The UK is in the process of rebuilding its financial systems and structures after the global crisis of 2008-2009. This is a unique opportunity to ensure that the UK builds the right financial architecture for high-growth, innovative companies that are in need of multiple sources of capital.
Our work with early-stage businesses reinforces our belief in the innovative, entrepreneurial nature of the economy, one that is capable of generating and supporting the expansion of high growth firms. In fact, our research shows that high growth, innovative companies create more jobs, are more likely to be innovative and have strong positive social effects on our cities and regions.
However, our research suggests that growth firms are currently not accessing the finance they need to expand and explore their full potential. We need to make sure the UK's new financial architecture is geared to supporting this growth.
The new financial architecture emerging after the recession should provide a funding escalator that supports promising business and involves the availability of multiple pools of capital and a supportive and competitive financial sector.
Empirical evidence shows that venture capital significantly promotes innovation and business growth and creates significant spill-over effects. Venture Capital backed firms introduce more radical innovations and pursue more aggressive market strategies compared to other start-ups. There are currently between 800 and 1,100 venture capital-backed businesses in the UK and their high growth potential makes them vital to our economic future.
NESTA research shows that angel finance plays an increasingly pivotal role in financing growth business. The economics of angel investments means they can back high growth businesses smaller than those in which VC firms invest and can focus on particular regions. Our best estimate for angel in the UK suggests they make over 3,000 investments annually with a total value of over £1billion per year. Expanding angel activity will provide a substantial intelligence source of finance to promising companies.
Bank lending is the source of finance for the majority of companies and more effective provision of corporate credit needs to be encouraged. There is a strong case that more competition in business banking, and in particular the arrival of new entrants, would improve small business finance by encouraging innovative ways of meeting borrowers' needs.
NESTA research is also looking at the role of diverse new models of finance such as peer-to-peer finance, development finance from customers and others.
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Nesta Operating Company, a company limited by guarantee registered in England and Wales with company number 7706036 and charity number 1144091. Registered as a charity in Scotland number SC042833.
