By Michael Baxter

The government wants to spend as little money as possible. What it really wants is for the private sector to get behind its public bank. And that means it wants private investors. Should they oblige?

Funding for entrepreneurs has been a problem in the UK for decades. It was an issue during the noughties boom, which is why those who think the fix to the current crisis is to get things back to what they were, are wrong.

Part of the problem lies with cultural attitudes to failure. To quote Will Hutton from his book ‘Them and US’: “The European Flash barometer found around 43 per cent of people in the UK (compared with 19 per cent in the US) believe that a new business should not be created if there is a risk it may fail.” That simple piece of research uncovers a pretty foolish attitude amongst Brits. The truth is that a new business that has no chance of failure is a business that is bankrupt of ideas, and has no chance of innovation either.

In the US failure is akin to a badge of honour, and the list of Americas who have either been bankrupt or diced with it reads like a ‘Who’s Who’; among their number are Walt Disney, Henry Ford and Abraham Lincoln. In the UK, the stigma attached to failure is such that it remains a major psychological barrier to entering the brave world of the entrepreneur.

For too long UK banks and financiers have carried that mindset. A business that has no chance of failing may have no chance of innovating either, but that is precisely the kind of business that was able to attract finance in the past.

For that reason, buy-to-let business attracted finance; companies that had the potential to be UK’s equivalent of Apple didn’t.

But then again, for truly innovative companies debt makes no sense. A high percentage of companies that have the potential to be innovative fail, and a small percentage succeed. It is just that the small successful percentage often make more money than all the failures lose, combined.

It is impossible to predict with any accuracy which companies will succeed. Predicting the winners may be more scientific than tossing a coin, but not a lot more.

I think Vince Cable’s idea of a public bank has fantastic potential to give the UK economy a sharp injection of dynamism, but only if it recognises the reality described here.

A press release from the Department for Business, Innovation and Skills stated: “The bank will operate at arms-length from Government. It will be professionally run and commercially focused. It will facilitate the provision of loans, including long-term capital, to UK firms through banks and other financial institutions. By harnessing the power of capital markets, it has the potential to transform business finance in the UK.

“The new institution will operate through the wholesale markets, it will not have any retail presence and will not displace or subsidise banks. Its role is to encourage the development of private sector solutions and enable the market to work properly, not compete with it.”

Some have speculated that the new bank will be designed to encourage this new-fangled idea of peer to peer lending. You may not know but of late there has been a rush of announcements relating to new business angel networks, following a kind of eBay type model. You may also know that the tax breaks associated with investing in start -ups, known as SEIS are considerable indeed.

All this is very exciting and represents opportunities for investors.

But my observations above are still relevant. Most start-ups fail. A small number make enough money to cover all the losses.

When it comes to investing in start-ups, investment for equity/profit shares make more sense than money for interest.

Looking at it from a macro point of view, the biggest beneficiary from the start-ups that do make it is UK plc. The tax revenue that results, the jobs that are created — meaning fewer benefit payments — have the potential to sort out the UK’s public debt quagmire.

And this means that for such a scheme to work, the state has to be more heavily exposed than the private sector. Only if investors are satisfied that this is indeed the case, should they consider it.

This article is ©2012 Michael Baxter of Investment and Business News, who also offer a fantastic newsletter that you can sign up for at http://www.investmentandbusinessnews.co.uk/

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