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VC is no Order Of Merit

Updated: Aug 30, 2022

As the Coronavirus Crisis continues, SMEs which make up the bulk of the global economy are denied access to many of their markets and worldwide government intervention can only go so far, for so long, towards mitigating the hardships which will ensue.

The state funded measures, welcome as they undoubtedly are, address the most pressing present needs rather than structural issues. I thought it worthwhile to take a look at why this is and what should and could be done about it.

In recent UK history, governments have preferred to look to Private Equity, Venture Capital, Peer to Peer and Business Angel's to meet the funding requirements of SMEs, as large institutional lenders failed to address this market post 2009, despite having received very large bailouts themselves. The latest round of Business Bounce Back and other loan initiatives represent a very welcome change of heart, the result of some moral persuasion from the Treasury.

However, governments continue to confuse an SME with a Startup and private lenders shy away from the sort of commercial finance necessary to underpin a growing economy. If you are a Biochemistry PHd working in oncology research and you have synthesised a new cure for cancer, there are numerous organisations wishing to help themselves to a share of the returns accruing from your hard work and intellect.

The same is not true if you want to run what is derisively termed a "lifestyle business". However the bulk of the economy is made up of these businesses and to deny them access to funding, assuming they are viable, is short sighted in the extreme.

This is a historical misdirection. Two decades ago, Venture capitalism rode the wave of the bubble and although some caught a massive cold, other funds became so big they no longer needed to source capital from high net worth individuals greedy for instant gratification, but could work for large institutions, putting together portfolios strategically managed for long term growth. This resulted in a two tier system, with the big guys at the top and a devil takes the hindmost, Dragon's Den approach at the bottom.

In 2002 came a combination of events, a crash in stocks, liquidity and a drop in property prices, which reduced the tax take. Whether intentionally or not, governments and finance institutions adopted courses which changed the market dynamic. Credit was opened up for property internationally at the same time as, for example, tax relief on UK pensions was extinguished by Gordon Brown. So, in the UK, a large number of chattering class entrepreneurs got into Buy To Let. This suited the government as it meant they did not have to invest to meet their social housing targets, simply increasing state housing payments to pay off the private landlord industry it had created.

Housing benefit payments grew and private landlords got rish. Then, following the 2009 crash, George Osborne decided he had to raid the kitty he had created, by taking away Buy To Let landlords' right to deduct repayment interest against taxable earnings, thus setting them aside from every other form of business. The Chancellor giveth and the Chancellor taketh away.

So the smarter, or greedier, of those who had amassed equity from the Buy To Let arrangement took cash out and put it into Private Equity schemes. A network of Business Angels could get together and invest in scalable startups with tax breaks which meant if they cocked up totally the loss was no worse than the first year depreciation on their new cars. The upside being, if you made it big on the surging economy you could ensure your pension was safe. Even better, startups were the new property ladder, with TV programmes, books, news and digital channels devoted to glorifying the new high priests. One government subsidised ego trip had replaced another. Meet the new boss, same as your old landlord, to paraphrase The Who.

This is why we have a VC system focussed on getting richer quicker by finding the next Tesla, Amazon, Facebook or Google. Profits are not the measure of success, but what the next person in the chain thinks of your post funding valuation. Organic sales led growth is of little interest to these networks as they search for the next Unicorn.

That is not what is needed. If we want to trade our way out of the economic and social effects of Coronavirus, we have to translate the rules of business to suit a new landscape, where physical goods are delivered without physical interaction, services are delivered remotely by people you have to trust without looking them directly in the eyes and 121 is replaced by one to many. If you are a hairdresser, service engineer or shopkeeper, you have access to subsidy but nothing which moves your business forward to a model of engagement for the future.

We have the somewhat ironic situation where Donald Trump and Boris Johnson, both elected on capitalist tickets, are presiding over the largest state intervention in the economy since the creation of the National Health Service. There is not, however, any sign of a government sponsored initiative to foster the services which emergent SMEs need:

  • High Speed Broadband

  • Business Rate reform

  • Simple, low cost, open Payment Transaction Processing

  • A framework for service delivery with infection control, including free PPE

  • Public works infrastructure investment

  • Business Education

International governments have opened up banking and made state backed finance open to SMEs as well as making herculean efforts to provide income for furloughed staff and the self employed. This is welcome and necessary, but this is an aid package, not an investment and the final word on aid is, “give a man a fish and he can eat for a day. Teach him to fish and he can feed himself for life.”


Jeremy Nicholson, Screen Matrix 2020

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