There’s a scene in the Martin Scorsese movie Goodfellas where Tommy (played by Joe Pesci) thinks he’s going to be “made” and become a fully fledged member of the mafia. Instead, he’s ushered into an empty room and unceremoniously “whacked”
Entrepreneurs who’ve gone down the venture capital route may sympathise with Tommy’s demise. What seems like a perfect arrangement, destined for the heights, can end badly, with businesses stripped and sold without so much as an apology. Nothing seems to quite divide entrepreneurs like venture capital. Perhaps that’s only to be expected given that it’s the high-risk end of the market, where innovation and success go hand in hand with broken dreams and failure.
Research commissioned by the British Venture Capital Association reveals the virtues of this type of finance. It estimates that sales growth for venture-backed companies over five years to 2006/07 was 12 per cent per annum, compared to five per cent among FTSE 250 companies. Research and development expenditure rose 12 per cent annually, compared to one per cent nationally, while the value of exports increased 14 per cent against a national average of four per cent.
The private equity boom
Private equity-backed companies generated total sales of £310 billion and exports of £60 billion, and contributed nearly £35 billion in taxes. Ninety-one per cent of companies responding said that without private equity the business would not have existed or would have developed less rapidly.
You may remain unconvinced by the VC option. Often, the loss of control involved defeats the purpose of becoming your own boss. Other options do exist. The rise of angel investor networks in the UK shows that VCs don’t have to be the first port of call. Angels’ expertise can be invaluable to a fledgling organisation and the sums they inject can surpass an early round of funding provided by a VC. Unfortunately, however, they often fall short.
If 15 people club together to invest £50,000, the only outcome you’re guaranteeing is failure. Angels certainly have their role to play in assisting companies but it’s time for them to start thinking big.