By Simon Acland
I'm with those that say there is not much magic in Project Merlin. As usual the devil is in the detail and the key paragraph in the banks' statement reads as follows: "Each bank's lending expectations, capacity and willingness..will be subject to its normal commercial objectives, credit standards and processes and regulatory obligations, as well as the availability of the required funding." In other words, nothing has changed.
And my experience in my 25 year venture capital career is that banks have never lent to small companies without asset backing or guarantees. An early low point in my investing life was one wet day in November 1993 visiting a clearing bank in the hard streets of Macclesfield with the CFO of a software business to try to persuade the bank not to take away our £50,000 overdraft facility just before we were about to start using it for the first time. We failed. The overdraft was withdrawn. Maybe fair enough; the company had moved into loss and had no significant tangible assets. We found another way through. That company did go on to become Surfcontrol, a member of the FTSE 250 with a market capitalisation of over £1 billion, and returned 50 times cost to us as equity investors. So in retrospect perhaps the bank made a small error of judgement — but then they were not being offered an equity return.
For every penny that the share price of RBS increases, UK plc, as the 83% shareholder, makes a profit of £480 million. As stakeholders in UK plc, perhaps start-up entrepreneurs should take some comfort from that thought, because they are unlikely to be comforted by access to the banks' lending.
The venture capital industry does not offer much more hope either. Some statistics presented at a recent seminar I attended at the Department of BIS showed that seed and start-up investment declined 50% between 2005 and 2009. Early stage investment declined 30%. Since 2005 just 1193 early stage deals of less than $5 million have been recorded by VentureSource — little more than 200 per annum.
I don't have the statistics, but I doubt that is a very different to the number of deals that were done each year in the late 80's and early 90's when I started out as a VC investor. Then for a while, in the irrational exuberance of 1998-2001, there was an absurd oversupply of early stage equity and this is when the seeds of the current difficulties faced by the venture capital industry were sown.
In those early days, some of the best investments I made were alongside experienced angels, because as entrepreneurs themselves those angels knew how to work effectively with the companies they backed. There are some encouraging signs that Business Angel investment is on the increase, and my advice to an entrepreneur raising external equity for the first time would be to try this route.
Most individuals invest less than institutions, so with an angel investment also comes the necessary discipline of making every pound of capital stretch as far as possible. It may also mean doing imaginative early deals with customers, perhaps before products are fully developed. In my experience both of those requirements can often lead to a better company — tougher, leaner, with products more closely aligned to market needs. And raising less money generally means leaving more of the equity in the hands of founders. So perhaps the relative difficulty of raising outside money is not all bad. Entrepreneurs are not entrepreneurs unless they are resourceful.
Simon Acland is a veteran investor and entrepreneur, with over 25 years' experience and 23 board seats under his belt. He has been involved with many successful trade sales, IPOs and flotations; he has also experienced failures and learned from them.