Risk takers play safe with venture capital: Cautious financiers threaten long-term recovery, says survey report
Wednesday 10 November 1993
The survey by accountants Levy Gee - which is based on the responses of 139 venture capitalists and claims to be the largest of its kind - found that the industry is consolidating and less prepared to fund start-ups and rescues. Since 1991, the number of venture capitalists in the UK has fallen by 15 per cent, while the proportion prepared to invest less than pounds 500,000 has dropped by 36 per cent and the number willing to refinance bank debt has slipped by 14 per cent. As a result, hundreds of companies are not receiving the cash they need to survive or expand.
The strongest preferences among venture capitalists were for established companies. This indicates a hesitancy to take chances with young firms and start-ups, although 95 per cent of those surveyed claimed in follow-up interviews that they were risk-takers.
Development capital was the most popular method of investment, followed by management buyouts, buyins and replacement capital. At the bottom of the scale were rescue funding, start-ups, mezzanine and seed-corn investments.
Among suggested solutions to the problems facing businesses were: reducing or abolishing capital gains tax for small firms to encourage investment; granting tax relief against returns rather than the cost of investment; and lower corporation tax for small firms.
London and the South-east were the most popular region for investment, pushing Yorkshire and Humberside into second place for the first time in several years. This reflects the severe impact of the recession in the area and the belief that it has the greatest potential for recovery. However, the service sector - traditionally strong in the South-east - is not seen as attractive. Only 43 per cent were willing to invest in financial services or advertising and marketing. By contrast, 89 per cent were prepared to put money into industrial products, and 85 per cent to invest in engineering.
Graham Woolfman, head of corporate finance at Levy Gee, said the survey indicated that venture capital was a misused term. 'Although the organisations we questioned definitely take risks, their preferences clearly lie with safer and more measurable investments.
'Unless we create a climate which encourages people to take risks, investors and entrepreneurs may be restricted to recycling established companies and not creating or restructuring new business vehicles as the basis for recovery.'
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