Covid-19 heralds collapse in investment in innovative firms

Investment in small, new innovative companies in the UK collapsed by a third during the Covid-19 pandemic, damaging the prospects of thousands of high-growth firms.

An analysis of the equity finance ecosystem by Leeds University Business School also found that many small firms which have received equity funding have been unable to raise further money from banks or Government Covid-19 support schemes during the pandemic.

The research project was run in conjunction with the EIS Association and warns that a majority of small firms surveyed predicted that they would have to stop trading if there was no improvement in 12 months.

The study uses data on investments made by venture capital and equity investors in small firms which are eligible for support by the Enterprise Investment Scheme – a Government programme designed to boost funding for small and new firms.

Investment into firms eligible for the Enterprise Investment Scheme (EIS) – which offers tax relief to investors buying shares in a business - fell 29% in the second quarter of 2020 compared to the first, and slumped 33% compared to the same quarter of 2019.

Investment in firms eligible to use the Seed Enterprise investment Scheme (SEIS) – which is designed to attract investment into start-ups – fell by 24% in the second quarter of 2020 compared to the first, and was down 33% compared to the second quarter of 2019.

The research is led by Professor Nick Wilson of Leeds University Business School. He said: “This study set out to look at the impact of Covid-19 on the UK’s equity finance ‘eco-system’ and the experiences and prospects of equity funded firms.

“The results show a finance gap for the high technology and knowledge intensive firms that are key to generating the growth and innovation required to meet the challenges of the future and address the levelling-up agenda. The analysis reveals regional disparities in the provision of equity finance and a shortage of growth capital to support larger and longer term investments”

The report, ‘Equity finance provision in the UK and the impact of the global pandemic’, reports on the findings of a survey of more than 160 companies which received equity finance about their experience of the pandemic and the challenges of raising funding.

While most firms were reasonably optimistic about impact on revenues and staffing to date, 40% reported that their request for bank finance or Government Covid-19 support had been unsuccessful, and 70% reported that they faced going bust in 12 months unless the situation improved.

The Leeds team also looked at how the equity gap – the difference between funding that firms need grow and the amount invested – changed over the last decade. The study looked at deals between 2011 and the third quarter of 2020: more than 42,000 deals involving more 18,500 businesses in total.

The equity gap grew over time and is biggest in the north and midlands of England, as investment was concentrated in London, the East of England and the South East.

Between 2011 and second quarter of 2020, 49% of all equity deals and 59% of all invested funds were invested into companies in London region.

Professor Wilson said: “Small innovative companies can often find it difficult to raise finance to grow, leading to funding gaps - where credit markets fail to supply sufficient finance to fulfil entrepreneurial demand, even in more buoyant times. The widening gap between the north and the south is a real cause for concern and undermines the Government’s effort to rebalance the economy.”

The research analyses the equity gap at the different investment stages of business growth – seed (for start-ups); venture stage (small companies seeking to expand on first phase of growth) and growth finance (companies seeking to invest to grow to the next stage).

In 2019, the national equity gap was £768m gap at seed stage; £1.45bn at venture stage and £4.45bn for growth finance, with the biggest gaps in the northern and midland regions.

Commenting from the EIS Association, Director General Mark Brownridge, said: “The outputs from the research are stark. Without the Government addressing the incentives and terms for EIS based investors, many of the businesses that have the opportunity of becoming the mainstay of the UK economy will cease to exist.

“At the EISA we are calling on the Government to extend the allowances, review the ‘age restrictions’ on qualification, commit to the schemes for beyond the current 2025 review date, and open up opportunities for pension funds to benefit from EIS incentives”

A copy of the report ‘Equity finance provision in the UK and the impact of the global pandemic’, is available upon request.


Professor Nick Wilson is available for interview. Contact: Guy Dixon, Media Relations, Leeds University Business School: or 07954 277 539