RVCF and EGF Interim Evaluation:

Recipient Business and Stakeholder Surveys

Summary Paper
URN 10/603

January 2010

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 TABLE OF CONTENTS

1 INTRODUCTION......................................................................................1
2 KEY FINDINGS........................................................................................1
3 NEXT STEPS...........................................................................................2
4 BACKGROUND.......................................................................................2
5 PROFILE OF RVCF / EGF RECIPIENTS................................................5
6 OBJECTIVE ONE: “Test the rationale for the programme by
examining whether businesses could have obtained finance in
the absence of RVCF / EGF finance”.................................................5
7 OBJECTIVES TWO AND THREE: “Assess the benefits for recipient
businesses from access to RVCF / EGF finance and the extent to
which these benefits can be considered additional”......................9
8 OBJECTIVE FOUR: “Examine the employment growth and turnover
performance of the surviving RVCF / EGF businesses”...............11
9 OBJECTIVE FIVE: “Explore the views of key stakeholders on the
performance of the funds’ investments and their wider impact on
the equity gap”...................................................................................14
10 FURTHER FINDINGS..........................................................................16

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1 INTRODUCTION

The Regional Venture Capital Fund (RVCF) and Early Growth Fund (EGF) programmes were
introduced in 2002-03 in order to increase the amount of equity finance available to Small and
Medium Sized Enterprises (SMEs). The following paper provides a summary of the main
findings of recipient and stakeholder interviews which form part of an interim evaluation of the
RVCF and EGF. In doing so it:
 Presents a background to the “equity gap” issue;
 Outlines the rationale for and operation of the two funds; and
 Highlights a wide range of evidence to support an assessment of the extent to which
the funds have met key objectives at this stage of their investment lifecycle.

2 KEY FINDINGS

At this interim evaluation stage, evidence from business and stakeholder surveys has
revealed that both the RVCF and EGF programmes have provided finance to companies who
would have been unlikely to have received equity finance from the private sector.

Findings from this research include:

 Recipient businesses reported a range of benefits, from the introduction of new
products and services and entry into export markets, through to the benefits received
from the advice and guidance of Fund Managers.
 The majority of businesses have already experienced growth in employment and
turnover, and many reported that much of this was a direct result of the investment of
public funds.
 The general view amongst stakeholders (such as Fund Managers) was that the funds
operate within the equity gap, albeit at the lower end. The funds have leveraged a
substantial amount of funding into the equity gap, with very few suggesting that
RVCFs and EGFs had displaced private sector funds.
 The predominant view amongst stakeholders was that most recipient businesses
would not have secured the finance through other routes.
 Investment rules, in particular the upper limit on investment deals, are felt to have
hindered fund performance. The upper limit has been set higher for successor
programmes (e.g. Enterprise Capital Funds) but there was some concern that this
would lead to a lack of supply at the lower end of the equity gap.
 Stakeholders report the funds have had wider benefits, including the establishment
and growth of investor networks.
 However, a common belief was that neither scheme would deliver a lasting impact on
the equity gap, meaning there was a continued role for public funds.

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3 NEXT STEPS

The data collected by this project were designed to enable BIS to undertake an interim
evaluation of the net economic impact of these programmes. BIS is also to supplement the
data collected herein, with longitudinal data on employment and turnover growth and
comparator groups of businesses.

However, it is important to note that the final conclusion as to the full impact of the RVCF and
EGF programmes can only be carried out once the investments have been fully realised,
perhaps 2012 at the earliest. A final evaluation would look to consider whether the
improvements in turnover and employment have been sustained or enhanced and to whether
the predicted portfolio performance in terms of realised returns is achieved.

4 BACKGROUND

4.1 CONTEXT

Access to finance is a critical factor for enterprise, and is one of the five identified drivers of
productivity.1 Well functioning capital markets facilitate business start-up and ensure
established businesses are able to finance investments and expand operations to meet
demand. Equity finance, while only used and considered by a small proportion of businesses,
is an important source of finance, particularly for SMEs that have strong and rapid growth
prospects. Equity investors provide capital in exchange for shares in the business, enabling
them to receive a proportion of its future profits or at a later stage to sell these shares on to
other investors. This form of financing is most appropriate:
 For businesses at an early stage of development, that are yet to generate sufficient
revenue to service debt interest repayments; and / or
 For businesses developing new technologies, products or markets with the potential
to achieve substantial rates of growth, but also with significant risk of failure.

It has long been recognised that there exists an equity gap in the UK, whereby characteristics
of the market, such as information failure and due diligence costs, limit the availability of
equity funding for smaller businesses. In addition, there may also be demand side constraints
with businesses unsure of where or how to access equity finance and to ensure that they are
‘investment ready’.

The concept of an equity gap dates back to at least the 1931 Macmillan report to the
Parliamentary Committee on Finance and Industry. In 1999, BIS estimated the equity gap as
affecting investments up to £500,000. However, the ‘Bridging the Finance Gap’ research

1
http://www.hm-treasury.gov.uk/ent_index.htm

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undertaken in 2003 by HM Treasury and the then Small Business Service identified the
shortage of modest amounts of risk capital – the “equity gap” – to be most acute for
businesses seeking investments of between £250k and £1m, but extending up to £2m.

4.2 OVERVIEW OF RVCF AND EGF

To help close this perceived equity gap and address the lack of capital, the Government has
developed a number of solutions, including RVCF and EGF, and has sought to learn from
different methods of intervention.2 Both the RVCF and EGF programmes were designed to
increase the amount of equity investment available to SMEs seeking finance within the equity
gap3 in order to help these businesses achieve their growth potential.

The RVCF was an England-wide programme created to provide risk capital finance in
amounts up to £500,0004 to SMEs who demonstrated growth potential – the limit was
increased to £660,000 in 2006. They were designed to address an acknowledged equity gap
at the lower end of the capital raising market. An RVCF is active in each of the nine English
regions, seven have been operational since 2002 and two since 2003. All nine funds have
now come to the end of their investment period, with the majority ending in 2008.

The EGF programme, first introduced during 2002-03, was developed to encourage risk
funding for start-ups and growth firms. The EGF complements the regional funds by providing
smaller amounts of risk capital, averaging around £50,000, for start-up and early stage
businesses. The funds were able to make maximum initial investments of up to £100,000,
which for most EGFs had to be matched by private sector investment. All EGFs are still
operational.

At the end of December 2008, a total of £226 million had been raised by RVCFs, including a
Government commitment of £74 million. In total 356 businesses received investments, of
which 91 have been written off and 18 exited. Over £200 million has been invested alongside
EGFs, which received a Government commitment of £31.5 million. In total 138 businesses
received equity investments from six EGFs, of which 34 have been written off and 1 exited,
whilst 85 businesses have received mezzanine finance from a seventh EGF, of which loans
to 13 businesses have been written off.

2
Lessons learnt have already influenced the design of successor programmes such as the Enterprise Capital Funds.
3
By directly supplying the finance and through improving the wider financial infrastructure, such as creating investor
networks and attracting skilled fund managers.
4
Initial investments were limited to £250,000.

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4.3 AIMS AND OBJECTIVES OF THE RESEARCH

The aim of this research was to provide evidence on the effectiveness of the policy of
providing SMEs access to growth funding through the RVCF and EGF programmes.
Evidence was collected from:
 Interviews with representatives of 132 recipient businesses (90 RVCF and 42 EGF), 5
86% of whom were either the main partner or managing director;
 Consultations with 40 key stakeholders;6
 In-depth case study interviews with several recipients businesses, including a number
for whom investments have either been exited successfully or written off.

It is very important to note that the RVCF and the EGF programmes were specifically
designed as longer term growth interventions. As a rough rule of thumb, the funds have a ten
year expectancy – five years making investments and then five years managing existing
investments until exit.

Therefore, a full picture of their potential positive impact, and associated costs, will only begin
to emerge several years after investments have been made – an issue even more pertinent
as a result of the recession.7 It will still then be a number of years until a full impact evaluation
can effectively be conducted and the financial performance of the funds (i.e. achieved rate of
return) quantified.

The purpose of this research was to provide an interim assessment of the funds, focusing on
the impact on the individual recipient businesses. The specific objectives of the interim
evaluation were to:
1. Test the rationale for the programme by examining whether businesses could have
obtained finance in the absence of RVCF / EGF finance;
2. Assess the benefits to surviving businesses from access to RVCF / EGF finance;
3. Assess the extent to which these benefits were considered by the businesses to be
additional;
4. Examine the employment growth and turnover performance of the surviving RVCF /
EGF businesses; and
5. Explore the views of key stakeholders on the performance of the funds’ investments
and their wider impact on the equity gap.

5
Representing 34% and 41% respectively of the active recipients when interviews were conducted.
6
Key stakeholders interviewed included all 15 Fund Managers of the RVCF and EGF programmes, 7 ECF
(Enterprise Capital Fund) Fund Mangers, representatives from all 9 Regional Development Agencies and from 9
other bodies / organisations including investor trade groups, business trade bodies and advisors, etc.
7
Many of the stakeholders consulted during this research felt that the recession will lead to a delay in exits for many
investments.

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This report provides a condensed summary of the main findings. It is structured according to
the five objectives mentioned above and uses evidence that was gathered from all of the
research activities undertaken as part of this interim evaluation.8

5 PROFILE OF RVCF / EGF RECIPIENTS

In terms of the type of businesses represented by the survey, 73% operated in the business-
to-business sector, 27% sold to the public sector and 8% to end consumers. The most
common sectors of operation were professional, technical and scientific (30%), information
and communication (30%), manufacturing (23%) and wholesale / retail (11%).

Main partners and directors tended to be highly qualified and experienced – 73% had more
than 10 years experience of managing or owning a business, a similar proportion had
previous involvement in starting a business and almost 90% were qualified to degree level.

The majority of recipient businesses were found to be innovative and technology driven.
Notably, four fifths (90% EGF and 79% RVCF) of recipients believed that the technology they
used was ‘cutting edge’ in their sector.

6 OBJECTIVE ONE: “Test the rationale for the programme by examining

whether businesses could have obtained finance in the absence of RVCF /
EGF finance”

To answer this question, views were sought from the businesses that received funding from
either of the two programmes, as well as from key stakeholders.

6.1 RECIPIENT PERSPECTIVE

Evidence was collected through the business survey to assess whether recipients felt they
could have obtained finance in the absence of the RVCF / EGF programmes. Firstly,
businesses were asked whether there were other sources of finance available, whether they
had applied for these and if other finance was dependent on receiving the RVCF / EGF
investment. Secondly, businesses were asked to assess the likely impact on the business
activity that was funded had they not received the investment.
8
Un-weighted, as opposed to weighted, data is used in the following analysis for a number of reasons. Firstly,
the sample represents a significant proportion of active businesses (30% of the total population). More
importantly, opinions / outcomes were broadly similar across sample sub-groups, and therefore overall results
differed little between un-weighted and weighted data. Finally, un-weighted data is considered more robust in relation
to investment year. A relatively small proportion of early fund recipients were consulted as they were less willing /
able to discuss the RVCF / EGF investment than more recent fund recipients. A greater weighting of this sample
group, to allow for such non-response bias, could actually lead to increased overall results bias, due to the inflation of
small sample outcomes which can be heavily skewed by individual extremes in response.

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Other Sources of Finance Available

More than half of respondents (57%) had sought equity finance at the time of applying to
RVCF / EGF as there were “no other forms of finance available”. Reasons given included that
the risk was too high for other forms of finance, that it was a route to other funding and that it
freed revenue to finance growth rather than service debt.

“Trying to secure monies from banks for things like Management Buyouts is
very difficult. Equity funding is well positioned for the type of deal we were
doing. The principle of it is very good, as long as everything stacks up from both
sides.” RVCF Recipient Business

When specifically asked about sources of finance other than RVCF / EGF, 67% of
respondents stated that they considered there to be alternative or additional sources of
finance available. Over 90% of these had applied for additional or alternative sources of
finance and over 80% had done so with at least some success. Of those that had applied:
 47% had applied for Venture Capital, 79% successfully;
 35% had sought investment from a Business Angel, 81% successfully;
 45% had applied for a bank loan, 53% successfully; and
 30% had sought loans or equity from existing directors and / or shareholders9, 81%
successfully.

For many businesses, either the supply or demand of the additional finance was dependent
on them having received the RVCF / EGF investment. Of those that received additional
finance, 30% said that they would not or could not have taken up this finance in the absence
of the RVCF / EGF investment.

Considering these responses together, there is sufficient evidence to suggest that at least
60% of recipient businesses would have faced difficulty obtaining finance in the absence of
RVCFs and EGFs.10 More specifically:
 30% of recipient businesses believed that no alternative sources of finance to the
RVCF / EGF were available to them;
 14% of recipient businesses considered other finance was available, but either did
not apply elsewhere or had done so unsuccessfully;

9
Higher amongst EGF recipients – 42% compared to 25% for RVCFs.
10
Of the remainder, 34% had accessed finance from other sources and would still have taken up this finance in the
absence of RVCF / EGF investment, while no assessment can be made for 6% of respondents who were unable to
provide the necessary information for at least one of the key questions.

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  16% of recipient businesses had obtained additional finance from other routes, but
stated that they would not or could not have taken it up without the RVCF / EGF
investment.

Impact on Funded Activity

In the absence of RVCF / EGF finance less than half (48%) of all respondents were confident
that their business would have gone ahead with the planned activity for which the funding was
sought, a further 8% thought it was possible. Of those businesses who thought it at least
possible that they would have proceeded, 71% said that the investment would have taken
place later than it actually did and 66% suggested that their investment would have been
either significantly or slightly smaller in scope and / or scale. Overall, only 14% of those
recipient businesses that would have proceeded would have done so without compromising
time or scale.

“We couldn’t have done the Management Buyout without the RVCF funding.
We couldn’t have bought the assets and we couldn’t have operated without it –
it was essential. The business wouldn’t be here and the people wouldn’t be
employed if it wasn’t for that money.” RVCF Recipient Business

“Without the first round of EGF the company would not exist.” EGF Recipient
Business

Long Term Impact on Funding

There was also evidence that RVCF and EGF investments have had a positive impact on
recipient’s ability to raise finance post investment.

Almost 80% said the investment had made them more confident in their ability to secure
external finance. It was notable that this increase in confidence was more marked in relatively
young companies (i.e. operating for less than 5 years) compared to their more established
counterparts (i.e. operating for 8 or more years). In addition, almost two thirds of respondents
(59% RVCF and 76% EGF) said that their Fund Manager had supported them when seeking
to raise further finance.

“If we needed to raise finance again I think that there would be more doors
open to us. Private equity investors would have more confidence.” RVCF
Recipient Business

Having received monies from RVCF / EGF, 64% of respondents reported that they had
already gone on to seek further additional finance. Of these companies, over half (52%)

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sought more than £500,000 in additional investment. Over 84% of respondents who had
obtained additional funding believed that their success in securing these monies had been
positively influenced by the fact that they had previously received RVCF / EGF funding.

6.2 STAKEHOLDER PERSPECTIVE

Other Sources of Finance Available

There was general agreement that sources of finance for start-up and early stage businesses
were limited, not least evidenced by the lack of competition reported by the Fund Managers
for equity financed deals at the lower end of the market.

There was little doubt about the existence of an equity gap amongst stakeholders, although
differences of opinion exist about where the equity gap starts and finishes. This being said,
based on almost all responses the RVCFs and EGFs operate within the equity gap – albeit at
the lower end.

A common view was that the equity gaps starts where the ability of entrepreneurs to raise
money from re-mortgaging their houses finishes. Thus, with different house values across the
nine RDA regions, the start of the equity gap will differ by region. Views about where the gap
finishes also differed, with figures of up to £1m and £2m commonly mentioned, but some
suggested it extended as far as £5m. A number of stakeholders commented that the upper
level of the equity gap was not fixed and fluctuated according to the perceived level of risk
and reward available from transactions in each segment of the market. For example, it was
likely to be greater in high-tech sectors where risk and development times tend to be higher.

It was also noted that this competition had recently been further reduced as a consequence of
banks reassessing their strategy of debt finance provision and so reducing the number of
funding options open to these businesses. Whilst current economic conditions were identified
as affecting the willingness of banks to provide debt finance, stakeholders also pointed out
that it should not be assumed that the market for debt finance would return to levels seen
prior to the recession. Thus, such a possible structural change could amplify the need for
public funds to continue to assist the early stage business population.

Given the existence of an equity gap, most stakeholders considered that the vast majority of
the investments made by the RVCF / EGF programmes would not otherwise have been
made.

“I think it would have been very difficult because in a lot of these companies
somebody needs to take a cornerstone investment. I certainly don’t think many
of the companies would have grown and attracted further finance had it not

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 been for the catalytic effect of the investment.” Key Stakeholder: Private
Sector

“There is strong evidence that many of these companies just would not be
here without this investment. Either they were start ups or they were MBOs 11
and without the RVCF they would just not have got off the ground. Therefore,
there would be no jobs, no turnover and no growth. For others there is strong
evidence that the projects they undertook using the development capital would
not have happened. There weren't many other places they could have gone to
get money.” RVCF Fund Manager

“I would say it would be extremely unlikely, particularly the high-tech ones. You
need to have the cornerstone fund and do a lot of work and due diligence to
give Business Angel investors confidence.” EGF Fund Manager

Long Term Impact on Funding

Most stakeholders that were able to comment felt that the receipt of RVCF and EGF
investments had gone on to help the businesses access other finance. Primarily, as other
investors were given confidence as the businesses had already been assessed as being
significantly attractive propositions to receive funding. However, a number of Fund Managers
identified incidences when this had not occurred, as the businesses were not clear of the
equity gap but the scheme rules prevented the Fund Managers themselves from making any
further investments.

7 OBJECTIVES TWO AND THREE: “Assess the benefits for recipient

businesses from access to RVCF / EGF finance and the extent to which
these benefits can be considered additional”

7.1 RECIPIENT PERSPECTIVE

Respondents to the recipient business survey were asked to highlight the main reason why
their business had sought finance. The top three responses were “to finance research and
development” (28%: RVCFs 25% and EGFs 36%), “to provide working capital” (23%) and “to
start-up a business” (19%).

Respondents to the recipient business survey were also able to identify additional benefits
that they received as a consequence of the investment monies. Whilst these benefits were
identified by both RVCF and EGF recipients, often EGF recipients acknowledged greater
benefit, perhaps reflecting the greater maturity of RVCF businesses.
11
Management Buyouts.

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 Innovation

Investments have enabled recipient businesses to develop and introduce innovative products
and processes – with over 60% of recipients experiencing a significant benefit to their
innovation and a similar proportion on their Research and Development.

Following receipt of funding from the RVCF / EGF programmes, 46% of respondents stated
that their business had been able to introduce both new and improved products or services. A
further 33% had introduced new products or services and an additional 3% had introduced
improved products or services.

Of those who had introduced new products or services, 76% believed that these introductions
were sufficiently innovative to be new, not only to their business but new to the markets that
they served.

Recipient businesses were also engaged in process innovation, with 53% of respondents
reporting either the introduction of new and / or improved processes since receiving the
investment from the RVCF / EGF programme (28% of respondents suggested that they had
introduced both new and improved business processes, a further 17% reported introducing
only new processes and 8% introducing only improved processes).

In terms of the sources of these innovations, it appeared that respondents had been working
with other companies up and down their supply chains. Specifically, 74% reported co-
operation with customers / clients in the development of new and / or improved products,
services and processes, whilst 71% reported co-operation with other businesses or suppliers.

Exports

In total, 71% of recipient businesses were exporting. Of those exporting, 60% reported that
the investment had either enabled them to either commence export sales (27%) or increase
their exports (33%).

Fund Managers and Investment Process

73% of respondents reported that the Fund Manager with whom they worked to gain the
investment monies was a source of general business advice, over and above that associated
with the actual investment process. Further, 64% of recipient businesses then used their
Fund Manager to help them raise additional finance. Other types of assistance received from
Fund Managers included assistance in the development of business plans and strategic
direction documents (55%), marketing plans (27%) and the recruitment of key staff (26%).

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Overall, 23% of respondents held the view that the assistance received from their Fund
Manager had been of “significant benefit”, with a further 38% identifying a notable benefit.
Only 6% of respondents felt that their Fund Manager had provided no additional benefit to
their business.

“I always describe the support we get as two-fold. We obviously get the

investment but we also get a lot of advice and general business support. I ring
our Non-Executive Director several times a week to bounce ideas off him or to
get his take on things. I find that side of it very valuable – it has been almost as
valuable as the money. This is something we didn’t anticipate when we applied
for the funding.” EGF Recipient Business

Whilst the investment process required the development of a business plan, these plans were
seen as delivering benefit to the company to such an extent that over 94% of respondents
had written or revised their plans within the last two years.

8 OBJECTIVE FOUR: “Examine the employment growth and turnover

performance of the surviving RVCF / EGF businesses”

The following presents evidence from recipient businesses in relation to changes in their
levels of employment and turnover following RVCF / EGF investment.

8.1 EMPLOYMENT

Nearly three quarters (73%) of respondents to the recipient business survey reported that
they had increased the number of staff employed following receipt of the invested funds.
Overall, of those respondents willing or able to comment, an increase of 1,265 jobs was
reported following receipt of the equity finance (representing an increase of over 125%
between the time of the investment and the present day).

Of the businesses receiving RVCF monies, those who reported requiring the finance for
working capital suggested the largest percentage increase in employment (278%). Again
within the RVCF cohort, those businesses which had introduced new or improved processes
experienced a greater percentage increase in employment than average (154%).

Within the EGF cohort, the largest reported increases in employment came from respondents
who originally sought funding to finance research and development (185%). Further, of those
EGF respondents who considered that there was no additional source of finance, their

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employment growth of over 98% was greater than the average growth reported by the EGF
cohort as a whole (79%).12

Table 1: Change in Employment Levels Since Receipt of

Investment
Response Jobs Current Jobs % Actual
Before Change Change
Overall (129) 1,012 2,277 + 125.0 + 1,265
RVCF (88) 797 1,893 + 137.5 + 1,096
EGF (41) 215 384 + 78.6 + 169
(a) Base: In Brackets

Respondents were asked to use banded percentages (grouped in 20% bands) to attribute
increases in employment to the investment received. Of those that did report an increase in
employment, 43% considered that this increase in employment could be wholly attributed to
the equity finance that had been received and a further 11% believed that the receipt of funds
accounted for more than 80% of the increase.13

It was found that those respondents who perceived that the investment in their business
accounted for a significant increase in employment were more likely to be relatively “young”
companies with a comparatively small turnover (typically less than £500,000 per annum).

By taking the mid-points of the banded percentages, it was possible to extrapolate an

approximate total number of jobs created or saved that respondents attributed to the
investment.

Assessment of the views of all respondents able to state their current and previous
employment figures and estimate the proportion of growth they attributed to their investment
identified that approximately 733 jobs were perceived to have been created by the
investment.14

Even in companies where employment had not increased, some respondents reported that
the receipt of the equity funds had either arrested the rate of decline in employment or had
helped to ensure that employment had not declined. Those respondents whose employment

12
EGF base sizes were large enough to enable sub-analysis of employment increase. However, due to the overall
sample profile the base sizes were lower than for RVCF analysis. As such, the findings should be treated with a
degree of caution.
13
Due, in part, to low base sizes of completed interviews in some investment periods, there were no significant
differences in employment change identified by year of investment.
14
This figure relates to the 81 respondents who stated that their business had demonstrated an increase in
employment since the RVCF / EGF investment and were a) able to state their current and previous employment
levels and b) estimate a proportion of growth attributable to the investment.

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had either fallen or remained the same and were able to estimate their situation without the
investment felt that approximately 85 jobs would have been lost in its absence.15

“My core staff members have been with the business through critical times and are
very experienced. Without the equity funding I wouldn’t have been able to retain all of
them. Now our growth is accelerating it means that we have the right people to help
the business continue to grow.” RVCF Recipient Business

8.2 TURNOVER

Overall, 77% of respondents to the recipient business survey reported that their annual
turnover had increased between the date of the investment and the present time (16%
reported sales had remained the same and only 3% reported a decline).16

17% of respondents also noted that, at the time of investment, their turnover was £0 (i.e.
start-up companies that had yet to start trading). At the time of this survey, the combined
turnover of these companies was reported as being over £12.3m. Further, at the time of the
investment this cohort employed 46 employees (an average of 2.3 employees per company)
compared to a current employment total of 260 (an average of 13 employees per company);
an increase of over 465%.

Overall, of the two thirds of respondents who willing or able to respond, sales were reported
to have increased by over 98% between the time of investment and the date of the interview
for this interim evaluation.

Table 2: Change in Annual Turnover Since Receipt of Investment

Response Turnover Current % Actual
Before Turnover Change Change
(£m) (£m) (£m)
Overall (87) £54.7 £108.4 + 98.2 + £53.7
RVCF (62) £49.6 £93.2 + 87.9 + £43.6
EGF (25) £5.1 £15.2 + 196.6 + £10.1
(a) Base: In Brackets
(b) Balance: DK

Much of the difference between the figures between RVCFs and EGFs can be attributed to
the relative differences in the size and age of the respective recipient businesses.
Specifically, RVCF respondents reported an average growth of 88% compared to 197% by

15
This figure relates to the 28 respondents who stated that their business had demonstrated either static levels of
employment or a decline since the RVCF / EGF investment and were a) able to state their current and previous
employment levels and b) estimate the number of jobs which would have been lost in its absence.
16
Due, in part, to low base sizes of completed interviews in some investment periods, there were no significant
differences in turnover change identified by year of investment.

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EGF respondents. These growth figures represented increases in sales of £53.7m overall
(£43.6m for RVCF companies and £10.1m for EGF companies).

Within the RVCF cohort, above average sales growth was reported by those who used
“cutting edge technology” (153% sales growth) and those who accessed the fund to provide
working capital (219% sales growth).

The EGF respondents tended to report much higher percentage sales increases compared to
the RVCF recipients, primarily due to the companies being smaller and younger at the time of
investment (NB: EGF focused on providing finance to start-up and early stage businesses).
Specifically, those who used the funds to innovate through the introduction of new or
improved products and services reported an increase in sales of over 240%, those improving
or introducing new processes reported sales growth of 214% and companies that used the
finance for research and development achieved sales growth of 942%.17

Respondents were asked to use banded percentages (grouped in 20% bands) to attribute
increases in turnover to the investment received. Notably, 27% of the respondents who had
seen an increase in sales between the date of the investment and the present day ascribed
all of the sales growth to the RVCF / EGF investment. In total, 82% of those businesses
which had generated an increase in sales believed that the investment had at least some
influence on this sales growth.

By taking the mid-points of the banded percentages, it was possible to extrapolate an

approximate total turnover created that respondents attributed to the investment. Assessment
of the views of all respondents able to state their current and previous turnover figures and
estimate the proportion of growth they attributed to the RVCF / EGF investment identified that
approximately £27,370,400 additional annual turnover was perceived to have been
created by the investment.18

9 OBJECTIVE FIVE: “Explore the views of key stakeholders on the

performance of the funds’ investments and their wider impact on the
equity gap”

Overall Impact on the Equity Gap

17
EGF base sizes were large enough to enable sub-analysis of turnover increase. However, due to the overall
sample profile the base sizes were lower than for RVCF analysis. As such, the findings should be treated with a
degree of caution.
18
This figure relates to the 73 respondents who stated that their business had demonstrated an increase in turnover
since the RVCF / EGF investment and were a) able to state their current and previous turnover figures and b)
estimate a proportion of growth attributable to the investment.

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In general the view of stakeholders interviewed was that the funds had leveraged a
substantial amount of private sector funding into the equity gap, with very few suggesting that
the RVCFs and EGFs had displaced private sector funds. However, the majority of
stakeholders felt that neither scheme would deliver a lasting impact on the equity gap. If
anything, there was a belief that the recession may now mean that the role for public funds
has increased.

Impact on Financial Infrastructure

Amongst RVCF and EGF Fund Managers, there was a common view that they had to employ
a number of different approaches to generating relationships than would be required for larger
or later stage investment funds.

Stakeholder opinion was split as to whether the RVCF and EGF funds had promoted the
private sector venture capital industry. Respondents who believed this to be the case felt that
the Fund Managers had raised awareness amongst the business and financial communities
and had shown how the public and private sectors could work together. However, for others
the impact on the private sector was limited as investments at the lower end of the market
had not become more appealing to those operating large funds. There was cautious optimism
amongst some RVCF Fund Managers that as the number of exits increases there will be a
positive impact on investor attitudes to this segment of the market.

The majority of stakeholders consulted felt that the schemes had helped to establish investor
networks. Notably, many felt that EGFs have had the greatest impact in this regard because
of the co-investment model they adopted, with EGFs both enhancing Business Angel
networks and attracting new investors.

“In our region Business Angel investors were not sure about whether to do the
private equity investment. There’s no doubt the funds have made it easier for
them to get involved. I have no hesitation in saying that it has unlocked a
considerable amount of private equity that would probably not have otherwise
been available.” Key Stakeholder: Private Sector

The networks that were developed have also been able to provide advice and guidance to
applicant businesses regarding the funding options available. In addition, there was a belief
that the equity funds enhanced the knowledge and understanding of key intermediaries, such
as accountants.

However, many stakeholders pointed out that the health of these networks was reliant upon
the availability of the public sector funds and there was general concern that were these
funds to be withdrawn, the networks might well not be sustained. Even the most optimistic

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stakeholders believed that maintaining activity in the absence of public sector funds would be
challenging and require new ways of working.

Impact on Demand

Several stakeholders thought that the RVCF and EGF funds had helped to generate demand
for equity finance. One stakeholder described a snowball effect of greater fund availability
stimulating demand, which in turn encouraged more funds to be made available. However, it
was also suggested that a reduction in fund availability would then send demand into reverse.

Fund Performance

In terms of the performance of companies in which the funds have invested, the majority of
stakeholders felt that it was too early to make a fair assessment of performance – a view
equally held by Fund Managers themselves and other interviewees. A number of
stakeholders suggested that the funds were now at their lowest point as failures will show
earlier while successes take longer to develop. Indeed, many suggested that the ‘J curve’ will
have been accentuated and drawn out by the economic climate, which will have sped up the
failure of some investments whilst also delaying the successful exits of others. Fund
Managers remained confident in the ability of their respective portfolios to generate the
investment returns they require.

10 FURTHER FINDINGS

10.1 RECIPIENT SURVEY

The majority of those surveyed were confident about the prospects of their business over the
next two to three years, with over two thirds (67%) expecting to experience substantial growth
during this period. It is worth noting that businesses were surveyed during the height of the
economic downturn, with the pessimism widely felt at this time likely influencing responses.

There was a general consensus amongst RVCF / EGF recipients that their businesses would
in some way be affected by the current economic downturn. Overall, 40% of those surveyed
had slightly reduced growth objectives as a consequence of the downturn and a quarter
(24%) had significantly reduced growth objectives.
Survey findings highlighted high levels of satisfaction among recipient businesses in relation
to their overall experience of receiving the investment. 83% of all EGF recipients were either
very satisfied or fairly satisfied (57% and 26% respectively) while 73% of RVCF recipients
held this view (31% and 42% respectively).

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Respondents were also asked if they would recommend equity finance to a business in a
similar position to that of their business when they first sought the investment. The
overwhelming majority (92%) of respondents surveyed stated that they would recommend
equity finance to other businesses, with only 4% indicating that they would not do so. This
suggests that the RVCF / EGF investment was well received and that there were clear
benefits to recipient businesses as they were willing to promote the investment type to others.

10.2 STAKEHOLDER SURVEY

As it has transpired, RVCFs and EGFs operate at the lower end of the equity gap. Fund
Managers reported having to turn away businesses whose finance needs were too great and
that on occasions they were unable to push recipient businesses clear of the equity gap,
constraining both the performance of the relevant fund and recipient’s growth. The design of
Enterprise Capital Funds, the successor scheme, has already learnt from this experience,
permitting investments up to £2 million. However, a number of stakeholders were concerned
that this signalled a withdrawal of Government support at the lower end of the equity gap, and
to a lesser extent regionally. Those expressing this view felt that by being allowed to make
larger investments Enterprise Capital Funds would be drawn to later stage ‘safer’ deals.

In a number of discussions with stakeholders the example of 3i was highlighted; an

organisation set-up to deal with the equity gap, identified before the Second World War, but
which then switched focus to larger-scale ‘easier’ types of investment. This also brought into
discussion the paucity of larger Venture Capitalists in the UK, in comparison with the US, and
the detrimental effect this had on the UK’s ability to produce the next Google or Microsoft.

Fund Managers noted that the amount of work required to complete transactions at this end
of the market was at least as much as that for larger deals. In addition, it was pointed out that
the investee companies tended to rely to a greater extent on the Fund Managers and their
investment executives / appointed non-executive directors. Thus, there was an additional
benefit accruing to the recipients, but also further costs to the Fund Managers, in greater
mentoring and relationship management.

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