Mind the scale-up gap: why UK SMEs still face a funding valley of death

The UK is one of the easiest (and best) places in the world to start a business. Seed capital has never been more plentiful, from SEIS/EIS angels to crowdfunding platforms and accelerator programmes. At the other end of the journey, mature, de-risked companies can tap buyout funds, infrastructure investors and public markets.

But in between those two poles lies a stubborn problem. If you're building a scale-up (a business already growing at scale and looking to expand revenues, teams and markets, not just to prove viability), you're entering what government reviews have called the “valley of death”.

This is the part of the UK funding landscape where too many promising firms stall, sell early or move abroad. As a venture debt provider, we see this gap up close every day. But we also see practical ways to bridge it.

The UK’s scale-up problem in numbers

Scale-ups punch far above their weight. The ScaleUp Institute's 2024 research shows that 34,000 UK scale-ups (less than 0.6%) are responsible for around half of all SME turnover. When you grow from early traction to £20–50 million+ in revenue, you create high-value jobs, exports and productivity gains that ripple through local economies. Scale-ups generate outsized job creation, export activity and productivity growth — three areas the UK has struggled with for more than a decade.

In our culture, we often talk about founding and starting businesses. A challenge to be sure, but in my experience, it’s not the hardest part of running a company. The hardest part is scaling. That’s when the difficulty really ramps up. 

This isn't a new diagnosis. A joint review from BIS and the British Business Bank of equity investment identified a persistent lag in finance at the venture stage, calling it a traditional “valley of death” where capital-intensive businesses can fund development but “lack the scale of funding to exploit [their product] fully in the market.”

That same report highlighted that venture-stage investment had been broadly flat, even while seed and late-stage deals were rising, with a particular weakness in the £2–5 million deal range.

In other words: the UK isn't short of ideas or start-ups. It's short of the patient growth capital needed to turn early-stage promise into mid-market success.

A £4bn+ annual funding gap at scale

Multiple official reviews have quantified the problem, and the numbers are significant.

The UK Government's Patient Capital Review – summarised in the British Business Bank's interim evaluation of British Patient Capital – estimated an annual equity funding gap of around £4bn for innovative, high-growth companies, with the problem “most acute for companies requiring more than £5 million in equity investment.”

In parallel, the ScaleUp Institute's “Future of Growth Capital” work identified around £15bn of growth capital gap across asset classes, sectors and regions. Even as UK VC markets have matured, average fund and deal sizes still lag the US, and you're less likely to secure follow-on funding beyond Series B if you're based in the UK.

Recent data confirms this gap hasn't gone away. The British Business Bank's Small Business Equity Tracker 2024 shows that equity investment in smaller UK businesses fell by 48% in 2023 to £8.8bn, with the number of deals dropping by 25%. London alone accounted for 63% of the capital and 49% of deals, leaving many regional scale-ups competing for a smaller pool of funding.

The 2025 data tells a similar story. UK equity investment into smaller businesses remains heavily concentrated at earlier stages, and the UK still lags the US on a GDP-adjusted basis by roughly 10%.

The Small Business Finance Markets Report 2025 highlights that only around 45% of smaller businesses are using external finance, which hasn't increased materially despite a stabilising macro environment. 

Perhaps most telling: the SME Intermediary Survey 2025 found that 84% of finance intermediaries believe there are still gaps in finance supply across UK growth stages, particularly for scale-ups. That's third-party verification that the middle of the capital stack remains underserved.

Part of the issue is structural. Countries that outperform the UK on scaling allocate materially more pension and insurance capital into growth and innovation assets. In the UK, these institutions allocate a much smaller percentage to venture and growth equity, which tightens the supply of follow-on capital.

Why traditional equity and bank debt don't fully solve it

So why does this gap exist? There are structural reasons on both the equity and debt sides.

On the equity side

Early-stage funding (SEIS/EIS, angels, seed VC) is strongly supported by tax reliefs and government programmes, making pre-seed and seed relatively well served. But as cheque sizes move into the £5–20 million range, there are fewer domestic funds able or willing to lead. You face steeper dilution and pressure to exit early, especially outside London. If you're in the “awkward middle” – past the seed stage but not yet big enough for a major growth round – you're competing for a limited pool of institutional capital that's increasingly concentrated in the capital and a handful of other cities.

On the debt side

Traditional banks have shifted towards lower-risk, property-backed lending. A recent Allica Bank study cited in The Times estimates a £90 billion SME lending gap compared with historic norms, with around £65 billion still not filled even after alternative finance.Overdrafts and unsecured facilities have been in long-term decline. If you're asset-light and IP-rich – exactly the kind of business driving innovation – you often lack the tangible security banks require. The product isn't live yet, so the metrics don't match the lending model. You're building ahead of revenue, but the bank wants to see last year's balance sheet.

At Nighthawk, we've seen it happen to companies with solid R&D pipelines, government grants approved and strong teams in place. But because the revenue wasn't there yet, the answer was no, not now, or come back when you're further along.

The British Business Bank's Small Business Finance Markets also show persistent regional disparities, particularly in equity finance. Capital scarcity also disproportionately affects underrepresented founders. Data from 2023 shows that all-female founding teams in the UK received just 2% of total VC funding, while ethnic minority-led firms face significantly higher rejection rates for traditional bank debt.

Put simply: Seed equity is supported, buyouts are well funded, but scale-up growth rounds and flexible growth debt in the £2–20 million range remain structurally under-supplied (particularly outside London and in R&D-intensive sectors).

Where venture debt fits

One of the most under-used tools in this part of the market is venture debt and other forms of non-dilutive growth capital. Rather than replacing equity, it can sit alongside it – extending runway, funding working capital and capex, and smoothing the path between equity rounds.

International comparisons are instructive. The ScaleUp Institute notes that countries ahead of the UK on scaling businesses – such as the US and Canada – have much greater deployment of venture debt as part of their growth capital stack, alongside deeper institutional and sovereign participation.

As a specialist venture debt provider, we focus on businesses that have validated business models and recurring revenues, are raising (or have recently raised) institutional equity, and need additional capital to invest in growth – without taking on excessive dilution or covenants that don't fit a high-growth profile.

In practice, that means funding things like stepping up sales and marketing into new markets, building out product and engineering teams, bridging cash flow to major receivables (for example, R&D tax credits or export-linked income), and funding bolt-on acquisitions or capex. 

Innovative businesses need funding solutions that account for the way growth actually unfolds, instead of how it looks on last year's balance sheet. If your plan involves building ahead of revenue, you need a lender who gets that.

What needs to change

The good news is that the UK has already taken important steps – from the British Business Bank's equity and regional funds to British Patient Capital and recent Mansion House and Edinburgh reforms aimed at unlocking more institutional capital for growth.

In 2025, the Bank expanded its direct co-investment and institutional partnership programmes aimed at crowding in more growth capital for scale-ups. The existence of these programmes is itself evidence of the recognised scale-up gap.

But if we want more of our innovative SMEs to become global leaders from the UK, we need to normalise non-dilutive growth capital – including venture debt – as a standard part of the scale-up toolkit, not a niche afterthought.

We need to broaden regional access to both equity and debt solutions, so great businesses outside the Golden Triangle don't have to move or sell early. And we need to encourage blended capital stacks where founders, VCs, lenders and public schemes work together to close the £4 billion+ scale-up gap rather than each operating in silos.

Our experience is that when you combine smart equity with flexible debt, you extend runway, keep more ownership and build more resilient balance sheets. In other words, you cross through and beyond the valley of death faster – and with fewer casualties.

If you're building a UK scale-up and recognise this funding gap in your own journey, let’s talk. We can't fix the system alone, but we can help one ambitious business at a time. Get in touch to discuss your growth funding options.