With bank funding for ambitious businesses still in short supply, the government could do more to help, argues Chris Allner, MD of Octopus Ventures.

With bank funding for ambitious businesses still in short supply, the government could do more to help, argues Chris Allner, managing director of Octopus Ventures.

In its green paper, ‘Financing a Private Sector Recovery’, the coalition government has called for suggestions on how to ensure small and medium-sized enterprises (SMEs) get the support they need in order to grow and create jobs.

As an active investor in the SME space, we look forward to making a full contribution to the debate, but these are the basic principles we believe should underpin the discussion.

1. Government intervention should encourage private sector involvement on a large scale
Support for SMEs needs to be on a major scale if we are to make a difference. Since the mid-1990s, government intervention has been fragmented, which has encouraged the development of a plethora of small fund providers, few of which have the scale to offer real support, in addition to the funding, to the smaller companies they back. The lack of tangible post-investment input in turn has led to more modest financial returns in this part of the market, discouraging the private sector from investing. For this reason, we’re excited that the tide may turn with the arrival of the new Growth Capital fund, which could provide serious scale, eventually of £500 million or more, in order to deliver the much needed support.

2. State support needs to be centralised (but with regional reach)
We advocate centralised or national rather than localised support. We should seek to support the best companies across the UK, not the best in Yorkshire or Cornwall, or London. Indeed, we have to pick the companies that are best able to compete on an increasingly global stage. It is therefore essential that fund managers have the scale and network to reach from Lands End to John O’Groats.

3. We must help small companies through their different phases of growth
One way in which current legislation is failing SMEs is that funding support is restricted when companies increase beyond a certain headcount and turnover. The Rowlands Report, referenced in the Green Paper, points out that once businesses progress from being small to medium-sized, they become part of a group that represents over a third of the UK’s GDP, yet they’re underserved in terms of funding, both from banks and equity providers. It’s clear that legislation and policy has to be addressed in order to ensure that we can continue to help SMEs as they continue growing. In addition, to allow investment funds to make commercial returns, they must be allowed to back their winners, irrespective of size.

4. SMEs need advice as well as funding
It’s vital that SMEs get advice pre and post-investment. Greater scale of intervention will help achieve this to a degree, but overall it’s about recognising that management teams of SMEs will often be operating in relative isolation, many raising third-party funds for the first time, and they can benefit enormously from specialist input and advice. As with teenage children, even the brightest management teams and best companies still need guidance and support, even when they think they know it all. The Green Paper noted that only 4 per cent of mid-sized companies and only 2 per cent of SMEs have recently accessed equity finance, either because they’re not ‘investment ready’ or may be reluctant to cede ownership. Such figures reflect the need for education around accessing funding as well as in how to progress a business.

5. The VCT and EIS market should continue to grow and bring funding to SMEs
Changes to income tax and pension relief mean that investors are increasingly looking to tax-efficient vehicles such as the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs). The last tax year saw a surge of investment into VCTs, with inflows of more than £340 million, according to the Association of Investment Companies. In helping SMES, the Government can look to build on this interest by ensuring that tax breaks remain attractive and there’s sufficient awareness among investors of what these vehicles can offer.