British Business Angels Assocation Annual Conference
Baroness Shriti Vadera, Minister for Economic Competitiveness and Small Business (jointly with Cabinet Office)
Brands Hatch, 19 June 2008
Thank you Anthony and congratulations on the work you’re doing through the BBAA to strengthen the UK business angel sector. I’m delighted to be able to join you here this morning to discuss a subject that is central to the UK’s competitiveness and that has been close to my heart for 10 years.
In a fiercely competitive global economy, the UK needs to retain its edge in terms of productive churn, innovation and the challenge to discover the next global leaders “game-changers” as some call them.
And so enterprise, by which I mean starting a business and growing today's businesses into tomorrow’s leaders, is central to our future success as an economy.
We have one of the most highly developed and sophisticated financial markets in the world, despite recent disruption and the continued global credit crunch. Over recent years we have grown into one of the best places in world for raising finance.
But we also recognise that market failures do exist in the so-called “ladder of finance”. A gap exists in equity markets because the costs of making smaller investments is often disproportionately high. In addition, venture capital is moving up-stream, leaving a gap in the critical area we require for the growth of innovation and enterprise.
In 2005, private equity investments in the UK were two-thirds higher than 2003 levels. Going back further, total funds invested in the UK rose by more than 200% between 1992 and 2004.
However, whereas total funds increased by 200%, the number of UK businesses invested in increased by only 13%. And the total value of equity investments made to businesses at start-up and early-stage is estimated at only two and five percent respectively.
This highlights the increasing trend towards the funding of a smaller number of larger and more established businesses.
However, as venture capitalists shift their focus to later-stage deals with more mature and larger businesses, we are seeing angel investment pick up some of the gap at the earlier stages.
Where venture capital invests in start-up and early stage businesses in the hundreds every year, business angels invest in the thousands. Injecting around £1bn a year into at least 3,500 businessses. And we are seeing an increasing number of syndicates and networks being established with more collaboration with early stage fund managers – something that is very apparent in the mix of people here today.
You are increasingly significant contributors to the growth of enterprise in the UK.
And you invest more than just your money, you invest your time. As we know, all too often young and growing businesses are unable to take advantage of the range of finance available because they don’t understand what finance they need what financing methods are available to them or have the skills to access them even if they did. If we didn’t know that already, then dragon’s den has surely taught us that.
That is why there is huge value attached to the expertise and mentoring that business angels provide and where you have such a critical role to play.
Your role is much deeper than that of other finance providers. Entrepreneurs value the knowledge and experience that business angels bring, at least as highly as the funding they provide.
This is important because we know that small businesses in the UK are less aware of the possibilities of risk capital in particular than their US counterparts and negative perceptions of equity finance frequently deter businesses from seeking it.
There is also reluctance amongst many businesses to cede ownership to third parties. Of the businesses considering equity finance, only one third consider themselves knowledgeable about how to go about it – and I think that’s probably an optimistic assessment.
Government has sought to nurture and support the angel market in a number of ways.
Since its inception the enterprise investment scheme (EIS) has raised over £6.1bn, enabling investment in more than 14,000 smaller, high-risk companies. Alongside EIS, venture capital trusts (VCTs) have invested more than £3.3bn in at least 1,500 businesses.
Alongside this year’s budget we sought to stimulate further investment by increasing the amount eligible for income tax relief in EIS from £400,000 in any one tax year to £500,000. And the Treasury’s consultation on how to simplify the operation of the scheme to make it more accessible to investors and businesses closes tomorrow. I know that colleagues at the Treasury are grateful for the pro-active & constructive input to the consultation from the BBAA.
However, as we all know, there remains a systemic finance gap to smaller higher risk businesses. This is why government has also put in place measures to increase the supply of finance to start-up and early-stage growth firms.
Since 2000, we have supported programmes to address the equity gap through a variety of funds you’re all familiar with. The regional venture capital funds, early growth fund, high-technology fund and most recently we have been focusing on the enterprise capital funds have provided an injection of around £700m into the early stage market.
In our Enterprise Strategy, published with the budget this year, we announced a package of measures to build on these initiatives. Capital for enterprise limited has been established to manage over £1bn of existing government venture capital and loan activity.
As you will all know, the 3rd round of enterprise capital funds is now underway and we have provided an additional £30m though the programme to stimulate the delivery of mezzanine finance.
At the same time we increased the amount of bank lending available under the government’s small firm’s loan guarantee by £60m to a total of £360m this year. And we have made the scheme more widely available, not just to start ups but also to businesses over five years old with growth aspirations. And we continue to look for innovative ways of increasing the flexibility of government funding into the finance gap.
I therefore encourage you all to explore ways of working in partnership with banks and other lenders to develop innovative ways of financing the needs of small business - I look forward to seeing proposals as part of this ecf round.
But just as the injection of capital is only part of the offer of a business angel, so to is it for government. We recognise that if the UK’s small businesses are to grow they require support to make themselves investment ready. So that they understand the how they can access finance and investment.
In the autumn we will be bringing forward a national investment readiness framework within which all publicly-funded readiness support will be delivered. Working through the RDAs will want to see better designed, better targetted and better connected programmes.
We will set out the minimum level of support that should be available across the country and will contain four key elements:
- Awareness raising of financing options;
- Coaching and skills to develop a robust finance strategy;
- Helping entrepreneurs prepare their propositions and pitches for finance;
- And importantly, access to potential investors and networks.
Of course government cannot deliver this support on its own. It needs to be seemlessly integrated into our equity funds and it needs to be developed in partnership with people like you - individual business angels, syndicates and early-stage growth funds.
We want to test this framework through informal consultation over the next few months and we want would welcome your contribution.
Let me emphasise that the new enterprise strategy is not the final word, but the next steps in a long established agenda which we will drive forward over the next few years. We are already embarking on a refresh of the evidence base to establish whether the boundaries of the equity gap have changed.
Our ambition is to make the UK the most enterprising country in the world. If we are to achieve this, we cannot be complacent. To secure an effective “ladder of finance” that growing businesses in the UK have the ability to access we must work in partnership - government, banks, investors, angels and businesses themselves.
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