Dragons’ Den’s Evan Davis: Why entrepreneurs need to jump higher to raise finance
If you’ve found raising finance tough, the BBC’s economics editor Evan Davis has two words: try harder
Money moves around in quantities too large for most of us to comprehend. The annual turnover on the London Stock Exchange is about £2.5trillion, (over £40,000 for every man, woman and child in the country).
UK banks have assets of £5.5trillion. Currency worth £1.2trillion is traded every day.
And by taking small commissions, the City makes billions for its wellpaid staff, and for the economy more generally. But even though a lot of the money handled is international, the UK financial institutions still operate at the core of Britain’s national fi nancial system – the real economy. There’s no point 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-fi nancial wealth creation. Old businesses producing things, new businesses inventing them. And yet, compared to the sums handled in the City, new business investment is surprisingly small.
Venture capital backed
According to the British Venture Capital Association, in 2005, only 491 new businesses raised venture capital. A total amount of £382m, (which amounts to about £750,000 per company) either as start-ups, or as early stage investments. Now, that’s not very much funding for fledgling businesses. £382m amounts to 0.03% of our national income, or £6 for each person in the country, not much relative to the £5.5trillion in the banks.
In fact, even the VC industry itself invests most of its money in buy-outs and private equity investments that do not fi nance early stage companies at all, but merely change established firms’ ownership structures. 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 misdirecting its resources, they would say, and failing to support entrepreneurs. And it’s certainly true Britain needs more than 491 new businesses a year.
Risking it all
Fortunately, there are other ways to get going. Young entrepreneurs beg from friends and family, spend their inheritance; use lavish divorce settlements; re-mortgage; subscribe to one of the three thousand government support schemes. Or, they go on Dragons’ Den.
Entrepreneurs routinely open themselves to financial ruin by putting all their eggs, and those of their family and friends, in one basket. Now, there are two responses to this. One is to feel sorry for entrepreneurs. But the other is to remember that part of the skill of being an entrepreneur is to overcome and manage financial constraint. And there are three obvious things that the likely winners inevitably do to manage capital.
First, they sequence early activities to ensure they economise on capital. They don’t order 100,000 widgets when for a much smaller sum, they can order 100 and get a steer on whether the next 99,900 will sell. Second, they put their own money into the business. Not because it’s sensible, but by doing that they can persuade other people to believe in their business. And third, they raise some money externally when they need it.
Many entrepreneurs fail on one point or another. They think they need more money than they do, so don’t economise on capital. Or, they ask for other people’s money without committing enough of their own. Or, they fail to accept external finance, in the expectation they can run the business alone, without having to share it.
All classic entrepreneurial mistakes that testify to the fact, it should never be made too easy to finance a business. If money is the problem, the answer is not for the world to lower the bar for entrepreneurs; it is for entrepreneurs to jump higher.