SME investment: What can we expect in 2017?

Grant Bergman reveals his predictions for how the small business investment landscape will turn out in 2017.

This year could be a more positive and stable one for SMEs

This year could be a more positive and stable one for SMEs

Against a backdrop of political and economic uncertainty, 2016 saw small and medium-sized enterprises (SMEs) facing a number of challenges, with many concerned with how the state of the economy may affect their success in attracting investment. But now that Brexit and the US presidential elections are out the way, what is the outlook for 2017?

A more stable year ahead?

Compared to a somewhat tumultuous 2016, this year is looking a more positive and stable year for SMEs. We hope to see continued support from the government, which over the last year has introduced a number of schemes, such as the credit sharing scheme and the Treasury’s bank referral scheme. Both of which should provide a welcome boost for small businesses seeking finance.
Innovative start-up firms should get some help too. In the Autumn Statement, Sir Philip Hammond pledged to inject an additional £400 million into venture capital funds through the British Business Bank, unlocking £1 billion of new finance to help growing UK firms make the transition to global leaders.

While Brexit uncertainty is not likely to dissipate anytime soon, SMEs will continue to be attractive investment opportunities, especially whilst tax efficiencies are still available to investors. But it will be companies on home soil that will be seen as the safer bet.

The search for the ‘unicorn’ is over

During this period of uncertainty, we expect investors to seek out more stable portfolio returns as opposed to higher risk ones, as seen in the likes of Powa Technologies which famously collapsed at the beginning of last year. While bets on more successful unicorns, like Funding Circle and TransferWise, have paid off, we believe the search for the life-changing ‘unicorn’ is now over as investors play it safe.

Technology will continue to be a hot space though, especially with the launch of more diversified tech funds. Traditional business models and industries are constantly undergoing digital transformation and the businesses disrupting them will be key targets for investors.

More specifically, the companies operating in the Augmented Reality (AR) and Virtual Reality (VR) spaces will emerge as the real winners this year. Research from the International Data Corporation recently found that Virtual Reality and Augmented Reality revenues are set to rocket from £4.2 billion in 2016 to more than £130 billion in 2020. And the UK is a hotbed for these players, with 150 of them based in Britain out of the 800 companies working in the segment worldwide. Companies like Blippar, Visualise and Surreal Vision could be hot picks for investors.

Valuation will continue to be a challenge

Valuing an early-stage business has always been a difficult task. Unfortunately, there is not a set formula or valuation method that is universally applicable for valuing companies at this stage so sometimes investors get it wrong.

This challenge will continue to face growth companies in 2017, with the risk being that if businesses set their valuations too high, they will have priced themselves out when it comes to doing follow-on funding rounds. Investor appetite is strong and there’s an abundance of opportunities out there for growth companies, but they will have to price themselves sensibly from the start if they want to stand a chance of attracting capital and capitalising on later stage investment, especially in the fiercely competitive landscape of companies seeking growth capital.

Liquidity and regulation will be key talking points

Entrepreneurs eager to build tomorrow’s businesses have a broader range of funding sources to choose from than ever before, with the number of investing and crowdfunding platforms proliferating over the last five years.

While these platforms are great for businesses looking to raise money quickly and gain exposure, they do not provide enough transparency and communication for retail investors. This will become a problem when those retail investors realise they can’t achieve liquidity over their crowdfunding investments as easily as they may have hoped.

In addition, there is likely to be regulation coming out in this arena and this could limit access to such capital or add more costs to businesses pursuing this route.

A brighter year ahead

While SMEs are likely to face some headwinds in 2017, we believe it should be a more stable period than last year. Valuation and regulation could provide some obstacles but overall investor appetite is strong and there’s an abundance of opportunities for businesses to capitalise on, particularly for those operating in the Augmented Reality and Virtual Reality spaces.

Grant Bergman is head of finnVentures

Further reading on investment and 2017

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