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About The FSE Group

At The FSE Group, we have a 20-year history of supporting high growth UK SMEs, especially in underrepresented areas of the UK. In that time, we have had the opportunity to work through multiple market cycles and economic phenomena and see how they have affected SMEs.  Our mantra is “more than money”, which is achieved by genuinely looking to provide insight and challenges to businesses we support, to ultimately improve their “probability of success”.

This time is not different

The COVID-19 pandemic threw multiple assumptions about economic policy out of the window. One of them being whether the government should provide direct financial support to people and businesses, and if so, what are the circumstances under which that support is considered a good idea? Society appeared to agree that direct monetary assistance was reasonable in an economic crisis that was caused by non-economic short-term factors – namely, a global pandemic.

Whilst some SMEs have been hit very hard, others have remained unaffected, and for them it really has been business as usual, some are even showing strong growth.  Having spoken with many different sized SMEs which make up our portfolio, they have managed to demonstrate their true competitive advantage – their adaptability. From quickly changing their working models to fully remote ones, all the way to launching new businesses and products built around the new world of work, SMEs took up the challenge to boost productivity and keep the engine of the UK economy running.

SMEs now face quite a different challenge, including most government support to businesses coming to an end. Whilst they faced inflationary challenges during the pandemic, partially driven by challenges in supply chains, this has now been amplified by the rise in energy prices, bringing back memories of the 1970s. This has driven up costs considerably - the RPI (Retail Price Index) for April 2022 was 11.1%, notably the highest in decades. SMEs face the challenge in costs for themselves, but also for their staff who are feeling the pressures of inflation. This leads to challenges in staff retention and is a factor in what is being termed “The Great Resignation”.

Facing the challenge

There are going to be some causalities from this current business trading environment.  There always is – typically it boils down to decisive management action.  Using mentors and other support resources helps owners and leaders to work “on their business” even when it feels that it’s fire fighting “in the business”. 

Retaining, and motivating highly productive staff is so important.  Businesses that can afford a pay rise for their staff in line with inflation, should pay their staff more – or at least understand the difference between the effects of inflation on their staff’s disposable income.  However, this is a relatively privileged position - for many SMEs, especially those at the earlier stages who may not be profitable or have a balance sheet that can support this, this is not a viable solution. This is where the adaptable and nimble nature of SMEs can be an advantage. SMEs that are focussed on rapid growth and increasing shareholder value can consider setting up an option pool for their staff – it is generally good form for options to be allocated to all staff and not just restricted to senior team members. SMEs can also consider providing additional flexibility to their teams, as moving to a hybrid or fully-remote working model can help keep costs under control, and can help provide staff with greater flexibility. Additionally, it no longer restricts the hiring pool for candidates to a 20-mile radius of the office, allowing SMEs to hire skilled staff based across the UK’s regions.  The key is for leaders and owners to think differently.

In summary

UK Plc needs SMEs to grow and prosper. The FSE Group’s regional funds are open to support them by providing funding to eligible businesses to assist in their growth journey.  Many of the funds can provide both debt and equity finance and this allows the right combination of funding.  In addition, the funds are there to support the future – through genuine projection-led funding.

This year, International Women’s Day (#IWD2021) falls on Monday 8^th March and what a good way to start the week!

In the early 20^th century, Emmeline Pankhurst founder of the suffragette movement, led marches and fought for women to have a voice and be equally heard like their male counterparts. Since then, women have proved that in this ever-changing and challenging world, they are helping to forge a gender equal environment where they are not intimidated by the challenges which they may encounter.

This year’s International Women’s Day theme focuses on “choosing to challenge” and striking this year’s pose, “a raised hand” could encourage everyone to commit to help forge an inclusive world.

Through skill and sheer determination, many women have earned themselves senior positions in a wide range of sectors including the defence and security sector. The FSE Group has supported many female founders to help them scale-up their businesses and reach the next level. We are proud of our success in supporting female led SMEs and across our funds, 24% of our portfolio companies have at least one female director.

Julie Silvester, Head of Commercial at The FSE Group comments: “Defence and Security is a key sector within the UK economy. We consider it highly important in terms of investment and many of our existing portfolio companies work within this sector. So, we are thrilled that more and more women are taking up high level positions within the field. We have a rich history in not only supporting female led SMEs but also having great representation of female leaders in senior positions within our company. Last year we were delighted to sign the Investing in Women Code, a commitment by financial services firms to improve female entrepreneurs’ access to tools, resources and finance. We appreciate that there is more work to be done and strive to build on our successes over the coming years.”

Ann-Marie Warner-Read, Defence Advisor at TriCIS Secure Integrated Solutions added: "As of March 2019, four of the five largest defence Original Equipment Manufacturers (OEMs) in the US are being led by women. By nature, women tend to be problem solvers. It’s a trait that is important in whatever role a woman plays but can work to our detriment at times as it takes longer to reach the top. Often, I am the only woman in the room and I’m absolutely fine with that. Working in defence should be about bringing authenticity to the table and building credibility. If there are errors or problems, it’s best to acknowledge them and move on. My gender doesn’t matter, what matters is what I do with the opportunities given to me."

Ren Kapur MBE, Founder & CEO at X-Forces Enterprise and Board Member SME Lead at Enterprise M3 Local Enterprise Partnership, said:“It is absolutely brilliant to see the phenomenal presence International Women’s Day now has around the world and is testament to all the incredible work local communities are contributing to the greater worldwide platform of #IWD. Wearing both my X-Forces Enterprise (XFE) and Enterprise M3 LEP (EM3) hats, I am thrilled that within our own business communities, we are continuing to champion women empowerment and women in enterprise. I am proud to say that through XFE we have one of the largest cohorts of female entrepreneurs in the armed forces network, with 30% of our start-up businesses being female led. Also, one of my non-exec board role positions at EM3 makes up a rich diversity of representation, including women. There is still much to do as a society, but we are making such great strides and I strongly believe the future is bright for all when diversity is embraced.” 

About The FSE Group

At The FSE Group (FSE), we have a 20 year history of supporting high growth UK SMEs, especially in underrepresented areas of the UK. In that time, we have been proud to back multiple university spinouts from across the country.

Emerging trends in investment into spinouts

A recent Beauhurst report found that even though investment into spinouts increased in 2020, it was to a smaller number of spinout companies (269 in 2020 compared to 360 in 2019) implying an increase in the average investment size and suggesting that investment efforts were focussed on existing portfolio businesses rather than new deals.

However, the amount of capital invested in university spinouts in 2020 is still lower than the record number in 2018 (£1.11 billion compared to £1.3 billion). What are the reasons for this? A paper by Research England found that compared to conventional startups, university spinouts tend to have a longer time horizon to exit, which increases the variability of returns and requires several rounds of funding, some of which can be explained by the inherent DeepTech focus of university spinouts. This latter point is further corroborated by Beauhurst’s finding that the biggest sectors for university spinouts are Artificial Intelligence (AI) and Health, both of which are research and capital-intensive.

Spinouts clearly need long-term patient capital to fully grow and realise their potential, and this is reflected in the fact that spinouts tend to exit more than non-spinouts (10% compared to 7% in the wider SME population). However, investment into spinouts is heavily focussed on the Golden Triangle (Oxford, Cambridge and London), with over a third of investments made there, driven by funds local to each region, which has helped build a local ecosystem. To grow more spinouts from universities outside this area, they need investment from funds local to them, who have networks within their region to help create value for an SME.

In recent years, many universities have built vibrant ecosystems boosted by programmes to support graduate enterprise and science parks geared towards SMEs, which encourage collaboration with the university.  Research intensive universities tend to have their own linked funds, but this leaves a large number of other institutions without easy access to funding for their SME community.  In 2019, the government announced the launch of 20 University Enterprise Zones (UEZs) in universities across England, to provide support and funding to university connected startups.

Our experience with spinouts

FSE’s first fund, the South East Seed Fund, was developed in conjunction with 11 universities across the South East with public and corporate funding. Since the launch of that fund the FSE Group has continued to invest in university linked businesses with its other regional SME funds and through its angel network. 

On average, 20% of spinouts have at least one female founder, and only 6% of spinouts have an all-female founding team. FSE is proud of its success in supporting female led SMEs, and across our funds, 24% of our portfolio companies have at least one female director.

Some examples of FSE’s investments in university spinouts are:

UltraSoC - FSE first began funding support to this project in 2004 when the concept behind UltraSoC Technologies was initially conceived at the University of Kent. At that time, FSE provided funding from the South East Proof of Concept Fund for research into an optoelectronic debug support interface for embedded System-on-Chip's (SoC's). The South East Proof of Concept Fund (SEPoC) was managed by FSE on behalf of six South East based universities and was financed by the Higher Education Innovation Fund to increase the levels of commercial innovation within the academic knowledge base.

During the SEPoC grant, the University of Kent spun out the ‘project’ into a company that became known as UltraSoC Technologies Ltd. FSE continued to advise on business planning and funding strategy development. In 2006, FSE provided UltraSoC with a PoCKeT loan, which was designed to facilitate the transfer of knowledge from universities into industry, Funds were used to develop a prototype software tool for the electronics industry in collaboration with the University of Essex as well as market research and maintenance of the IP portfolio. UltraSoc subsequently took its first institutional equity investment from FSE managed South East Seed Fund alongside a specialist fund connected with the University of Essex in 2008.  From there followed further IP development, a leading customer base and international private equity investment.

UltraSoc was acquired by Siemans in 2020 to provide a comprehensive solution for their semiconductor industry customers including manufacturing defects, device failure, functional safety, and malicious attacks. 

Codices Interactive Limited (Codices)  – was founded in 2018 by Tim Edwards and Fern Pombeiro at the Falmouth Launchpad Entrepreneurship programme. Through the FSE managed Cornwall and Isle of Scilly Investment Fund (CIOSIF) the company secured equity investment in 2020.

Codices works with brands and influencers to create live interactive shows on Twitch, a video live streaming service which is a subsidiary of Amazon. By using Codices’ tools, broadcasters can build, engage and monetise their audiences through player-driven entertainment. The Twitch platform has proved a great success with over 3 million unique active streamers and over 15 million daily active users.

The business continues to go from strength to strength, most recently having won awards and connected people across the UK during these difficult circumstances with the global COVID-19 pandemic.

Glas Data – Rob Sanders and Colin Phillipson, founders of Glas Data, recognised that data fragmentation issues within the agricultural sector existed and saw how it restricted farmers, processors and retailers.

Referred from Falmouth University’s Launchpad (with MA Entrepreneurship) course, they approached FSE who were delighted to be able to invest in the agri-tech company as part of a larger funding round.

Their technology is developing rapidly, allowing farmers to collect real time data on everything from weather and animal health to load cells and a vast array of sensor devices. With so much data & technology now available, the challenge is how to make it accessible and easy to understand. The clear visualisation of data analysis makes real-time decision making easy from any device. Glas Data now employs seven people, with more recruitment to follow.

In Summary

Some university spinouts in the UK have been successful and raised considerable sums of capital, when compared to international counterparts. Between 2013-17, spinouts from Cambridge raised over $2.2 billion, compared to $1.84 billion for spinouts from Stanford, or $906m for spinouts from MIT. However, there is still a long way to go, and UK spinouts that can compete on a global scale are few and far between. As a comparison, MIT has supported 26,000 businesses who generate a turnover of $2 trillion, far beyond UK universities.

FSE believes there is a funding gap to provide investment for developing commercial scale across a wider number of Universities. This requires specialist fund management skills to understand the particularities of spin outs, how to make the best use of the innovation available, the funding landscape and the objectives of the universities themselves. We believe that more UK universities should come together to share expertise and build a sustainable funding model to support spinouts across the country.

We are committed to supporting eligible, ambitious, innovative, high growth and scalable SMEs to help fuel their growth ambitions, as an essential part of helping the UK’s economic bounce back.

Words by Julie Silvester, Head of Commercial at The FSE Group.

About The FSE Group

At The FSE Group, we have a 20 year history of supporting high growth UK SMEs, especially in underrepresented areas of the UK. We have seen how inward investment has helped our portfolio companies to grow and thrive, whether it be from large VC funds from Silicon Valley, or reputable funds from the UK.

Location, Location, Location

Inward investment is the deployment of capital into a country or region from an external source. This definition is usually applied to FDI (Foreign Direct Investment), but is also applicable to funding from capital providers in different regions in the same country.

Beauhurst recently released a report on inward investment trends in every UK region in 2020, which mentions, to little surprise, that most of the UK’s funding providers reside in London. As this is the case, high-growth SMEs based in the UK’s regions need to secure capital from funds outside of their region to scale.

Existing funding providers within an underrepresented region can help an SME scale to the point where it becomes an interesting proposition, with a proven business model and a loyal, early set of customers.  At this point, the business becomes attractive to larger funding providers based outside the region. This is important to fuel economic growth and the ecosystem within a region, since when  larger and more prominent funds invest in a region, it acts as a signal to other stakeholders and funding providers that a region’s ecosystem is maturing and is ready for more investment.

Regional Funds and Scaling Up SMEs

Wildanet, one of our investee businesses in Cornwall which provides superfast wireless broadband to hard-to-reach areas, recently raised £50m in investment from the Gresham House British Strategic Investment Infrastructure Fund, which will enable it to roll out its gigabit-capable broadband network across Cornwall.

This is one of the largest investments ever made in Cornwall, and is positive on two fronts. Firstly, it proves that businesses in Cornwall are capable of scaling up to the point where they can attract inward investment from larger funds. Secondly, one of the key requirements for remote working to be a long-term sustainable option for businesses is the availability of reliable, high-speed broadband. Wildanet’s proposition will allow more Cornish SMEs and entrepreneurs to grow their businesses in Cornwall, further building a virtuous cycle of growth.

In Summary

UK Plc needs SMEs business to scale-up (we are still massively behind other major economies when it comes to scaling up SMEs), and we believe that strong early-stage funding via venture debt and equity works best on a Regional basis.  This then supports businesses to reach the level of scale required to secure inward funding. 

At The FSE Group, we are committed to supporting eligible, ambitious, innovative, high growth and scalable SMEs to help fuel their growth ambitions, as an essential part of helping the UK’s economic bounce back.

Words by Paul Marston, CEO at The FSE Group.

About The FSE Group

At The FSE Group, our focus is to support the rise of high growth UK SMEs, especially in underrepresented areas of the UK. As a dedicated early-stage investor and lender with over 20 years’ of experience in the early-stage SME market, we have seen how, over time, the ecosystem has started to mature.

The growth of the VC market

In particular, the European Tech industry has seen significant growth over the last 10 years, with the UK at its focal point. A recent report published by Mountside Ventures (access here), found that UK start-up expenditure has increased from £2 billion in 2011 to £12 billion in 2020. This is welcome news for the UK tech ecosystem, but is it realistic to expect this level of growth to be sustained?

The British Business Bank’s recent report on VC returns in the UK, found that Funds which are based outside of the Golden Triangle (London, Oxford and Cambridge) offer the potential for higher returns.  

The report also mentions that early-stage VC’s have the potential for higher returns than other stages of the market – this is particularly positive news given the historical reluctance of institutional LPs in Europe to invest in early-stage Venture Funds. However, the capital raised by Buyout Funds in Europe, was still 3.7x higher than the capital raised by Venture Funds in Europe (Atomico’s State of European Tech 2019), so there is still quite some way to go.

As the UK SME investment industry matures, Funds start to specialise in specific areas or sectors due in part to the potential availability of more businesses in these sectors who are looking to raise capital.

SMEs and the current economic climate

Whilst there is uncertainty in the current markets due to COVID-19 and it is still too early to know what the real impact of this crisis will be on the SME ecosystem, the inherent qualities of Venture Funds allow them to be resilient, because they are designed to cope with uncertainty and market cycles due to their long fund lives. This can be taken a step further with regard to Evergreen Funds, which do not, unlike many Venture Funds, have a fixed fund cycle. Thus allowing for long-term, patient capital to be re-invested into SMEs, especially in the early-stages.

In Summary

It is clear that the early-stage SME market in the UK is growing and needs a strong early-stage finance industry in order to support its growth. At The FSE Group, we are committed to supporting eligible, ambitious, innovative, high growth and scalable SMEs to help fuel their growth ambitions, as an essential part of helping the UK’s economic bounce back.

To find out more, why not join us for a fireside chat with Mountside Ventures on the 10^th of December at 12:00? We will be discussing early-stage fundraising for SMEs and how they can improve their chance of success. To attend this event, please register on the Eventbrite link here: https://bit.ly/2V4QHlr

Words by Julie Silvester, Head of Commercial at The FSE Group.