Finlay Kerr is the Founder of Raising Expert – helping early-stage businesses raise funding to grow their businesses in a sustainable way. He founded his first business in the travel trade in 1996, it has evolved over time but it still exists today. He spent 7 years in Local Government working in Economic Development where he developed a number of innovative programmes to support SMEs. This work has led him to develop his expertise in the equity investment space where he advises, consults, and speaks on the topic.
Nobody needs reminding of the challenges facing the planet and all of us who live here. Every day there are shocking reminders that we need to act and act fast!
Is there more that businesses and enterprises could be doing? Or possibly there are changes central and local governments could make to nudge the whole entrepreneurial ecosystem to a more sustainable focus.
In my work, helping startups and scale-ups raising equity investment, I have noticed a step change in the last few years, in innovation in the planet-positive space. From renewable energy and recycling – a couple of very obvious sectors needing drastic changes, to logistics and transport, food & drink – some more obvious culprits – through to a focus on developing cleaner, greener websites for any offering.
There is no question that small businesses, the innovators, are driving change – but they need help and I suggest that this could come from both local and national governments in what could be seen as radical but at the same time very simple changes.
As individuals and as groups, investors are moving towards ‘ESG’ investing – which is to be applauded and in particular the early adopters. But what measures could be taken to move the majority of investors to look at sustainable opportunities first and prioritise planet-positive businesses in their portfolios?
With the undoubted success in the UK of the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) to channel investment to SMEs and in the case of SEIS, very early stage, innovative businesses.
I suggest this incentive model could be applied to change investor behaviour to produce the same massive changes in investment activity.
‘The Green SEIS’
This could work in tandem with the existing system. Rather than simply giving an additional tax break for investors some smarter thinking is needed to create more holistic impacts and benefits across communities and of course to benefit the hard-working and innovative founders.
Great work is being done at centers such as GreenFin – Green SME finance research within CEEDR (Centre for Enterprise, Environment and Development Research) at Middlesex University, London. Professor Robyn Owen and Dr Amy Burnett are undertaking some fascinating work in this space. (See Owen et al., 2023)
To this end, Raising Expert is partnering with Middlesex University on an event and training programme to bring together planet-positive investors and entrepreneurs. Through this activity, we hope to further their research and refine their SME toolkit as well as introduce founders to suitable investors.
National Scheme – local impact
I believe there is an opportunity for Local Authorities to become influential actors in this space with a targeted equity investment in private businesses – ‘LA Investment’. There is a very successful model in the United Kingdom with the British Business Bank and Scottish National Investment Bank and the associated co-investment scheme investing in this way. It could be argued that as such they have this covered and by including a local element this could become confusing or cause displacement of the national activity.
However, by doing this they could support local policy, and target significant industry sectors. Using this activity to nurture or create ‘Local areas of excellence’ – different renewable energy production such as hydro or tide, energy storage, or agri-tech.
They should be able to leverage other instruments at their disposal such as grants and loans, rates, and owned and managed property alongside the equity investment that other investors do not have the ability to do. This activity can create the desired direct or indirect outcomes in the local economy in terms of employment, regeneration, social mobility and inclusion, etc.
There are clear pitfalls in a scheme like this as there is understandably high risk in investing in early-stage innovative businesses. High-risk and local governments are not usually a good combination so it will only work for the most innovative and forward-thinking authorities. Of course, the flip side of the risk is reward and a well-managed evergreen fund should deliver net financial results over the medium term. Not wanting to hide from the scrutiny this will invite but local authorities can look to the other benefits this will bring to the local economy and society before, as well, or instead of financial returns. There are of course other challenges for local government beyond this reputational and financial risk such as fairness and inclusion and avoiding displacement of competition to overcome.
Without the in-house expertise it will be a challenge for Local Authorities. However, I would urge them to take the even braver step to invest before local angel investors to stimulate the investment elevator, after grants and soft loans but prior to co-investment. There is actually a gap in the elevator – around the grant stage, as many innovative companies either hesitate to apply for innovation grants or get caught in the ‘cash-flow-trap’, being unable to fund the project in the short term before retrospective grant payment.
Matching grant funding against grant funding has always been seen as a no-no and almost always prohibited. Is there space for a hybrid offering? – ‘Convertible Green Grant’ where founders have the choice to pay back the investment to the grant/investment fund (at an agreed rate) or convert to equity. At this point, a clever instrument could be used to unlock innovation grants.
Equity investment offers the opportunity to develop a stronger relationship with local businesses with clear benefits. This partnership approach would bring local government closer to the issues facing businesses but also let business owners and leaders engage with local government representatives in an entirely new way.
Given time – any local investment fund should grow and become evergreen but the financial, social, and economic benefits would be local rather than a large financial centre. This is more significant in areas away from these key hubs but plays to the regional support agenda and ‘levelling up’ policies
The two main ideas I have set out – a national incentive for green investment – ‘GSEIS’ and hyper-local equity investment from local government can and should be connected. GSEIS could create Green Tokens – beyond the tax breaks- valid only within the LA area of the business, redeemable by certified green suppliers. GreenFin has done extensive work researching these concepts and has more developed proposals than I have outlined in this article.
At the same time, LA Investment could also attract GSEIS investors to invest alongside them providing the best of both worlds – public and private – local and national.