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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.

In the SME market, banks are focused on secured lending. Deviation from this type of secured lending is usually applicable for larger SMEs, when banks may consider unsecured projection led lending for that SME undertaking a larger transaction, for example a £25m turnover business about to make an acquisition.

Many commercial equity funds are focused on real high growth business, especially those which already have existing turnover.

The conclusion is that more funds which can combine both debt and equity funding and which focus on the “S” of SME are required.  

This will allow the right solution to be deployed:

• Debt finance - if the business can support debt after perhaps a capital repayment holiday to allow the new monies to be put to good use to ultimately generate the future on-going repayments (this naturally also reduces the need to dilute shareholding at that stage).
• Equity funding - if the business is looking to grow rapidly and is focused on innovation & long-term shareholder value (or if it is too highly debt leveraged already, or the growth story cannot support debt at that stage).

These funding solutions are best delivered locally with Relationship Investment Managers.  Regional focus works to encourage general economic growth, but also allows additional focus on particular sectors, under-represented groups or those with a specific purpose, for example supply chains / productivity.

Business loans and equity solutions available via The FSE Group

The FSE Group offers funding solutions and support for all sizes of eligible SMEs. Currently there are 8 regional Funds under management, which can act as a key building block to leverage additional finance, for local SMEs. We are dedicated to bridging the SME funding gap to serve innovative, ambitious and scalable SMEs who, for whatever reason, are unable to source funding from conventional or even alternative funding channels to support their growth ambitions.

By understanding the direction and business goals of the individual SME and its clear expansion and growth plans, the business loans or equity solutions available, could enable them to make that step change to achieve the next level of growth for their business.

The Funds are supported by the likes of the British Business Bank and the LEPs / Local Authorities who have played such an important role in supporting market gap impact funding, and it is evident that the continued support of more Regional Funds is crucial to the recovery and growth of the smaller SMEs.

The power of creating smaller funds to support the community

The FSE Group’s parent entity is a Community Interest Company and it is a purpose led organisation. As a fund management business, we have a real passion and successful history in deploying and managing economic impact market gap funds to support SME growth.

The funds managed always have an economic impact purpose to them rather than a pure commercial return.  The organisation has the capability and proven track record of managing both debt and equity funding and therefore can create the right solution / combination of those funding options.

The Group promotes sustainability and has a proven track record of successfully recycling smaller funds to generate continuous economic impact.  This is shown for example, with the East of England Regional Growth Loan Scheme which is a £6.5m Fund, but over time that £6.5m has been recycled and has supported 225 businesses, agreeing more than £27.5m worth of loans and leveraging a further £75m of other finance into growth orientated SMEs. Supporting these businesses has created 1,100 new jobs with the East of England. The fund remains solid with the net assets still above £6.5m.

Complete our enquiry form to find out how we could support your business.

Words by Paul Marston, CEO at The FSE Group.

Lockdown Part II and adjusting to the “new normal”

Lockdown part II has seen our high streets and hospitality sector temporarily pause again. Restrictions have been reimposed on households meeting and the education system is staying open, but what about UK SMEs? As businesses had previously eased into the recovery period, this afforded them the time and opportunity to re-group and focus on how best to strengthen their proposition in the light of the global crisis. Here at The FSE Group, our Fund Managers have continued to provide support and advice for all of their SMEs and work with them during these unprecedented times.

SMEs remain open for business

It is true to say that the global crisis has had different impacts on UK SME’s. Whilst some 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 the portfolio here at The FSE Group, many of them have pivoted their business model to adjust to new ways of operating, which has in turn accelerated some productivity activities and strong growth opportunities.

The months ahead will no doubt remain challenging as we continue to operate under strict conditions, but it is important to remember that UK SME businesses are both resilient and creative and will continue to find ways to alter their business model accordingly to facilitate recovery and growth.

What can SMEs do to further accelerate their recovery and growth opportunities?

What we can see is that a significant amount of debt has been taken on with the Government supported loan schemes.  However, we need SMEs to recover and then grow.  Some will have a new debt burden from just surviving, and some may have used up historically generated cash reserves (which may have been deployed for growth purposes) to just survive, and thus there is going to be an increasing funding gap.

The recent report from Sir Anthony Seldon & Stephen Welton (BGF) focussed on a cohort of businesses that have existing sales turnover of over £2.5m that are deemed to be high growth. It is correct that these larger SMEs should attract attention to accelerate their growth and commercially focussed pure equity funds should rightly be attracted to them.

However, there are many more SMEs with much lower existing sales that need to be encouraged to grow their business and to have access to support and help finding the right funding solutions. 

These smaller SMEs will typically be less attractive for traditional equity funds as their growth potential (and thus valuation and exit options) may not be as high as the larger SMEs. The growth potential is there but they could be a far more risky investment for those type of funds.

The above-mentioned report also stated that 67% of high growth businesses are based outside of London, and we agree with the importance of Regional Funds. 

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 and recovery journey.  Many of the Funds have both Debt & Equity solutions and this allows the right combination of funding.  In addition, the Funds are there to support the forward looking story, ie genuine projection led funding.

The clear objective is to strengthen the potential to achieve economic growth through enterprise whilst transforming the funding landscape for the UK’s SMEs.

Words by Paul Marston, CEO at The FSE Group.