How to overcome the finance gap: A focus on Gazelles

Small and Medium-sized Enterprises (SMEs) make up more than 2/3 of all employment in the European Union – and there are over 22 Million different SMEs all over Europe. It is obvious that SMEs are the heart and core of then European economy – and should be therefore the focus of domestic economic-political strategy. One segment of the SME market is often referred to as Gazelle companies – due to their growth. A common definition of a Gazelle is a company that doubles its revenue turnover in four to five years. These companies are often at the forefront of technology development and often found in knowledge intensive market and high-tech services. Around 3% of all SMEs are Gazelles – and they are particularly important for economic growth and the labour market. It is estimated that most of all net new jobs – new job creation minus closed jobs – are generated by the Gazelle companies.

Financing growth

The general trend within EU, moving from basic manufacturing towards more technology intense manufacturing and services, often internet based, has given rise to a new type of company, particularly within the IT, engineering and professional services sectors. Light on assets, they are also less well suited for traditional bank financing, which typically needs to be secured by the borrower’s tangible assets. Only a very small number of companies regard equity as a relevant alternative external source of finance. The most common reasons stated are the cost of capital and the desire not to lose ownership control.

Since the years after the financial crisis 2008 through 2013, growth in the European SME sector has recovered and with it, the need for growth capital among SMEs is also likely to grow, particularly for fast growing companies.

Bridging the finance gap

The question then arises, will the market be able to support the financing needs? The Duisenberg School of Finance recently published a study in which they show that there is a considerable gap between demand and supply of financing. In our work, we talk almost daily to successful entrepreneurs at Gazelle companies in Austria, Germany and Sweden. They confirm that they face considerable challenges financing their growth, particularly raising debt follow-on financing after the start-up phase.

These are the companies that drive economic and employment growth in Europe and still they struggle to maintain momentum. It appears to me that there is a big gap in the eco-system for supporting business growth in the market. After the early stage financing through bootstrapping, business angels or VCs, Gazelle companies end up in a vacuum, that constrains their ability to grow further. While business models have changed dramatically, driven by technology and changing customer needs, the way we finance them has not adapted to their needs.

With the launch of Round2 Capital Partners we want to help filling a critical gap in the financial eco-system for young, growing businesses. Round2 offers Gazelle companies a new alternative to raise growth capital, revenue based loans, a product that is better suited than existing alternatives to meet the specific needs of many of these companies.

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