As an entrepreneur, I am by nature an optimist. It was therefore just a matter of time, I believed, before coalition ministers – many of whom seem never to have been near a whelk stall let alone to have run one – would twig that entrepreneurial businesses are key to an economic recovery.
The recent budget did mark a small beginning to the return to the enterprise economy, with moves such as a doubling of the lifetime limit on entrepreneurs’ relief to £10m – although the 5% qualifying limit excludes many risk-taking founders – and an extensive relaxation of the Enterprise Investment Scheme which can only serve to stimulate early stage funding.
Then, a few days later, the StartUp Britain initiative launched, organised by, among others my fellow Growing Business columnist Oli Barrett. Any effort which encourages entrepreneurship, does not cost the taxpayer anything and gets the attention of the government (the launch was attended by the prime minister, the chancellor and business secretary Vince Cable) deserves plaudits.
But all this is just the beginning. For entrepreneurship in the UK to succeed on a much greater scale we need a low tax, low regulation environment – not what we have currently. We also require a much more receptive banking system. The coalition’s Merlin initiative is a joke, as small enterprises are fully aware. Banks are, in many cases, simply refusing to lend to smaller companies, even those with whom they have had longstanding relationships and offer excellent credit risk. And when they do lend it is all too often with punitive terms including unrealistic payback periods and harsh covenants.
It would be good too to see further growth in the UK of the venture capital industry. As the US experience shows, venture funds can play a dynamic role in the progress of smaller businesses.
Venture funding is not a panacea however. Business owners who are approaching venture funds need to do so with a full understanding of what that entails. When I was first raising money for a business which I founded some two decades ago, I had very little understanding of how the venture funds worked. My venture investors pulled some wonderful stunts. For instance, very late on in the process, the plain equity finance originally promised became loan stock with a 10% coupon rate!
So it was with some fascination that I read a book recently called Angels, Dragons and Demons by Simon Acland which offers very practical advice from someone who was a venture capitalist for some 25 years.
Acland shares with his readers many fundamental truths to which VCs (the ‘vultures’ of the title) will not immediately ‘fess up’. For example:
• The ‘customer’ for the VCs is not the entrepreneurial business but rather the investors who back them. The investee business is simply the product.
• The language of the VC dealmaker is becoming increasingly complex and contains within it some potential landmines for the unsuspecting entrepreneur. Even a simple term sheet can now be baffling. As Acland parodies it: ‘there’ll be some drawdown milestones, and our standard dilution provisions. We decided we needed some backstop redemption rights and a bit of a participating dividend…’
• Many VCs are not nearly as successful as you might imagine. He states that many VCs have never even received a 9X return on any single investment.
• The chances of a founding CEO surviving the course in a VC-backed enterprise is slim Of the 23 investments in which Acland took a board seat, less than one third of the founding CEOs were in place when the business exited.
Former Conservative business secretary Lord (David) Young said at the StartUp Britain launch “too much start-up money ruins more businesses than those with too little”. That is why growing businesses should not chase external funding for its own sake. And venture funding in particular often comes at a heavy price.
Nevertheless, with the paucity of bank finance and an angel investment community a fraction of the size of that in the US, VCs do perform an important role in promoting company growth and many of the UK’s most dynamic growing businesses have accelerated as a consequence of venture investment.
David Soskin is the co-founder of Howzat Media LLP and sits on the boards of several internet companies, including Cheapflights Media, of which he was CEO from 200 to 2008. His book Net Profit has been published by John Wiley & Sons.