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15th December 2015

Richard Blakesley

Efficient financial markets? Since when?

As we spend more time in the regions of the UK working with national, regional and city government organisations, angel networks and accelerators we find increasing evidence of the most bizarre variations in what should be a fairly transparent market.

This is what we hear:

“If an early-stage company’s equity is valued at 3 on the West Coast of the US, it will be valued at 2 in London, and 1 in the regions”.

Perhaps we cannot control what happens on the other side of the Atlantic, but how can valuations vary so much between regions separated only by a few hours on a train?

We think it is linked to our theory on the supposed “Funding Gap”. Yes there is probably an under-representation of true VC’s in the UK compared to the US, but in general we do not think there is a systemic lack of funding available for investment in early stage growth companies.

We think it is a Risk and Validation Gap - an information gap rather than a funding gap. Growth businesses struggle to validate their business propositions successfully in language which investors understand. And investors struggle to quantify the risk implicit in truly innovative business models. It is worth noting that the US VC community, because of its larger scale, tends to be more specialised by sector, whereas the UK community is more generalist which potentially exacerbates this risk and validation issue.

Aside from this Risk and Validation Gap, there is a geographic issue in the UK. There is a huge concentration in London both of deals and investment funding, and perhaps a sense that there is no need to travel out of the capital. And yet a couple of hours on a train could put investors in front of companies looking for funding with significantly more reasonable valuation expectations and probably less competition.

Angel funding tends to be highly regionalised for obvious reasons, but other forms of funding have no reason not to be national, and there is increasing evidence that better deals can be achieved outside the London hotbed.

There is a slow trickle of investors moving regionally. An interesting example is Mercia (www.merciafund.co.uk) which has recently opened an office in Edinburgh – interesting because their base is in the West Midlands, so they understand the regional model.

We at EFH see it as a central part of our mission to connect companies in the regions who have poor visibility on appropriate sources of financing with investors who “should get out more”. We spend around half our time outside London, as we look to build presence in Scotland, the North, the Midlands and Wales.

A strong message to the investment community: there are high quality innovative companies all over the UK who need your support at sensible valuation levels. Edinburgh, Manchester, Liverpool and Birmingham, where EFH expects to launch pilot schemes early in 2015, have great histories of innovation, forward-thinking governments/councils, great universities, and a plethora of high-quality growth companies. Join us at our launch events and learn about the great investment opportunities that exist just a couple of hours’ train journey away.

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