10/09/10

By Julie Meyer

Economics and trade will help lift millions out of poverty.

Capital efficient financial services will drive the new economics shaping the post-financial crisis world order. Microfinance organisations such as the Grameen Bank in Bangladesh as well as the Fredericks Foundation in the UK will lift millions of people out of poverty.

In David Cameron's universe —and mine — economics trumps politics. Growing the economic pie offers opportunities to more people, solving inherent disequalities which create political and social issues. Those countries who will enjoy ascendancy in this century will act on this.

Here is where the UK can punch above the weight of its population. Who — if not the Government — will regulate the pandemonium of market-based economies in the 21st century? The individual. Deny people anywhere, from Iran to the North East of the UK, an economic opportunity, and you will see unrest. Enable them with capital-lite financial services and they will be too focused on making money to create problems.

Trade will stop the wars, neutralise the tyrants, and silence the troublemakers. Everyone wants a better future. You can't outsource that dream to anyone; you can only own it for yourself. Good fortune then that the UK is good at the new finance. Our "unfair advantage" will be trusting in the "bottom up" nature of things to come, enabling the mass market with capital-lite finance.

From zero to £150m

The United Kingdom is good at building frameworks for the next paradigm shift in financial services. Witness the rise of Monitise, the mobile banking company, from zero to £150m in market capitalisation in seven years. They are backed by Visa, Standard Chartered, PCCW, and have deals with Carphone Warehouse and ICICI. Once in a generation, a company aims to transform the way that we will live, so it's worth just stopping to think about the shift that it will engender.

From any bank account, via any phone, with any mobile carrier, you can transfer funds, pay for things, and check your balance. That proposition can't be beaten. No stored value card. No PayPal. I don't want to change my behaviour; my phone becomes the remote control to my finances.

The genius of Monitise is that it organises the business model for all of the players who participate in the transaction that they engineer.

Britain does Big

Part of the reason that the average, fearless 28-year-old individual capitalist who is setting out to build their new venture thinks big is that they know that Britain can do big. Indeed, it has been "doing big" throughout its history.

We owe it to those creators of the next big thing to suspend disbelief and negativity, to find our optimism every morning, and to don the cloak of "early believer" and help their success in every way that we can. It's actually very simple — follow the entrepreneur.

The role of the venture capitalist is to follow the entrepreneur. Not to try to put the entrepreneur under their thumb or to control the company, but to channel the enormous energy and obsession which drives an entrepreneur. Nothing trumps founder passion.

New models of Vc

Enterprise Ventures or EV, as they are commonly called, is a pan UK investment franchise that is focused on providing venture and growth capital to UK SMEs. It may be the new 3i, but with entrepreneurial flourish. It has around £120m currently under management with £50m of total funds under management specifically focused on UK early-stage technology deals, an area where EV is growing. EV's Growth Funds are led by Jonathan Diggines, one of the venture industry's leaders with 25 years' experience. EV was recently appointed fund manager of the Finance Yorkshire Seedcorn Fund, a £15m fund specifically aimed at providing funding to pre-revenue, high-risk early stage innovative technology and knowledge-based businesses based in Yorkshire.

It invests up to £780,000 and is building on its success in investing in the early stage technology market in the South Yorkshire region. It will also manage the £30m venture fund element of The North West Fund, and closed a £20m fund in mid 2009, which saw its funding capabilities extend to up to £2m in deals at all stages in business development.
But "entrepreneurs backing entrepreneurs" is the new mega-trend in venture capital. Those who have been in the hot kitchen of building a business are best placed to teach the chefs of the next generation. A growing breed of start-up investors dubbed "super angels" is rapidly raising new money — and ratcheting up competition with established venture capitalists in the process. Many super angels started out just as mere angels, wealthy current and former Silicon Valley entrepreneurs and executives who invest their own money in technology start-ups. This trend has come to Europe in a big way.

Private Debt or Private Equity?

While everyone complains that the banks aren't lending, a number of new debt providers have found the lending to SMEs sector to be lucrative.

Since launch in 2003, BMS Finance has backed nearly 40 individual private companies. They focus on deal sizes between £0.5m and £5m. They are sector agnostic but prefer businesses with an element of technology sitting behind their core offering. Currently, with £26m under management, they are currently looking to grow their book and have capital to deploy. They look at tangible and intangible assets which enables them to help a company leverage assets that traditional lenders are not willing to consider (such as IP). Unlike banks, they do not have fixed, defined criteria for lending that puts an emphasis on the past three years' performance, which is inappropriate for growth businesses. BMS focus on more recent trading history, the future potential of the business and the quality of the management team.

Launched this month, Funding Circle is the first ever online marketplace to enable savers and investors to sidestep banks and directly lend to small businesses in the UK. In the first week of trading, they completed a loan, secured 400 members, and lenders have transferred £300k to lend to SMEs. In the UK, large companies can access bondmarkets before considering equity investment. However, SMEs currently don't have this luxury so often turn to equity investing for projects whose risk level is more in line with debt finance.

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