There are two reports, one from a national newspaper and the other from a major broadcaster. These variously describe the new fund as a high-street twist on the BBC’s Dragon’s Den, a kitty to provide a cashflow boost for small businesses, a new venture capital fund that addresses the equity gap, a reincarnation of the original 3i, and a source of finance for businesses with turnover of between £20 million and £250 million.
You don’t have to be an expert on business finance to realise that those definitions are not compatible.
Granted, these are just leaks and we’ll have to reserve judgement until we get the full story. But it’s to be hoped there is some clearer thinking behind the fund than is apparent from these reports.
The last government launched quite a few initiatives of this ilk, some of them more successful than others. In fact, money is still being invested from the various funds and schemes set up in the past decade.
It’s to be hoped that the current administration learns from these past successes and failures.
Lesson one: the different stages of growth a company goes through demand markedly different approaches from investors and any state-backed initiatives should be shaped accordingly. To give just one example, if you’re backing very early-stage companies, schemes need to be as flexible as possible to allow investors scope to make money in this tricky area.
Lesson two: every scheme will migrate towards larger, later-stage investments if given the chance. A fund to support businesses with turnover of between £20 million and £250 million will end up picking a lot of companies at the higher end of that range. This was the case with 3i, and it’s happening with VCTs too, to the greatest extent that it can under the regulations. If the banks get involved, it’s even more likely that more ‘stable’ businesses will be favoured at the expense of faster-growing concerns that could do more with the money.
Lesson three: the scale of the intervention has to be matched with need. For example, a fund of £1 billion (the mooted size of the bank-supported vehicle) backing mid-sized companies with sales in the nine-figure region will not be able to make a great number of investments, and its impact will be limited. People will see through it as a superficial PR exercise for some institutions desperate to polish their public image.
On second thoughts, perhaps the comparisons with Dragons’ Den aren’t so far wrong…