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
Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Collections Agent

£14000 - £16000 per annum: Recruitment Genius: This company was established in...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE 40k: SThree: SThree are a global FTSE 250 busi...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: SThree are a global FTSE 250 ...

Reach Volunteering: Trustees with Finance, Fundraising and IT skills

Voluntary and unpaid, reasonable expenses reimbursable: Reach Volunteering: St...

Day In a Page

Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

How Isis profits from destruction of antiquities

Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

'If we lose touch we’ll end up with two decades of the Tories'

In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea
Tunisia fears its Arab Spring could be reversed as the new regime becomes as intolerant of dissent as its predecessor

The Arab Spring reversed

Tunisian protesters fear that a new law will whitewash corrupt businessmen and officials, but they are finding that the new regime is becoming as intolerant of dissent as its predecessor
King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

Academic claims King Arthur was real - and reveals where he lived

Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
Who is Oliver Bonas and how has he captured middle-class hearts?

Who is Oliver Bonas?

It's the first high-street store to pay its staff the living wage, and it saw out the recession in style
Earth has 'lost more than half its trees' since humans first started cutting them down

Axe-wielding Man fells half the world’s trees – leaving us just 422 each

However, the number of trees may be eight times higher than previously thought
60 years of Scalextric: Model cars are now stuffed with as much tech as real ones

60 years of Scalextric

Model cars are now stuffed with as much tech as real ones
Theme parks continue to draw in thrill-seekers despite the risks - so why are we so addicted?

Why are we addicted to theme parks?

Now that Banksy has unveiled his own dystopian version, Christopher Beanland considers the ups and downs of our endless quest for amusement
Tourism in Iran: The country will soon be opening up again after years of isolation

Iran is opening up again to tourists

After years of isolation, Iran is reopening its embassies abroad. Soon, there'll be the chance for the adventurous to holiday there
10 best PS4 games

10 best PS4 games

Can’t wait for the new round of blockbusters due out this autumn? We played through last year’s offering
Transfer window: Ten things we learnt

Ten things we learnt from the transfer window

Record-breaking spending shows FFP restraint no longer applies
Migrant crisis: UN official Philippe Douste-Blazy reveals the harrowing sights he encountered among refugees arriving on Lampedusa

‘Can we really just turn away?’

Dead bodies, men drowning, women miscarrying – a senior UN figure on the horrors he has witnessed among migrants arriving on Lampedusa, and urges politicians not to underestimate our caring nature
Nine of Syria and Iraq's 10 world heritage sites are in danger as Isis ravages centuries of history

Nine of Syria and Iraq's 10 world heritage sites are in danger...

... and not just because of Isis vandalism
Girl on a Plane: An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack

Girl on a Plane

An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack
Why Frederick Forsyth's spying days could spell disaster for today's journalists

Why Frederick Forsyth's spying days could spell disaster for today's journalists

The author of 'The Day of the Jackal' has revealed he spied for MI6 while a foreign correspondent