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Finance for technology
The funding gap between financiers and small technology-based businesses continues to grab headlines. Most recently, the CBI's Tech Stars report joined other eminent voices in highlighting the importance of breaking down the barriers to growth experienced by 'tech stars' and recommending ways in which to overcome the problems. The arguments as to where the blame for the funding gap lies continue to be rehearsed; are the banks and venture capitalists too impatient with their funds, too uninterested in small sums, too keen to demand security and simply too shy of something that sounds technical? Or are the small businesses themselves simply ill-equipped to grow, lacking both management skills and realistic business plans? In a sense it doesn't matter. Generalising about such problems often breeds further argument and an unhelpful entrenchment of views. But handwringing and wishful thinking don't get us very far either. So what are we up against? |
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DTI recognise the problem but would like to find a solution that costs next to nothing to the public purse. They are currently thinking that the solution might lie in culture change. |
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Venture capitalists would like a solution which allows them to continue in their present highly individualistic style, makes evaluation of the opportunities less onerous (ie better quality business plans) and somehow brings them greater returns than their now waning MBO income. |
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The technology-based businesses themselves want to get their hands on appropriate financing when they need it and without having to jump through too many hoops or give away control of their company in the process. |
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We should be realistic about what can be achieved. Culture change follows rather than engenders a different approach and major publicly-funded programmes will be unpopular whichever government is in power. Improvements are bound to take place gradually but it should not be beyond us to devise ways of coordinating our efforts to try to eliminate some of the patchiness of current initiatives and to do so at relatively little cost. We could make a start by concentrating on two of the issues inhibiting investment in technology-based companies - management and technology. Quality of Management
This has frequently been highlighted as crucial to the success of tech stars and few dispute it. Already, there are a variety of schemes in place to help improve matters. But we could do better. The two suggestions set out below (the first a national scheme and the second local) are neither original nor do they provide a complete solution but they could be started now and would allow us to make some progress. |
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Build on the 'Business Boost' idea recommended by the CBI in the recent TechStar report. Here it is suggested that representatives from the financial community and Government set up a small group to advise TechStars/individuals on how they might address weaknesses in their businesses, providing help, for instance, with management recruiting or team building. Developing this idea a little, I would suggest that such a group be drawn from a broader spectrum than just Government and the Financial sector, perhaps including two or three large and successful technology companies, the Patents Office, consultants and others who might supply on-site management help for periods of say 3-6 months followed by a mentoring service. The group would be funded partly by participating bodies and partly by the companies they help, the latter paying either through a small equity stake or, where funding is being sought, on a success fee basis. |
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On a local scale, incubators, science parks, and technopoles could be encouraged to form management companies which would themselves provide expert management help. Again, the 'help' could be drawn from a network of local, experienced managers (HR specialists, business strategists, marketeers, accountants etc) and they could, for short periods, work with the companies (both at the incubator and at the critical post-incubator stages) to help them establish the right management arrangements and practices. Whilst incubator management companies would need to provide up-front funding, payment by the companies helped could be on a deferred basis or by means of a small equity stake. |
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The Nature of Technology
There is rarely a need for a detailed understanding of a particular technology in deciding whether or not to make an investment. What is important is understanding the market for and the cost of that technology. There are a range of well-honed business techniques for answering such questions. Such techniques, if properly used, should provide reassurance to investors that a given technology is sound and has a commercial potential. So, how do we help businesses to present their technologies in an easy-to-understand business context and how do we enable the technology-shy investor to see past the science to the business opportunity? The Dutch government has pioneered a system of technology ratings. These are requested and paid for by technology companies and conducted by an independent expert panel. The rating is based on both the technology itself and the business and management supporting it and is used to help technology companies secure funding. So far, the system is working well and the Dutch are seeking to expand it across their borders. We are told (though I am not entirely convinced) that such a system would not find favour in the UK. The venture capitalists would prefer to do their own thing and would resist being corralled into a national framework. But, surely, we can learn something from the Dutch experience? Two points are immediately clear: firstly, small technology-based businesses are willing to pay modest amounts for the help they need to grow; secondly, simple tools used to demystify technology businesses can pay dividends. So, perhaps there would be merit in laying down some simple guidelines to technology businesses and their advisers, suggesting ways in which they can explain and present their technology to the outside world in language which would be understood by financiers of all types. There is plenty of good practise around to draw on (e.g. the methodology being used by the NatWest Innovation and Growth Unit) and an injection of consistency in the way in which we evaluate technology may well do wonders for the quality of business plans. |
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