Proudly the most admired Lid Dem at one time, Vince Cable, announced another bucket of money to stimulate small business. Of course I am all for this but this is going t be a tragic waste of money. I thought Vinnie was brighter than that.
Vinnie’s plan will not start until something like 2014 which is the first problem. Why wait so long? Perhaps it is because by that time most of us will have forgotten about it and gone for the real alternatives. More realistic is that it takes that long to build the bureaucracy and systems needed, besides, by then, it looks like Vinnie may no longer have control.
Which brings me to the next problem, which is that the scheme is planned to go through the banks. This means that a range of dubious bank managers (judging by the ones I have met recently – they certainly are not the same kind of bank managers we used to have) will be judging the plans. No doubt they will be assisted by anonymous bureaucracies will hidden from any of us, so the decisions cannot be discussed. If, and this is a big if, they provide the funding, then they package the deals and sell them off to the government or investors. Brings back memories of 2007 and all that – this is exactly what went wrong then.
The biggest flaw is that most new businesses do not need loans. What they need is equity and this is more tricky. This is the real risk capital of the company but is also is where big returns can be made. The problem for young companies is that they need the cashflow desperately, the cashflow to pay salaries, develop software and systems, to buy equipment, etc. Interest on loans puts a serious dent into these cashflows.
So the answer to Vinnie’s challenge, which is how to stimulate new business, lies in finding ways of stimulating equity investment. Venture capital is nice for larger companies, but does not work for startups or even small companies. It is one of those areas which sets us apart from the US, where there is much more interest. This is unlikely to change anytime soon, as we have been talking about it for years. Besides, the regulators put too much cost on this sector to enable it to deal with small companies and startups.
The new way to raise equity is crowdfunding. In the UK equity crowdfunding is well ahead of the US, where the regulations do not allow it – yet! The JOBS act opens the door early in 2013 for the US to catch up. While we are ahead Vinnie needs to stimulate crowdfunding, which, to be fair, he is trying, but not hard enough. At the moment it is largely lip service to this burgeoning industry.
Crowdfunding is a simple extension of the friends and family model of investing in small businesses. Rather than the rather small and limited friends and family group investing small sums in new businesses, it allows a wide range of people to invest.
If Vinnie really wants to stimulate small businesses, he must stimulate equity crowdfunding. Encourage the FSA to be supportive, encourage the banks to be supportive and encourage VCs to be supportive. That alone is a full time job, but more rewarding than another complex bond scheme. Only by encouraging crowdfunding will Vinnie be able to conquer the economic dilemma he faces.