Monday 4th December 2006
Evan Davis
Out on your own
Evan Davis, presenter of BBC TWO's Dragons' Den and the BBC economics editor, believes there is no use complaining about the struggle to raise finances when starting up a new company. For Davis, it's simply part of the entrepreneur’s lot.
Money moves around in quantities too large for most of us to comprehend. The annual turnover on the London Stock Exchange is about £2.5 trillion, (over £40,000 for every man, woman and child in the country). UK banks have assets of £5.5 trillion. Currency worth £1.2 trillion is traded every day. And by taking small commissions on transactions involving such large volumes of money, the City makes billions for its well-paid staff, and for the economy more generally. Even though a lot of the money handled by Britain’s financial sector is international, the UK financial institutions still operate at the core of Britain’s national financial system, that is, the real economy. There’s no point in trading shares if there are no companies in which it’s worth owning them. So, the flourishing financial sector has to sit on the foundation of non-financial wealth creation. Old businesses producing things, and above all, new businesses inventing them. And yet, compared to the sums handled in the city, the scale of investment in new businesses is surprisingly small in the UK. According to the British Venture Capital Association, only 491 new businesses were given venture capital finance in Britain in 2005. It amounts to a total of £382 million - about three quarters of a million pounds per company - either as start-ups, or as early stage investments. Now that is not very much funding for start-up businesses. £382 million amounts to 0.03 per cent of our national income, or £6 pounds for each person in the country. Not much relative to the £5.5 trillion in the banks.
Sure things
In fact, even the venture capital industry itself invests most of its money in management buy-outs and private equity investments that do not finance early stage companies at all, but merely change the ownership structure of established firms. Clearly, money is a binding constraint on the ambitions of most entrepreneurs. Some would read all this and assume something is wrong. The economy is mis-directing its resources, they would say, and failing to support entrepreneurs. And it’s certainly true that Britain needs more than 491 new businesses a year. Fortunately, there are other ways to start up a company than to secure several hundred thousand pounds from venture capitalists. Young entrepreneurs find the money to get going from sources other than professional investors. They beg from friends and family, they spend their inheritance, (or their children’s inheritance); they use their lavish divorce settlements; they re-mortgage the house; they subscribe to one of the three thousand government support schemes for small firms. Or, they go on Dragons’ Den.
Evan Davis
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