Talking point: Dragons are mythical, but angels exist!
Where will the money come from? It is generally accepted that SMEs have a significant role to play in trading our way out of the current economic downturn. But for small companies to grow they need to be able to access finance. With the ongoing backdrop of tightened bank purse strings and rumours of cuts to R&D grants and business support, how will smaller companies find money over the coming months and year?
It is undeniable that the banks have tightened their purse strings but it is also unrealistic to expect anything different. In the run up to the economic crisis of 2008, many banks were indulging in reckless lending decisions, motivated mainly by transactional fees. Now, like it or not, banks will be far more judicial. They’ve had their fingers burned and so in the future the decision to lend will be credit and security based, not investment based. In other words, the potential growth is irrelevant, it is all about the security.
So what other sources are there? Grants? Well, we will know a lot more following the spending review on 20 October but, at the moment, indications are they will be a casualty of the spending cuts.
How about public sector equity funds? These have played an extremely important role over the last five years. Catapult’s Regional Venture Capital Fund and E-Synergy’s East Midlands Early Growth Fund have had a big impact on the availability of funds in the £0-2m bracket to growth potential companies. However, the recent Rowlands Review has recommended that future public sector backed venture capital funds should be aimed at the £2m-10m bracket. In this bracket, the companies have more established products and a proven management team and ability to grow. Therefore, backing them is more likely to give more economic bang for your buck with less inherent risk.
So what then for the poor earlier stage enterprise looking for seed and growth capital to help them along the way? Dragons' Den? I don’t think so. Dragons are mythical creatures created by and for TV... but angels do exist and the next few years are likely to see their coming of age. Business angels are wealthy individuals who invest their money in early stage companies in exchange for some ownership of the business. The premise is the same as the TV equivalent, the practice is very different.
Rumblings from the Treasury indicate that they are not going to ignore the need in the £0-2m bracket but instead use tax legislation and incentives (through EIS and VCT) to drive more private individuals’ money in to this early stage arena.
Now, tax incentives are good but on their own they are not enough. For this sector to operate efficiently, and not descend into a wild west gambling fest, requires sharing of knowledge and best practice amongst the investors and effective connections between those investors and the businesses looking for money.
It is for all of those reasons that we at Growth Investment Network run the Angel Insight programme. Its purpose is to introduce high net worth individuals to the world of angel investing. For further details see http://www.ginem.co.uk/home/events/angel-insight.aspx
Toby Reid, operations manager at Growth Investment
