Chapter 6: Assessing the Scale of the Equity Gap

This chapter is an assessment of the market for start-up finance in the UK for high growth potential entrepreneurial firms. It uses data from the UK’s Global Entrepreneurship Monitor surveys between 2001 and 2003 to assess the scale of equity finance in the UK and the strengths and weaknesses of the UK financial markets for supporting high growth potential firms on the basis of an additional survey of 60 experts conducted during September and October 2003. This work suggests that there are areas of the market that are strongly served by existing financial mechanisms. Government support programs such as the Small Firms Loan Guarantee Scheme, SMART and some regional venture capital companies, for example, are well regarded as sources of finance for firms seeking initial start-up finance for amounts up to and including £250,000. Similarly, there is evidence that the business angel market is also serving this market with syndicated financing deals taking investments up as high as £300,000 in some regions. However, there is a perception among business support agencies, venture capitalists and entrepreneurs alike that the size of investments in the formal venture capital market has been increasing and that companies seeking investments above this level, up as high as £2million, may be restricted in their access to finance. The paper tests this qualitative finding on a number of data sources and finds that there are indeed an “equity gap” of between £150,000 and £1.5million. It concludes that lack of finance in this area represents a brake on the expansion of high growth potential businesses in the UK.