Money, Money, Everywhere But Where's There Some For Me?


Posted by MalcolmEvans on Friday 20th of May 2011 | 1 Comment(s)

People are so prone to latching-on to what's happening in the States and regurgitating it wholesale on Linkedin and Twitter and various blogs as if things over there are directly mirrored onto the UK Tech scene.

The U.S. is very, very rich. It has a vast internal market and, when it comes to Tech, dictates a lot of the world markets. This is true in both the bad times and the good times - and the U.S's bad times (for the corporate world at least, whatever of its huge underclass of permanently poor citizens) are a lot shorter and shallower than they are for a lot of us elsewhere.

An overhang of investment capital is currently sitting over a frothy leading edge of social media evolution and over the accelerating convergence of communications and entertainment. Prices are being driven up and start-ups are finding it easier to obtain capital.

And I keep hearing these stories day after day as if this is the reality in Manchester's Northern Quarter, or down in MMU's Innospace incubator, or for all Manoj's mates.

It isn't. It's time to get real. There is a series of major business finance events rolling there way across the NW at the moment. Merseyside's was last week, Manchester's and Lancashire's are in a couple of weeks.

Behind the stories of banks needing to lend more and talk of various new funding iniatives, we need to step back a little and take stock of what is actually happening in the UK in a structural funding context, before we become totally beguiled by the stories re-tweeting in from the U.S.

The Liverpool Chamber-hosted seminar of the British Bankers Association was both very real and also slightly surreal.

It was very real in that a succession of very senior banking figures spoke frankly and reflectively about where things had gone wrong in the past and about their determination that they would not do so again.

It was slightly surreal in that there was a gigantic elephant in the room – but I am not sure that enough people, particularly those in government, even properly realise its presence and its size in the context of the current banking debate.

Let’s begin by being clear about what happened a few years ago now. Property in the UK was horribly overgeared. The UK Public Sector was ludicrously overgeared. Large UK companies were overgreared. The SME sector was moderately overgeared.

To some extent the banks, which one must remember exist as providers of lower-risk debt, had drifted into quasi-venture funding to SMEs. Pressures for relentless growth within newly aggressively expansionist banking giants led to more relaxed flows of money into SMEs.

The process was fuelled by a feelgood factor of general growth and the relentless enterprise rhetoric of the age.

Then the U.S. bottom-end housing market tanked, Wall Street’s vendors of explosive rip-off instruments (sorry, “derivatives”) wobbled, the shock waves smashed into Europe and the sudden shutdown of wholesale credit markets brought the whole vortex of upwardly spiralling debt shuddering to a standstill.

It is worth revisiting these facts as they are already becoming distorted as they apply to growth capital for younger and smaller enterprises.

The banks were not brought to their knees by failing small and mid-sized businesses, although they suffered losses from having too much money, of too high a risk profile, out into this sector. Global credit restrictions and dangerously thin balance sheets were the immediate causes of banks’ plights. Consumer credit, property purchase credit and major corporate over-gearing were much bigger factors than anything in the SME markets.

However, the banks had become looser in their lending to smaller businesses. They had drifted from very clearly definable debt into a fuzzier world of betting on growth stories. It was a market they didn’t really plan to be in and it is certainly one which they don’t plan on re-entering anytime soon.

But, whilst this rebalancing of SME lending practice has reduced funding availability within the sector, it is also not a situation that is going to reverse anytime soon.

And this is the giant elephant – there is vastly insufficient creative thought being given to about from where funding to match the clarion calls for enterprise and growth will come.

We are becoming trapped in a sterile cycle of government exhortations to lend more to SMEs and of the banks, still very mindful of their recent reconstructions and ongoing rehabilitation, wishing to be seen to be compliant. But they are also very much not wishing to lurch back into places they should never really have been.

Hence we got last week’s scenario. There was genuine humility about past failings. Personally this does not really interest me that much – I believe that bank bashing has always been vastly overdone: there were far too many players bought into the endless growth discourse for there to be much merit in seeking a single scapegoat.

Then we were told of the recent attempts at reform. There is a long list of initiatives around transparency, customer experience and access to development and trade funding. Such things are welcome but to my mind they smack somewhat of a sideshow to the main event.

How do we seed enterprise and fund development that falls below the (high) threshold of acceptable commercial risk? That banks can make big profits does not vex me – they are businesses. On top of that they require good margins to cover even moderate risk, and that is without accommodation of the high capital reserves requirement.

Governments which demand both banking prudence and banking largesse towards riskier enterprises are being either disingenuous, or simply uninformed (or possibly both).

Another piece of muddle in the political equation is that of free trade, aka. non-interventionism, aka. light-touch regulation. Small state commitment always seem to be more honoured in the manifesto commitments than in reality by Conservatives in power (and I am a card carrying Tory).

All governments are massive meddlers in trade. From the simple extraction (and endless fiddling with) profit, employment and trade taxation, through endless regulations on activities, environment and employment, governments seem obsessed with commercial intervention. There is nothing “free” about trade at all, so any claims relating to the sancrosanctity of non-intervention are a non-starter.

Then there is the natural desire to stimulate wealth creation, employment and sustainability. The present government may have done away with Regional Development Agencies but there is a whole slew of replacement activity around Local Enterprise Partnerships (don’t get me started!).

Despite the much-heralded culling of armies of business advisors (sic), there still seems to be an awful lot of them out there……..gatekeeping, signposting, synergising and god knows what else they purport to get up to in the name of enterprise stimulation.

And now we have the re-launch of enterprise zones, proven to be one of the costliest ways to stimulate net new jobs known to humankind.

Oh yes, the state will spend a great deal of money on packing people into shiny offices in the name of enterprise support and on pumping cash into shiny new offices in the name of enterprise stimulation.

But, beyond the people packing and the shed building, what about actually heading upstream to the wellspring of great enterprise – bright ideas and capital combining to generate growth and the creation of more capital?

How is it that successive governments will do just about anything – and at huge cost – to try to stimulate enterprise growth but will fight shy of the most direct measure of all, the allocation of capital? (Let’s just park the issue of EU competition issues around business supports for a moment – we could always just take the French option, which is that if they don’t like any particular directive, they just ignore it!).

What if we took the wage bill of all those “business advisors” still met by the public purse and added on the cost of the enterprise zones and distributed that sum by competitive application to smaller companies in, say, packages of £2,000 to £10,000? A start-up might avail of a new website, a larger company of a prize pool for staff performance. Everything could be receipted and checked but not in a way that the scheme became so hidebound in rules to render it next to inaccessible and impractical (as is the wont of many state initiatives).

This is just a single, simple and seat-of-the-pants example. What we need is a detailed debate about the core business of stimulating business.

Why don’t we put capital more directly to work? Some readers may point to various new regional investment funds, the Regional Growth Fund and other more recently announced development funds.

This is to miss the point. The RDAs passed the big European business investment funds over to the private sector – they never did much themselves if they could possibly pass the actual work on to private delivery.

This has immediately neutered the potential impact of this money: there is an automatic tendency where state investment funds are administered by private fund managers for the fees to be high and for the elongation of the fund to become a primary goal. This pushes the risk profile back up towards a banking threshold.

As for the RGF, experience to date indicates that it is becoming a capital budget replacement for local authority/establishment pet local projects in a time of reduced support. This is fine: but don’t pretend that it is somehow an enterprise-breathing gust of fresh air, blowing away the dust of decay with radical innovation.

What is not fine are the LEPs themselves. They have merely concretised the existing state and semi-state relationships within their given areas. They relied on an utterly false notion of there being a cohesive and pre-constituted “Business Community” ready to mobilise and somehow capable of taking over the existing town hall structures around which LEPs have formed.

From RDA to LEP; the journey from big budget glass palaces and shed building to small budget civic worthiness…….

As for the newer business growth funds being established with bank backing, this is a broadly welcome development. But the money will be available on much the same basis as existing VC – and there is no great shortage of lowish risk business development capital in this country.

It is the access to pure risk capital where we continue to fail. Our R&D system is appalling - there is far too little and it is far too difficult to access.

And it is the enablement of whole, radical business cultures that we fail - our provision of everything to broadband, to very cheap workspace, right through to advisors who actually have advice worth giving is also appalling.

We fail to nurture our young, from which everything good must start, and we fail to provide a nurturing environment, on which anything good must rely to become great.

The problem is that we seem incapable of crossing the assumed Rubicon to a pump priming mentality. Please don’t anyone roll out an ROI argument against this – the countless millions on advice and shed building and the all the rest achieves next to nothing.

Without this somewhat looser, more creative approach, the likes of Manchester's much-vaunted digital community is never going to see any meaningful investment. Whilst only a handful of its members may have propositions which can be leveraged by traditional venture funding, the broader value of its ecosystem cannot be assisted by the current investment mentalities. These are grounds on which the likes of Shaun Fensom continue to fight a somewhat lonely battle - I fail to see who is listening with sufficiently open minds.

And this is where BRIC economies will continue to catapult ahead - state investment which carries a broader economic uplift, rather than relying on the markes, which can only identify and invest within narrow individual entities.

The only category of UK enterprise which can support the low risk profile of commercially acceptable lending/investment are enterprises which are already proving themselves capable of meeting commercially acceptable lending/investment criteria. Exceptions include the rare projects of such remarkable potential that specialist investors will take a punt.

It’s time to stop looking to the banks. It’s not their job. We need to look into our ideological hearts and start thinking about whether we dare to entrust aspirant capitalists and promising capitalists with capital via more direct mechanisms.

It’s time to stop messing about with indirect initiatives and to silence the rhetoric of enterprise platitudes from those who wouldn’t recognise a viable enterprise even if it came and knocked them out of their comfy public sector torpor.

It’s time to recognise that the UK will sink lower and lower down the economic league unless we get real about stimulating fresh enterprise and nurturing such that we have.

It’s time, actually, to start thinking the really unthinkable: it’s time to start thinking like capitalists.

So, please stop filling up my digital spaces with tales from across the Atlantic. But do join me in figuring out how our own starving regional economy can start acquiring some of the growth sustenance it really needs.

- Malcolm Evans is passionate about ideas, business growth and creative investment strategies. His personal site carries more commentary on Manchester corporate finance and broader economic development.

Comments



nicwindley's picture

an interesting state of affairs

The UK market does present us with some challenges in fostering, developing and expanding UK tech sectors which were going to need to find those tangible things to replace the gaping hole in our economy left by our reliance on other areas like financial services.

Considering our industrial period was achieved with a lot of risk, r&d and mistakes we seem to have lost some important lessons.

It's interesting seeing what happens in other regions like the US as its highlights just how far behind our tech sector is in comparison and the difference in attitude, fostering and investing in technology businesses.

What's it going to take to make it happen ?

Business Development