Small Talk: Enterprise capital funds raise some difficult questions, with their mix of private sector investment and taxpayers’ money

 

For all the efforts made in recent years to stimulate investment in small businesses, serious gaps in the market remain – especially the type of firms that might once have attracted investment from the venture capital industry.

These small start-ups stand a good chance of generating growth if they can find capital backing – often several rounds of financing may be needed – but aren’t secure enough yet to attract support from investors such as the venture capital trust industry, which typically backs bigger businesses, or private equity firms. They fall into what funding experts call the “equity gap”.

There is some good news, however. A new analysis into enterprise capital funds suggests these vehicles may just be beginning to address the shortfall. ECFs, established by the Government seven years ago, have so far raised almost £550m, according to the Corporate Finance Faculty at the Institute of Chartered Accountants in England and Wales. The 16 funds in existence have already backed 169 ventures.

ECFs offer no tax relief or downside protection, but private sector investors do get the lion’s share of any upside.

The scheme relies in part on Government cash, but fund managers must also raise contributions from private investors – ECFs often operate on a matched funding basis, with the Treasury putting £1 in for every £1 raised from the private sector.

The upside boost for the private sector is delivered in the way profits – assuming there are some – are distributed. The Treasury has first call on distributions, but is only entitled to a return of its starting capital plus an agreed rate of interest. All profits thereafter can be distributed to the remaining investor.

It’s an attractive proposition for investors prepared to accept the risks of investing in genuine venture capital plays, which require both patience and an ability to absorb losses.

However, successes can be dramatic. Take OneDrum, for example, the Stirling-based software company which raised £525,000 from an enterprise capital fund and was subsequently bought by the US firm Yammer. Thanks in large part to OneDrum’s technology, Yammer was later sold to Microsoft for $1.2bn (£710m).

Since last autumn, Capital for Enterprise, the organisation that oversees the ECF scheme, has been part of the new British Investment Bank. The funds are run by private sector venture capital firms with private sector funding – but they do rely on public sector cash. Taxpayers’ money is at risk, but also the Treasury doesn’t get much of the upside from successful investments.

If that gives pause for thought, consider the economic importance of funding these ventures. The academic evidence is limited, but one recent study, by Deutsche Bank, estimated that for an increase in seed and early-stage investment worth the equivalent of 0.1 per cent of GDP, real GDP would increase by 0.96 per cent – that’s a 10-fold investment return.

At the very least, enterprise capital funds prove that a well-designed government scheme can attract private sector support without expensive upfront tax reliefs or costly guarantees. It will be interesting to see how the scheme performs in its new home.

Late payments headache getting worse

Britain’s late payments problem isn’t getting any better and small businesses are paying the price – that’s the message from the Forum of Private Business. Its latest survey of members suggests that just 3 per cent of small businesses have seen a fall in the number of customers making late payments over the past 12 months, while 23 per cent have seen an increase.

More customers are settling their bills late – and taking even longer to pay. The FPB warns that 29 per cent of businesses have seen an increase in the average number of days it takes for a bill to be settled after invoices fall due, while only 8 per cent had seen a decrease.

Phil Orford, the chief executive of the FPB, urged the Government to speed up its efforts to tackle late payments. “Responses to the Government’s late payment discussion paper revealed ample ideas for tackling the issue in a more robust manner, including the reintroduction of compulsory reporting of company payment terms and practices, and annual checks for Prompt Payment Code signatories,” Mr Orford said.

“It is essential that the Government uses the recommendations to introduce effective measures and accepts that it not only has a responsibility to play in this area but also that its increased action can act as an important catalyst for better payment practices.”

Aim rally at a peak thanks to Isa move

The remarkable recovery of the Alternative Investment Market is continuing, new data has revealed, with London’s junior stock exchange raising more money last month than in any month for almost four years.

Broker Allenby Capital reported that Aim-listed businesses – both new issues and existing constituents – raised £1.15bn during March, the largest sum since December 2010.

New joiners to Aim have already raised more this year – some £1.3bn – than market debutants picked up in the whole of 2013 and the number of companies on the market has begun rising again after several years of decline.

In March, 12 businesses joined Aim while only six left. The total number of companies with a listing now stands at almost 1,100.

Matt Butlin of Allenby Capital said the recovery on Aim also extended to trading volumes, which are up by almost 40 per cent on last year. “We believe the pick-up in volumes is due to the recent changes in rules that have enabled Aim stocks to qualify for inclusion in tax-free individual savings account wrappers,” Mr Butlin said.

“We also feel that the larger-than-expected increase in annual Isa allowances to £15,000 from this month onwards will assist in improving volumes and an additional boost is likely given that stamp duty on Aim stocks, usually 0.5 per cent, will be scrapped from the end of this month onwards.”

Small Business Person of the Week: Guka Tavberidze, Founder of SaVse

“The inspiration for my business was the smoothies my mother made at home when I was growing up; when I left home I couldn’t find anything to match them so I started making them.

“The difference between our smoothies and everything else on the market is the way they are made – other producers heat-pasteurise their drinks, but that degrades the nutrients, so we use a cold-pressure technique that keeps the ingredients raw, fresh and healthy.

“It’s been a steep learning curve. I had no experience of running my own business until I launched SaVse last year. I was fortunate that Selfridges decided to stock our smoothies and since then we’ve been picked up by Harrods, Planet Organic, Whole Foods and Waitrose.

“We’re also close to doing deals with Tesco and Sainsbury’s. I really believe the secret of pitching to these retailers is to understand that first and foremost they’re buying you rather than your idea.

“We’re hoping turnover will reach £2m this year. The business is growing remarkably quickly, but there is so much more to do – we’re developing different bottle sizes and new products, all the time. We’re a family business – I work with friends and family and I was lucky to secure funding from my uncle. Our family is originally from Georgia: savse is Georgian for ‘crammed’ – as our products are, with fruit and vegetables.”

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