By Keith Morgan, CEO, British Business Bank
The British Business Bank, as the UK’s national economic development bank, has a mission to make finance markets for smaller businesses operate more effectively, enabling those businesses to prosper, grow and build UK economic activity.
Part of this mission is to ensure that the UK small business finance market provides the right kind of finance to enable the UK’s innovative and high-growth start-ups to become the global success stories of tomorrow.
For many UK smaller businesses with ambitions to grow, the finance they need is patient capital – longer-term finance that will enable them to navigate research rounds and product development that may take years and decades to reach fruition rather than months. Patient capital is particularly vital for the life sciences and biotech sector, where development lifecycles can be complex and last for a significant amount of time.
Historically, research-intensive smaller businesses in the UK have had to look abroad and particularly to the US for the patient capital necessary to fund expansion or growth. The UK is well established as a start-up factory, with impressive rates of business births, but has lagged behind the US in financing for scale ups. Research shows that a significant economic impact could be made if the availability of patient capital in the UK was increased to the same level as the US.
Recent data has shown that the supply and diversity of the patient capital available to the life sciences sector has begun to increase. The British Business Bank’s Small Business Equity Tracker, published in July 2018, reported that the amount of equity investment into life sciences businesses in the UK grew by 19% between 2016 and 2017. While this is encouraging, much of the increase was down to larger deal sizes rather than many more smaller businesses getting the finance they need – in the same period, the number of equity deals in the sector grew by only 3%.
Much more therefore remains to be done. The government’s Patient Capital Review, published last autumn, showed that a lack of longer-term investment was holding back such young innovative firms. This ‘patient capital gap’ slows firms’ growth, dampens their ambition and means that some are sold to trade buyers rather than growing to maturity in the UK. Developing a company to be able to list on the stock market requires more funding than developing a company for a trade sale, taking 3.5 funding rounds on average to exit via an Initial Public Offering (IPO) compared to 2.4 for a trade sale.
That’s why we are proud to be taking forward recommendations from the Patient Capital Review to deliver an additional £13bn of patient capital to such firms, including through establishing a new member of the British Business Bank family – British Patient Capital.
A separate subsidiary of the British Business Bank, British Patient Capital launched in June 2018 and has been given £2.5bn of new resources by the Government. In line with the ambitions of the Industrial Strategy, it will deliver a programme designed to support UK bus inesses with high growth potential to access the long-term financing they need to scale up.
British Patient Capital builds on a successful 10-year heritage of the Bank’s programmes investing into UK venture and growth capital. The new programme is designed to support just the kind of scale-up businesses found in the life sciences sector. Our venture capital programmes have historically supported the sector – up to March 2018, we had supported 312 smaller businesses in the life sciences sector with funding of £322m – and we expect further commitments to be made to life sciences-focused funds and businesses.
One of the life sciences businesses to benefit from previous British Business Bank activity is Cambridge-based Exonate. The company aims to introduce a revolutionary, game changing eye drop for the treatment of retinal vascular
disease including Wet Age-Related Macular Degeneration (WAMD) and diabetic macular oedema.
Exonate needed patient capital to help it navigate research, optimise compounds, and proceed with a pre-clinical safety and toxicity development programme before entering clinical trials in 2020. The company was able to raise £2.8m equity funding from angels, supported by funding from the Universities of Nottingham and Bristol, and the British Business Bank-sponsored Angel CoFund.
We believe that the new British Patient Capital programme will be particularly beneficial to similar high-growth life sciences businesses.
When British Patient Capital was launched, we were proud that one of our first investments was a £9m commitment to the Dementia Discovery Fund, a specialist venture fund. The fund benefits from a diverse range of strategic investors including private investors, pharmaceutical companies and the Department of Health and Social Care and the charity Alzheimer’s Research UK (ARUK).
The goal of the fund is to discover and develop new medicines that have the potential to transform the treatment of dementia by slowing or stopping disease progression. It specifically aims to increase the flow of financial capital to fill the funding gap in pre-clinical research for dementia, enabling further progression through the research and development pipeline to human testing.
As well as making this additional finance available, we also want to equip smaller businesses with the information they need to seek the finance best suited to their needs. Our recent Small Business Finance Markets report, published in February 2018, found that only 50% of smaller business were aware of a basket of six alternative finance products that might help them grow and succeed.
To address this, we provide businesses with free and impartial information on their finance options.
For several years we’ve provided the Business Finance Guide (published in partnership with the ICAEW and a further 21 leading business and finance organisations) which impartially sets out the range of finance options available to businesses at all stages – from start-ups to SMEs and growing mid-sized companies. Businesses can take the interactive journey at www.thebusinessfinanceguide.co.uk/bbb.
In a significant step-up in our efforts, this summer we’ve launched the new British Business Bank Information Hub, www.financeyourgrowth.co.uk, specifically designed for high-growth businesses such as many of those found in the life sciences sector. The digital hub provides everything a business looking to scale up might need to know about their finance options, featuring short films, expert guides, checklists and articles from finance providers to help make their application a success. The new site also features case studies and learnings from real businesses to guide businesses through the process of applying for growth finance.
We believe that 2018 has the potential to be a pivotal year for ambitious UK life sciences businesses who want to grow to scale. With our new British Patient Capital programme and Information Hub now launched, we look forward to helping them to do so.