Why SMEs are the backbone of the UK Economy, and how VCT and EIS products can play an important role in their success.
We recently sat down with Reuben Wilcock, Head of Blackfinch Ventures to talk about Blackfinch’s Whitepaper “Tapping into UK SMEs” which provides not just a detailed look at the role of tax efficient schemes but focuses on how these play an important role for the small to medium enterprise (SME) economy in the UK. We asked him to tell us in his own words why this paper is important for all advisers to read.
Blackfinch Ventures invests in exciting new tech firms with innovative ideas and strong teams that hold ESG (Environmental, Social and Governance) values at their core. Our team of eight is supported by the wider Blackfinch Group of more than 120 talented staff, and a network of external Venture Partners.
The whitepaper is our way of showing advisers the most important aspects of why we do what we do at Blackfinch. As Richard Cook, our CEO, said in his introduction to the whitepaper these are difficult and uncertain times and it has been challenging for most businesses. But with challenges often come opportunities, and although the economy has had a devastating impact in some quarters, what we have seen is a resilience amongst smaller innovative companies, that we hope will enable them to not just survive but to thrive.
Our team’s highly structured investment process is designed to avoid bias to region, people, culture or product. As a result, across the VCT and EIS portfolios managed on behalf of investors, the portfolio companies are exceptionally diverse, located from Lincoln to London, and operating in many sectors from Wearables to Water Technology. Through the Ventures team’s own experiences as founders of innovative and fast-growing tech companies – and with the assistance of Blackfinch’s external Venture Partner network – we actively support companies from initial investment through to exit.
The UK remains one of the best places in the world to launch and grow an ambitious start-up. Out of Europe’s top 1,000 high-growth start-ups, 319 are UK-based, whereas second-placed Germany has 149. The tax incentives available through Venture Capital Trusts (VCTs) and the Enterprise Investment Scheme (EIS) are undoubtedly one of the reasons for this success, they leverage private capital to supercharge high potential companies. For investors, this doesn’t just mean 30% upfront tax relief and strong return potential – it also means helping the UK’s brightest entrepreneurs to build a better future.
The paper explores, proportionally, how much of the UK private sector turnover and employment is taken by SMEs and how vital they are to the long-term health of the UK economy.
The UK has always had an enterprise culture, and it still does today. According to the Department for Business Energy & Industrial Strategy, the number of private sector businesses in the UK at the start of 2021 was 5.6 million. Of these, 5.5 million were ‘small’ (0-49 employees), 35,600 ‘medium-sized’ (50-249 employees) and 7,700 were ‘large’ businesses (250+ employees). In other words, here in the UK, SMEs account for 99.8% of the business population. While large businesses make a major contribution to UK employment and turnover, the contribution coming from SMEs is impressive. They account for three-fifths of the employment and around half of turnover in the UK private sector. At the start of 2021, total employment in SMEs was 16.3 million (61% of the total), while turnover was estimated at £2.3 trillion (52%). UK SMEs are indispensable to the growth and long-term health of the UK economy.
One of the biggest strengths of the UK’s SME sector is its diversity. SMEs include sole traders, corner shops, plumbers, accountancy practices and so many more. The two sectors with the most SMEs are construction (16%) and professional, scientific and technical (15%). Many of these SMEs are providing a local service or a specialised, small-scale product. However, there is one type of business with broader ambitions that has a large impact on the economy: high-growth SMEs.
The paper explains the stages that SME businesses go through from ideation and initial concept, from the first outline of a product or service that could deliver the essence of an idea to potential customers (the minimum viable product or MVP) through to recurring revenue and brands showing “product-market fit” before discussing the difference between an early stage product and a proven customer fit with a clear growth plan. Companies that have achieved product-market fit are still very small relative to their market size, and they need to scale quickly. So while they have many of the pieces of success in place, there is plenty still to be done.
We then move on to show how VCT and EIS products can play a key role in supporting these businesses, through funding their growth in return for personal tax advantages. The paper explains the different types of businesses that each product would invest into, and what the different benefits would be.
Finally, we take readers through some examples of firms we have invested in so they can see the possible impact that EIS and VCT investing can have on our society, before showcasing our own team and what they look for in potential investee SMEs.