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Equity gap?

By October 13, 2006 January 1st, 2007 5 Comments

The received wisdom in this country seems to be that there is an “equity gap” in financing for small businesses.  The argument has it that there are lots of good businesses that can’t find financing in the £100k-£2m range because of an inefficiency in the market and that the government therefore needs to step in.

I am not convinced that this problem really exists.  Nearly everyone I talk to believes that companies with merit generally find the finance they need, and I have talked to a lot of people, including entrepreneurs and investors at this level.

I have even heard Jon Moulton say there is not so much an “equity gap” as an “equity hole”, by which he means instead of there being too little funding available at this level there is too much – so equity gets poured into the hole, never to be seen again!

This falsehood has taken hold, I suspect, because entrepreneurs and shareholders whose businesses fail when they can’t attract investment are much more vocal than their successful counterparts.

The issue is important because government policy is to push money into this segment of the market by way of matched funds with restrictive investment rules – more here.  These often force the manager to invest at a pace that makes it very hard to keep the quality high.

To my mind ministerial time and effort would be better suited to making it easier for small businesses to operate – less regulation, better infrastructure, by promoting entrepreneurialism and business in our education system, and by promoting the flow of people in and out of academia so we get more out our science base (lots of interesting stuff about this on Stephen Allott’s website).