The North East & Tees Valley can ill afford for its’ technology start-ups, spin-outs, spin-offs and scale-ups to fail because of insufficient private sector, ‘patient’ equity finance.
(Patient capital is where the investor is willing to forgo a short-term return for more substantial financial returns down the road. Patient Capital can also increase the social impact value of the investment).
Our region wishes to generate sustainable, high-skilled jobs through the creation of a fully functioning technology investment ecosystem. The brains side of that equation are here in spades across the myriad of research groups in our five universities (according to the UK’s Research Power Index they have a collective ‘Research Power’ rating comparable with Oxford or Cambridge Universities).
Furthermore, we have a great many national research institutes based here and local technology research institutes plus 10 Regional ‘Centres of Excellence’. This is indeed an embarrassment of riches by any standard.
So, why aren’t private sector venture capital (VC) growth funds and corporate investors falling over themselves to access our region’s talent?
It’s clearly not due to a lack of scientific know-how or to a shortage of numbers of start-up’s emerging from our scientific institutions – which will no doubt grow further under the stewardship of the Northern Accelerator.
The answer is down to a bit of a ‘chicken or egg’ situation. Without patient, private sector VC funding it follows that the region’s track record for the full commercialisation of early-stage tech is poor. A lack of case studies of successful home-grown tech companies results in funds simply not bothering to locate here or frankly to even board the train to come here.
Without VC growth funding, companies start-up and spin-out with relative ease but sooner or later fall-over. Public sector equity funds are currently vital in encouraging and funding start-ups, placing relatively small sums of ‘seed investment’ into new or new-ish companies (so called Innovation Funding). However, being limited in size, those funds are more often than not unable to provide the Growth Funding, i.e. the cash, companies require to grow from pre-commercial to full-commercial. That takes tens of £millions not 100’s of £thousands of investment capital and the accompanying specialist VC know-how.
Are there companies in the North East & Tees Valley looking for Growth Funding?
In August 2019 a Deloitte report on growth capital estimated the quantum of unfunded growth capital opportunities in the North East being in the order of £2bn-£3bn, which made the North East the worst performing English region. It also analysed the likely future seekers for growth capital in the North East, showing the North East as having the highest requirement and greatest appetite for growth capital in England by numbers of companies.
In 2020, we conducted our own analysis looking at 125 North East of England based technology companies founded after 2011. 56 received some VC investment, 23 raised more than £1m and only 6 raised more than £10m during that 10 year period. 21 of those companies appear to have exceptional growth potential but show signs of severe undercapitalisation. Yes, they’ve received investment but only small sums, principally from regional public sector or similar funds – without which they would surely have foundered. To put our findings in even starker relief, the total capital deployed in those companies over the 4-year period was £33.5m, which is just 0.2% of the $13.2 billion deployed by the whole of the venture capital industry in 2019!
Sadly, small sums of subsistence funding can result in the creation of ‘zombie companies’ that limp along, failing to meet their true potential. And which, instead of focusing on their core commercial objectives, they quite understandably become grant-chasers for their cash flow.
This lack of private sector VC funding is not a stand still problem
The ONS states that 230 science and engineering-based businesses are created in the North East of England each year. These new businesses, a minority of which stem from the region’s universities, require equity funding over successive rounds if they are to drive the regional growth, upskilling and prosperity of which they are capable. A massive gear change is therefore required in the scale, source and type of equity funding being made available.
If we can provide the right level of patient, scale-up, equity finance and expertise, then evidence elsewhere points to the ability of just one commercially successful innovative company to spawn many more successful innovative companies. This would add materially to our region’s reputation as a buzzing centre of entrepreneurship. An example of this multiplier at work is Cambridge based Cambridge Consultants (CCL), where NorthEast Capital Partner, David Livesley, worked for some years. CCL’s success led to the creation of a world-leading industrial and commercial inkjet cluster in Cambridge including Domino, Willett, Elmjet, Linx, Xaar, Xennia and Inca Digital. Furthermore, ex-CCL employees became key executives in the cluster, moving between companies to transfer expertise and experience.
That cluster created more than 3,000 jobs in the Cambridge region, generated revenues in excess of £500m per annum and helped Cambridge become recognised as a global centre of excellence which has subsequently attracted huge amounts of patient venture and corporate capital. A useful illustration of this is Cambridge Innovation Capital, a £107 million equity fund. It has attracted co-investment of £1bn into its Cambridge investee companies.
Large Corporates are also a significant provider of scale-up, equity finance and expertise
Strategic alliances / partnerships with big business are key to the development of both the small company and the big business. After all, most really innovative thinking comes from early-stage companies, endowed with an original idea and unimpeded by any embedded mindset. Nevertheless, one of the best things a small company looking to grow aggressively can do is hitch itself to a larger one in some capacity. It is often just too difficult or expensive to grow market share from scratch. While strong on mould- breaking thinking, good on ideas and excellent in the technology department, small, innovative companies often fall down on sales and marketing. It is not enough to have the best product.
Someone still has to knock on doors to sell it. A strategic partner can take up a product, badge it, market it and change out of all recognition the size and scale of a small company’s activities.
About NorthEast Capital
We believe that the North East & Tees Valley is ready for rapid growth but is constrained by the need for patient, equity capital to allow its companies to flourish and beget other successful companies. That is why we are committed to bringing private sector equity finance to our region and to leveraging these funds by orders of magnitude through our network of co-investors.
In partnership with local technical and commercial partners e.g. the Materials Processing Institute, our fund will directly address the gap in patient start-up and scale-up funding with a view to generating returns for our investors whilst creating investee exemplars to attract other fund managers and corporations to the region.
If you like the sound of this, find out more and support our fund at www.northeastcapital.uk.com
(This interview with Simon Robeson (Co-Founder, NorthEast Capital) outlines our origins, ethos & credentials).