Unremarkably, the review concludes that an equity gap exists for businesses seeking growth capital of between £2 million and £10 million. Neither banks nor equity investors are ‘likely to fill this gap in the near future’, concludes the review.
The advisory group conducting the review, which included Dragons’ Den star James Caan, suggests that the government needs to set up a fund that plugs the equity gap once and for all – a gap that’s been obscured in recent years by the easy ‘availability of bank lending’.
Prime minister Gordon Brown has given the thumbs-up to the creation of a new growth fund, which he estimates will need to raise around £500 million to be effective. Business secretary Lord Mandelson said: ‘It is now time for the government and the market to work together to address these issues effectively. It is vital that UK SMEs can secure the investment they need to grow.’
There is talk of creating a new, national organisation that would work on the same model as the Industrial & Commercial Finance Corporation, the post-WWII enterprise body that evolved into the private equity group 3i. Presumably, the growth fund suggested by the Rowlands review will also run alongside the UK Innovation Investment Fund, which is currently seeking to raise £1 billion of private investment, and let’s not forget the £75 million for the Capital Enterprise Fund (set up to combat the effect of the credit crunch).
There is an argument that suggests throwing money at young, growing businesses helps them to fail, rather than succeed. If you speak to venture capitalists, they will often tell you that money is the last thing a growing business requires initially. Rather, it’s focus, organisation and contacts that make all the difference in those early days.
If money is put in too early, it can encourage a certain lazy thinking. Similarly, there is also a view that government involvement in fostering enterprise is doomed to failure from the start.
Speaking at the British Library to mark the launch of Global Entrepreneurship Week, serial entrepreneur Peter Jones said that growing businesses should not be looking to the government for additional financial support. Another speaker at the event, David Wei, CEO and executive director of Alibaba.com, an online trading site set up in China a decade ago, insisted that entrepreneurs should never seek the assistance and support of the government. For Wei, starting a business is about going it alone and accepting there are no safety nets.
Whereas Wei spoke like a true libertarian, Jones talked up – again – the importance of education in encouraging entrepreneurialism in the UK. According to Jones, schools and colleges just don’t understand how to teach people about what it takes to start a business.
It was a point taken up at the event by Carl Schramm, president and CEO of the Kauffman Foundation, who said that even the prestigious business schools dotted around the world continue to teach students about corporate, ‘industrial capitalism’.
Entrepreneurial businesses will have a key role to play in rebuilding a new economy from the rubble of the recession. Given the importance of such businesses, it’s hard to see why they shouldn’t receive additional financial support, when appropriate, to help drive the recovery. That said, if young businesses and wannabe entrepreneurs are to really succeed, they will need a lot more assistance than money alone.
