small businesses to invest in innovation.

Support to the mobilisation of Pension funds to support long term SME growth

• We endorse the proposals set out in the Chancellor’s Mansion House Speech in July 2023 when he announced an ambitious package of measures to unlock UK Pension Funds also to make UK capital markets more attractive, aimed at fostering a better funding environment for entrepreneurship and long term investment. We support the commitment achieved with many of the UK’s largest Defined Contribution (DC) pension providers to the objective of allocating at least 5% of their default funds to unlisted early-stage businesses, potentially unlocking up to £50bn by 2030. and to support our key growth sectors. We support the identified  role of the BBB to aggregate, manage and mobilise these funds and we especially hope that Government working with BBB will ensure that these funds can reach SMEs with growth potential  in all regions and devolved nations of the UK and notably identifying the opportunity to deploy this important new funding to support SMEs at different  stages of growth and also reach the many growth potential businesses led by women and black and ethnic minority  founders  and from other diverse backgrounds to ensure that this really fundamentally transforms the level of investment available to high growth potential small businesses across the UK.

• We also identify the distinct opportunity to ensure that these new Pension Funds are designed to leverage and co-invest with the existing equity market across the supply chain including Angel investment and not displace existing equity investment, but to act as a vital catalyst to invest alongside existing Angel groups; VC funds and PE investments.

• As a key exemplar of this opportunity, we support the opportunity offered by the Long Term Investment for Technology and Science LIFTS to enable the existing  funds to crowd in UK Institutional investment especially the DC Pension schemes  to support the long term growth of the UK’s most innovative science and technology companies supported by a Government commitment of £250m.

What has the impact of Covid Bounceback Loan Scheme BBLS which was followed by the Recovery Loan Scheme been on SME Finance?

Many Angel-backed businesses accessed the Covid Bounceback Loan scheme during the pandemic. Accessing these loans enabled many of the businesses to be resilient and continue to survive and build their businesses and which provided invaluable support to  these businesses at a time when further Angel investment was  very limited with a 47% reduction in the level of Angel investment available in 2020-21[58].   At the same time Angel investors continued to provide hands on support and strategic advice alongside the BBILS loans to ensure that these were effectively utilised.  Our investment community have reported that the majority of these BBILS loans have been  now paid back, with less use of the RLS scheme by this group. Many of these businesses not only having avoided failure but going on to access further investment support in 2022-23. This demonstrated the important value of the scheme in enabling the SMEs to continue to grow and scale during this challenging period.

How Useful is the British Business Bank?

• We believe that the BBB plays a vital role in channelling public funding to support SME growth across the UK, addressing the needs of  small businesses at all growth  stages and offering a range of finance solutions  from loans, debt and equity.
• BBB’s role in leveraging and stimulating the power of private investment  not only from the UK but internationally is key to enabling the UK to create a sustainable supply of long term growth finance through the combination of public and private funding.
• Its importance is not only in managing the deployment of funding to SMEs, but in addressing market failures across the UK, including in the regions, sectors, diversity and in driving  investment behaviour into key areas such as environmental sustainability /net zero and ESG.
• The Bank’s role was especially important in being able to mobilise the emergency response the Access to finance needs  during the Pandemic  through both  loan and equity solutions, playing a vital role in ensuring the survival of many SMEs during that time.
• BBB through British Business Investments BBI is addressing regional investment capacity, deploying extensive levels of finance across the nations and regions through its Regional Investment Funds offering  debt and equity solutions and we were pleased to see the additional allocation of  funds enabling BBI to expand to  more regions and nations.
• The Bank is also supporting the development of Regional finance ecosystems through its Regional Network supporting  the development of connections on the ground between key players and SMEs seeking finance  and this is providing a valuable means to increase access to advice and support for SMEs and strengthening local partnerships at regional and local level.
• Its research and analysis on the UK economy and small business finance  through its SME Market reports and Nations and regions Equity  tracker has been invaluable in providing a framework  for identifying  market  needs and we have benefited from the data provided on the Angel and early stage through BBB’s regular UK Angel market Report done in collaboration with UKBAA.
• In addition, BBB is carrying out an important role  through its research and policy work to identify key issues in SME finance and drive out good practice, in influencing  financing for diverse founders through such reports as Alone Together report and latest What works  Report . BBB has also been taking a  leading role in  partnering with UKBAA and BVCA and UK Finance to support the Investing in Women Code including promoting  sign ups, data collection   analysis, reporting and disseminating the  annual progress report 
• BBB also plays a vital convening role in bring together the finance community for regular exchanges of insights and information  through roundtable, workshops and webinars.

Role of BBB Finance Hub:

• As one of the key industry partners across the supply chain of finance to SMEs, UKBAA  supported the  development of the Finance Hub launched in 2018, providing advice and support on its structure and content  and creating content   focused on accessing Angel Investment. We have also  continued to promote and disseminate information on the Finance Hub to our SME community through our website and social media. We believe that this reflects the strength of the Finance Hub model by bringing together a wide range of industry partners across the whole spectrum of finance from start up to scale up and enabling access to first-hand experience  and content. This created an indepth and wide reaching range of information available and  cohesion around its purpose and promotion. Its strength also lies in providing  bespoke and targeted support to SME decision making on which source of finance to approach and which is frequently one of the greatest challenges for SMEs. 
• Whilst there are other finance hubs and information sources, the BBB Finance Hub remains relevant and useful. There are opportunities for more bespoke and targeted platforms  for example through the new “Investing in Women Finance Hub” being developed by DIT with Council for Investing in Women  ( under the Rose review Board) which directly targets the specific access to finance needs of women founders and entrepreneurs, due to be launched this autumn.

What more can be done by BBB:

Whilst the BBB is clearly playing a very valuable role in SME finance , there are opportunities  to further enhance and reinforce its role to address the needs and challenges for the growth of SMEs  from start up to scale up and to ensure an effective and sustainable supply chain of  finance in the years to come , whilst also growing its role in capacity building and economic development:

• The Regional Angels Programme RAP:  originally allocated £100m by the Government in 2018, the RAP is designed to address the lack of Angel investment capacity  in the regions outside London and the South East by providing co-investment funding pots of between £5m and £15m to identified Angel groups and early stage funds with the track record, experience and capacity to manage and deploy investment into regional SMEs.  A further £150m was allocated by Government in 2021 and to date over £165m has been allocated to 13 partner organisations.  However, the scheme has precluded  a significant number of the most active angel groups across the UK many of which are directly focused on addressing the needs of diverse and founders in the UK regions because they do not meet the stringent parameters  required to qualify for an allocation of co-investment funds established by BBI .
• Working with BBI , we have identifyied relevant structures that can enable these less experienced but highly valuable regional angel groups to deploy  RAP funds.  We recommend that BBB should urgently move forward in  establishing these new structures and allocating co-investment funds to enable  these angel groups to increase and stimulate investment to early stage diverse businesses in the regions. We also recommend that additional £150m RAP funds should be allocated to BBI in the next budget to increase the capacity of further less experienced  groups focused on diversity and increasing long term angel capacity in the regions. 

• Enhancing BBB’s role in supporting long term Growth Funding  and Mobilisation of Pension Funds: As already indicated, BBB plays a vital role in mobilising and deploying  Risk Capital to support sustainable growth , attracting both UK and  international through the work of BPC. The Bank has a vital role  to play in addressing the lack of institutional investment into UK Venture Capital  and in the mobilisation and deployment of Pension Funds in support of the important commitment gained by the Chancellor by leading DC Pension fund schemes as announced by the Chancellor in July. We also see the LIFTS programme as a prime example of how BBB can mobilise  innovative solution for the use of  Pension Funds to support our key growth sectors such as Life sciences.

• Mobilisation and Deployment of the Pension Funds: We recommend that BBB be the central agency to structure the mobilisation, aggregation  and deployment of the Pension Funds. BBB has the potential  to channel these funds towards important equity investment opportunities into the UK growth potential businesses from early stage through to scale ups and de-risking these through its existing funding models and schemes  developed by BBI through its regional Investment funds; growth sector focused funds such as Life Sciences and to drive impact into investments to support diversity, ESG and Net zero.

• We also recommend that BBB should be established as a permanent structure to fulfil its core role in deploying Public sector funding into SMEs and ensuring its long term potential in leveraging and stimulating private sector finance  for long term growth and sustainability  and further enhance its role in supporting economic development. 

UKBAA is not making a response to the following issues:

• How successful has the Bank of England’s Term Funding Scheme with additional incentives for SMEs (TFSME) been at encouraging banks to lend to SMEs? 
• What role do credit reference agencies play in supporting SME finance?  
• What impact has the RBS bailout state aid Alternative Remedies Package and its various funds for SMEs (implemented by Banking Competition Remedies Ltd) had on SME access to finance? 

Regulatory issues 

• Do SMEs have adequate and appropriate access to a complaints procedure when in dispute with their bank or lender?  

• How effective has the Lending Standards Board’s Standards of Lending Practice been?  
• How well does the Financial Ombudsman Service (FOS) work for small business complaints?  
• Is the FOS’s existing role in SME finance appropriate? If not, how should it change? 
• How effective has the Business Banking Resolution Service been, and what lessons can be learnt from it?  

• Should SMEs have the same level of consumer protection and deposit insurance limits as retail consumers? 
• Should commercial lending to SMEs be brought into the regulatory perimeter? 
• What impact will the PRA’s proposed Basel 3.1 capital requirements framework, and in particular the proposed removal of the SME support factor, have on SMEs in the context of the PRA’s objectives? 

September 2023