Pitching an idea to the Dragons' Den investors should be only the beginning for entrepreneurs and their projects
Midweek View: What there is not, sadly, is enough chat of building up the firm and handing it over to the next generation
At a recent Dragons' Den event, I witnessed eight entrepreneurs appeal to angels for investment.
Without exception, all of them majored on their big idea and the exit strategy they had in mind for anyone wanting to climb on board. A couple of them devoted as much time to how investors could get out and realise a profit than their plans for achieving future growth. One in particular had charts predicting the killing to be made in a few years by anyone buying shares now. No mention was made of how big the business could become – where it might be 10, 20, even 30 years hence.
There was no talk from any of the eight about forming long-term relationships and those investors sticking with them for many years to come.
Beauty parades such as this one are held on a regular basis up and down the land, not to mention on our TV screens. In many ways they highlight much of what is good about Britain – our creativity and ingenuity, qualities that have stood us in excellent stead down the centuries, and doubtless will continue to serve us well in the future.
They also disclose, however, why we lag behind, why we do not have a vibrant layer of growing small and medium-sized enterprises along the lines of Germany's mittelstadt, for example, and why so few of our SMEs go on to reach the next level.
I left the Dragons' Den event both elated and perplexed. I'd been in close proximity to possible brilliance – a couple of the products seemed to my untutored eye to bear the potential of world-beaters. But among the would-be backers – and, perhaps tellingly, because they'd been in this situation before, and knew what language they were expected to speak, the entrepreneurs themselves – the horizon was confined to just two or three years. It seemed so short-sighted, debilitating, and negative.
We place far too much importance on getting out rather than staying in. Talk to anyone involved in venture capital, private equity and angel financing, and their favourite word will be "exit". They will detail their time-frame for selling, for getting back their stake with a handsome profit on top. What they won't pay any heed to is a long-term, regular income stream from a business that is doing very nicely.
What's worse is that those setting up the business also tend very often to have that same mentality – they, too, talk in terms of how soon they can cash in and leave. What there is not, sadly, is enough chat of building up the firm and handing it over to the next generation and the one after that.
Too many of our businesses as well, especially those in the service sector, declare their hunger for outside funding when, in truth, they do not need any at all. They're not facing ruin, their enterprise is ticking along steadily, and may even be growing at a good pace, but somehow they feel obliged to seek external investment. It's taken as given that they will hand over a sizeable chunk of the firm for cash.
We've allowed a culture to develop in which we eulogise companies that go around snapping up the smaller players. In Britain, in the City, in government and the media, big is definitely regarded as better – and among the best of all are those publicly listed corporations that get there in leaps and bounds by buying out the minnows.
No matter that those tinier operators were doing well, thank you, on their own, without being swallowed up by the large organisation. Their owners find themselves locked in, usually for three or so years. Any notion, however, that this is a joyous period is misplaced. Frequently, they must watch as the business they began loses its identity and mojo.
In the case of a service business, despite claims to the contrary, all the purchasers and their accompanying men in suits really desire is the client list and use of the brand name. As for the founders and senior executives who developed the firm, they might as well pack their bags and be on their way.
We get dazzled by the high numbers. Someone is offered £10m for their business. They own 60 per cent, so they're looking at £6m. If they invest that amount, they can expect to receive around £100,000 a year. But that may actually be less than the £130,000 a year they currently pay themselves. Nevertheless, all they see is the magic seven figures of £6m.
Of course, there is a major advantage to bailing out. Their work, their capital, is tied up in one concern – if that goes under for any reason, they lose the lot. But the disadvantages are: they're miserable, they're no longer in charge; the company they started and developed is destroyed; the workers, many of whom are their friends and like family, become disenchanted and depart; and the UK economy is denied a layer of medium-sized businesses.
One change that would assist a British mittelstadt would be for small businesses to be given an incentive to make a profit. At present, profits are subject to corporation tax. What happens is that the owners find all manner of devices for reducing those profits. The result is that they don't put anything aside for a rainy day. The nagging fear of insolvency never disappears and they remain vulnerable to an external approach.
We should introduce the equivalent of an Isa for small firms, to enable them to save, to grow a lump sum derived from profits, immune from corporation tax, that they can put back into the business. There is a lot of noise about capital gains tax and how it holds back the sale of businesses and is a brake on entrepreneurship. In fact, there is a stronger case for leaving capital gains as it is and reducing corporation tax. That would have the effect of providing SMEs with the safety valve they require, and assist them in growing without having to seek an exit.
If we truly want to develop an economic engine room and encourage the formation of small businesses that then grow into medium-sized ones and bigger, we must focus on staying in, riding with the business over its ups and downs, not getting out. We should stop always searching for the exit.
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