Financing business expansion – Iain Cameron.

20140610-183953-67193678.jpg is very lucky to have a third guest blog from Iain Cameron who worked for 25 years in the Department of Trade and Industry and Cabinet Office. He also worked for over ten years on business improvement in the UK automotive supply chain. Recently he has been developing a start-up, Industrial Strategy Communications and has worked on projects with Oxford University, the UK Commission for Skills and SMMT Industry Forum. According to Iain: “Andy Lane suggested that I write about new methods for financing business expansion as it is an issue which is constantly raised by Industry Forum customers. I produced a piece in my monthly series of articles for IF. Then in June I had a chance to attend an excellent conference on the UK equity gap at CEEDR at Middlesex University. This became a piece for Tech City Blog.”

On Tuesday morning (3 June) I went to a great conference at The Centre for Enterprise and Economic Development Research (CEEDR) at Middlesex University. It is a leading academic research centre for small and medium sized enterprises (SMEs) and regional and local economic development. A major area of CEEDR’s work is SME development including high growth SMEs and SMEs in the low carbon economy. Recently they have been working on finance issues for SMEs, including finance gaps. Accordingly, the conference was called: Financing SME Growth in the UK: Meeting the Challenges after the Global Financial Crisis.

It has long been recognised that the UK economy includes a financing gap for start-ups and small firms who struggle to find finance for expansion. The German economy, in particular, has been much more effective at bridging this gap as its financial system is less centralised than the UK’s and is better able to develop positive relationships with smaller firms. The US economy has grown a powerful venture capital sector with deep knowledge of digital technologies and a focus on small firms rapidly developing into global majors. It emerged on Tuesday that previous attempts in the UK to match the US in tech focused venture capital had been disappointing. The aggregate return on these investments turns out to have been close to zero.

The Coalition has set up the British Business Bank as a response. This brings together various existing support schemes but it will have about £1bn of new money. This won’t be fed directly into SMEs.

The BBB will act as a wholesaler and will seek to multiply up the impact of its investment by working with partners who will deal directly with small firms. This arrangement echoes aspects of the German approach.

The really exciting part of the conference concerned what is rather misleadingly called Peer-to-Peer (P2P)finance. A more familiar term is crowdfunding and P2P covers equity-based, rewards-based and loan-based crowdfunding. P2P is relatively new and researchers are still getting to grips with some key issues like what the average rate of return in this sector might turn out to be. However it is clear that the rate at which P2P is growing is amazing. Many P2P firms seem to be doubling their investments every six to twelve months. The UK is certainly the global leader in equity based crowdfunding with the two leading firms operating different models.

This kind of growth is only possible because a much larger community of small investors is prepared to trust the new P2P financial institutions. This is remarkable given that public attitudes to conventional UK financial institutions has plummeted after the problems of 2008 and shows no signs of recovering.

There a number of reasons why this has all happened. Firstly the UK public has become utterly familiar with on-line purchases and now trusts these new channels with its money. Secondly the availability of decent conventional savings investments in the retail sector has collapsed and many retail investors feel stung by a prolonged period of low rates earned on their savings. The BBC programme Dragon’s Den must have also spread the basic concepts of equity investment in start-ups and what the key investment criteria might be.

It has been suggested that the new P2P finance sector is concentrated in the Oxbridge London triangle – the area which has selected as the zone for the new officially backed initiative, Medcity, which aims to bring international investment into innovative firms using life sciences. This raises the question whether P2P is yet another economic phenomenon increasing the North-South divide.

Indeed at the conference the question of how Wales which is one of the poorest parts of the UK
could access this new source of finance for business expansion.

A little reflection suggests that the triangle concept may be over simple. For example with Heathrow on the West of London and beyond that the existing high tec corridor along the M4, it would be surprising if P2P was not utilised already in that zone and set to expand. Guildford is another centre of hi-tec and high value-added service activity. Rewards based crowdfunding is particularly well suited to creative projects and so it is to be expected that Brighton is already involved in the P2P movement. For decades that town has led rather than followed trends.

North of Oxford along the M40 in the South Midlands there is already a powerful cluster of innovative manufacturing and business services firms. Birmingham, Warwick and Coventry universities each has a great track record of innovative spin-outs and the JLR Gaydon Technical Centre is a vital source of innovative business. Birmingham as a city already has a good record of entrepreneurship and a strong civic tradition of business support. Motorsport Valley extends into the East Midlands and the innovative impact of Cambridge and Cranfield must surely stretch up into the East Midlands.

An important point made at the conference is that P2P is not a complete answer to the small firmfunding gap. The gap is a complicated phenomenon and the shape of it has been shifting. But P2P is very relevant to start-ups and early stage business and a significant extension beyond the traditional funding source for such firms – friends and family.

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