Margareta Pagano: Time to tackle lack of risk-taking with enterprise

Venture capital invests less than the Manchester clubs spend on footballers’ salaries

The UK's venture capital industry invested less in British business last year than the combined salaries of Manchester City and Manchester United's footballers. To be precise, the VC industry invested only £344m in 431 UK small cap companies – some £20m less than the football teams forked out on stars such as Rio Ferdinand (pictured). Only £5m of that VC money went on seed capital and £25m for start-ups.

It's one of the dizzy facts that beggars belief; not because the footballers earn so much, more that the amount of money being invested in our entrepreneurs by VCs has been falling since the crash and continues to decline.

Luckily, VC money is not the only source. Bigger by far is the money invested by the UK's private business angels, although even this remains static. While accurate figures are hard to extract, Jenny Tooth, head of the UK Business Angels Association, reckons that with those registered for enterprise investment scheme relief, the total could be £1bn plus – not bad but less than the salaries of all our football clubs and peanuts if the next generation of small businesses is to fly.

As the Breedon review on non-bank lending showed so vividly, there is a "financing" gap of between £84bn and £191bn for small and medium-sized enterprises over the next three years. Bank finance is still the main source for most SMEs: 55 per cent use credit cards, 44 per cent loans and 35 per cent overdrafts. But this is proving harder to get than before the crash as the banks – quite sensibly, despite Vince Cable's latest attack on the Bank of England for acting like the Taliban – are bolstering their balance sheets and deleveraging.

If anyone needs reminding about how vital it is we get new sources of funding, they should read the latest report from Warwick University and GE Capital, The Mighty Middle.

This showed that the UK's 27,850 mid-market companies – those with turnover of between £20m and £1bn – contribute a third of all private sector revenues. That's an astonishing number. And while these companies make up only 1.67 per cent of the private sector, they provide 11.2 million people with jobs, and it's rising.

What's more, these companies reported a productivity increase from £154,000 in revenue per employee in 2010 to £196,000 in 2011. If this were a report on German industry, we would be drooling at such increases. There's more to applaud: the UK mid-market has a higher number of "growth champions" – companies with sales growing at over 10 per cent a year – than Germany, France or Italy. Yet they all warn about the difficulties in finding finance to fund expansion.

So what's to be done? The answer is switching the UK's obsession away from debt towards equity. Xavier Rolet, head of the London Stock Exchange, put his finger on the problem in another excellent report, The New Equity, published last week, when he warned that we will be failing our entrepreneurs if more equity finance isn't made available to them. As he also said, raising equity rather than bank debt is far more effective for them as it aligns incentives between the owner and the investor.

Mr Rolet is spot on. Companies are far too hooked on bank finance and it's not actually good for them. All too often, it creates a mismatch between the risk that entrepreneurs take, and that taken by the banks as their incentives are not growth but a fixed return. Nor is it suitable for high-growth firms that often need external capital before they start producing income – a time when they can't make regular loan payments.

A survey of 451 businesses by the think-tank New City Network showed how bad this addiction has become. Half the firms had failed to raise finance because they only went to a bank; more worrying, they thought growth capital was only available from banks. That's plain wrong, but the banks should also be doing more to steer them towards the alternatives – like the angel networks.

Filling this education gap is essential to filling the financial one and reconnecting the debate about risk finance with growth. Maybe our entrepreneurs should visit Old Trafford to find out from the maestros.

Suggested Topics
Arts and Entertainment
Armstrong, left, and Bain's writing credits include Peep Show, Fresh Meat, and The Old Guys
TVThe pair have presented their view of 21st-century foibles in shows such as Peep Show and Fresh Meat
Arts and Entertainment
Keys to success: Andrew and Julian Lloyd Webber
arts + entsMrs Bach had too many kids to write the great man's music, says Julian Lloyd Webber
footballMan City manager would have loved to have signed Argentine
Arts and Entertainment
Hand out press photograph/film still from the movie Mad Max Fury Road (Downloaded from the Warner Bro's media site/Jasin Boland/© 2014 Warner Bros. Entertainment Inc.)
films'You have to try everything and it’s all a process of elimination, but ultimately you find your path'
Arts and Entertainment
Imelda Staunton as Dolores Umbridge in the Harry Potter films

New essay by JK Rowling went live on Pottermore site on Friday


Top Gear presenter is no stranger to foot-in-mouth controversy

Russia Today’s new UK channel began broadcasting yesterday. Discussions so far have included why Britons see Russia as ‘the bad guy’

New UK station Russia Today gives a very bizarre view of Britain

ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
Keira Knightley and Benedict Cumberbatch at the premiere of The Imitation Game at the BFI London Film Festival
filmsKeira Knightley tried to miss The Imitation Game premiere to watch Bake Off
Enner Valencia
footballStriker has enjoyed a rapid rise to fame via winning the title with ‘The Blue Ballet’ in Ecuador
Arts and Entertainment
A top literary agent has compared online giant Amazon to Isis
arts + entsAndrew Wylie has pulled no punches in criticism of Amazon
Arts and Entertainment
Charlie Sheen said he would

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

The benefits of Recruitment at SThree...

£18000 - £23000 per annum + Comission: SThree: SThree, International Recruitme...

Trainee Recruitment Consultants

£20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...

Finance Assistant - Part time - 9 month FTC

£20000 - £23250 Per Annum pro rata: Clearwater People Solutions Ltd: Pro rata ...

Marketing Manager

£40 - 48k + Benefits: Guru Careers: We are seeking a Marketing Manager to join...

Day In a Page

Bryan Adams' heartstopping images of wounded British soldiers to go on show at Somerset House

Bryan Adams' images of wounded soldiers

Taken over the course of four years, Adams' portraits are an astonishing document of the aftermath of war
The drugs revolution starts now as MPs agree its high time for change

The drugs revolution starts now as MPs agree its high time for change

Commons debate highlights growing cross-party consensus on softening UK drugs legislation, unchanged for 43 years
The camera is turned on tabloid editors in Richard Peppiatt's 'One Rogue Reporter'

Gotcha! The camera is turned on tabloid editors

Hugh Grant says Richard Peppiatt's 'One Rogue Reporter' documentary will highlight issues raised by Leveson
Fall of the Berlin Wall: It was thanks to Mikhail Gorbachev that this symbol of division fell

Fall of the Berlin Wall

It was thanks to Gorbachev that this symbol of division fell
Halloween 2014: What makes Ouija boards, demon dolls, and evil clowns so frightening?

What makes ouija boards and demon dolls scary?

Ouija boards, demon dolls, evil children and clowns are all classic tropes of horror, and this year’s Halloween releases feature them all. What makes them so frightening, decade after decade?
A safari in modern Britain: Rose Rouse reveals how her four-year tour of Harlesden taught her as much about the UK as it did about NW10

Rose Rouse's safari in modern Britain

Rouse decided to walk and talk with as many different people as possible in her neighbourhood of Harlesden and her experiences have been published in a new book
Welcome to my world of no smell and odd tastes: How a bike accident left one woman living with unwanted food mash-ups

'My world of no smell and odd tastes'

A head injury from a bicycle accident had the surprising effect of robbing Nell Frizzell of two of her senses

Matt Parker is proud of his square roots

The "stand-up mathematician" is using comedy nights to preach maths to big audiences
Paul Scholes column: Beating Manchester City is vital part of life at Manchester United. This is first major test for Luke Shaw, Angel Di Maria and Radamel Falcao – it’s not a game to lose

Paul Scholes column

Beating City is vital part of life at United. This is first major test for Shaw, Di Maria and Falcao – it’s not a game to lose
Frank Warren: Call me an old git, but I just can't see that there's a place for women’s boxing

Frank Warren column

Call me an old git, but I just can't see that there's a place for women’s boxing
Adrian Heath interview: Former Everton striker prepares his Orlando City side for the MLS - and having Kaka in the dressing room

Adrian Heath's American dream...

Former Everton striker prepares his Orlando City side for the MLS - and having Kaka in the dressing room
Simon Hart: Manchester City will rise again but they need to change their attitude

Manchester City will rise again but they need to change their attitude

Manuel Pellegrini’s side are too good to fail and derby allows them to start again, says Simon Hart
Isis in Syria: A general reveals the lack of communication with the US - and his country's awkward relationship with their allies-by-default

A Syrian general speaks

A senior officer of Bashar al-Assad’s regime talks to Robert Fisk about his army’s brutal struggle with Isis, in a dirty war whose challenges include widespread atrocities