Gosh what sort of pipe dream is this? A world free of these “B”‘s? Well, maybe not entirely. The UK over the past few decades has seemingly gone out of its way to make the finance and funding of smaller businesses considerably more difficult.
Despite the platitudes of the politicians of all parties, very few of them have any real understanding, or come to that any experience of having to fund start ups and smaller developing businesses. It’s takes a certain courage, or is it foolhardiness, to go down such a route. But nonetheless these are the entrepreneurs that should be the driving force for the next generation of our economy.
The good news is that there is now a record level of new starts in the economy, and not just as a flash in the pan as a result of government cut backs, but rather reflecting changes in technology, social attitudes and the sheer bloody mindedness of those willing to have a go themselves.
However, all of that will count for naught if we cannot re-build an effective funding mechanism for these entrepreneurs. Some would criticise the banks, but their job is not to provide capital but rather cash flow support – mind you, many would argue they can’t even do that reliably any more. So many turn to their families as a traditional source of investment, but that can all too often ends in tears. Of course we have the private equity and venture (or sometimes vulture) capitalists, but their aims for “rocket propelled” success are often over too short a period and at too high a hurdle rate of return.
No, what we need is access to longer term investing capital by way of both debt and equity. In days gone by we had the regional stock exchanges; in fact, back in 1945 we had 45 of them scattered around the United Kingdom and Northern Ireland. Most of these were fairly useless but a core of them were very effective at fulfilling the primary goal of a stock exchange: not to trade shares and bonds (that is a secondary issue) but rather to raise local money for local businesses.
Sadly, they closed down as they had little trading volume which was hardly surprising as smaller local companies don’t trade very often and contrary to popular opinion, private shareholders are rather loyal and rarely day trade their investments. In fact, the average investment period for an individual investor is usually five years, which is a period far more acceptable to companies than the short term private equity hunters.
So where to turn now? Some have talked about crowd-funding, but in my view such populist investment structures mixed with unchecked companies and unsophisticated investors can lead many down a dangerous path of losses and failures. I believe what is needed is a return to more old school evaluation disciplines where companies coming to the stock market and potential investors are both vetted and validated. This needs to be managed through a group investment hub and platform. In effect what would be created is a smaller form of stock exchange but with the trading aspect taken away until the investments have matured over time.
Just imagine if this were done on a regional basis so that significant pension holders could take a proportion of their pot for local investment. Thus for a region, if they could locate one thousand investors with ten thousand pounds to invest in their local companies, then that would be £10 million invested in a region – without banks, without bowler hats, but with maybe just the occasional pair of red braces.