The Business World: The Internet way to find capital investors

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The Independent Online
A FEW days ago I received a wonderful offer on my e-mail. I was one of the select few who could invest in some new hi-tech American company and would, for a small stake, probably become immensely wealthy at little or no risk...

I hit the delete button pretty fast. But then I regretted it because seeking funding by e-mail seemed a novel way of trying to finance a business and it would have been interesting to find out more. In particular it posed the following question: if the new technologies are bringing about a democratisation of information, how are the capital markets faring in bringing about democratisation of capital?

One of the most important changes taking place in the business world is the increased access that small and medium-sized companies have to information, thanks to the Internet and related technologies. We are racing towards a position where a tiny one-person business can find out as much about a market, a customer or indeed a rival as can a multinational with a big research department. But large companies still have the advantage of much greater access to capital: they raise money more easily and more cheaply.

This leads to a strange irony. Big companies the world over are, on balance, downsizing their workforces, while small ones are taking on more staff. But big money backs big companies, not the small. So it would seem that capital, in general, is on the side of job destruction, not job creation. Or, to put the point round the other way, the more democratic the access to capital the more likely it is that there will be strong jobs growth.

I have been looking at some work comparing access to capital in different countries around the world, carried out by the Milken Institute in California. The main thrust of this work is to measure access to capital in an orderly and consistent way - not just access to capital by small businesses, but access to capital by the private sector in general. The measures chosen are divided into three groups: quantitative ones, risk ones, and qualitative ones. The first include things such as the size of equity market capitalisation and private sector debt relative to GDP, the concentration of the corporate sector and of banks into large companies and company tax levels.

The second look at currency, interest rate and stock market volatility. And the third group covers everything from countries' credit rating and access to foreign capital markets, to levels of tax evasion and corruption, and risks of expropriation.

The result? Well, unsurprisingly the US comes out top and Russia comes bottom. More surprising, perhaps, is the top rankers behind the US: Switzerland, Hong Kong, the UK, the Netherlands and Singapore. Of the rest of the G7 countries, Germany and France do reasonably well, Canada is in the middle, while Japan and Italy do relatively badly.

League tables, in this area as in so many others, need to be taken with a pinch of salt, and it is easy to quarrel with some of the measures that have been chosen. The list does rather reflect an "Anglo-Saxon" approach to finance. Still, there are some interesting lessons for the UK, aside from the generally encouraging message.

For a start there is the benefit conferred on us by language. I don't think it is a coincidence that in the first six countries English is either the main language of the business community or is widely spoken. Is language related to access to capital? Well, yes, in the sense that the capital markets operate globally on a single language standard and it makes it easier to access those markets as all the information is automatically available in English.

This will become yet more important. At the moment the international segment of the financial services industry is big ticket land. We are still only in the very early stages of developing an international market in venture capital. Any small company here wanting to raise funds is really lumbered with the UK providers - the costs are high and there are holes in the system.

Question: will the hunt for small potential growth companies to back (at present largely a national sport) go global? There are two ways in which it might happen. The conventional path would be for the present largely national organisations operating in venture capital to set up international operations.

They do to some extent already: 3i does business in continental Europe and a number of US venture capital groups are now in the process of setting up overseas operations. The progress is uneven and "top-down" but it is easy to see a more global market developing.

The other path would be more bottom-up, driven by market laws of supply and demand rather than the executive decisions in the boardroom. If you can have a global market for information on the Net, why not a global market for venture capital on it too?

Now there are enormous dangers here. Most obviously if people are lured into investing without proper safeguards, a lot of them are going to lose a lot of money. But in as far as the new technologies enable like-minded people to reach each other, so they should be able to help to introduce owners of capital and seekers of capital. Think of a giant classified advertisement market rather than a conventional capital market.

This is to take democratisation of capital far beyond the scope of the Milken Institute study, which essentially looks at the effectiveness of conventional financial channels.

I am not suggesting that the new technologies present a quick fix for companies seeking to raise funds by bypassing those conventional channels. What I am suggesting is that, first, anyone in the venture capital business needs to think of the Net as a new way of hunting down investment opportunities; and second, that anyone seeking to raise money should think of the Net as another way of finding potential investors. For the big idea - that the more democratic a country is in providing the widest possible access to capital, the most successful it will be - must surely be right.

That does not, however, mean you should treat an e-mail investment offer any differently from the flood of paper offers that come in through most people's letter-boxes.

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