MONEY might not actually make the world go round, but much of what we take for granted is built upon a hefty pile of it. And without people willing to take a bet on the future – investing in the next generation of entrepreneurs – the pace of growth would slow dramatically.
Furthermore, recent changes in equity finance mean that opportunities for investment are now being made available to a broader group of people.
UK equity finance sits somewhere between the US and the rest of Europe. We may envy the private equity cash sloshing around Silicon Valley, but the City ensures access to a level of finance that turns our neighbours in Europe equally green with envy.
There are plenty of reasons for the UK’s success but, as the election nears, two deserve special mention. The Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) have been extraordinarily successful in supporting entrepreneurs. While many sound policies suffer from unintended consequences – certain types of share incentive plans arguably fit into this category – EIS and SEIS have been real drivers of new sources of funding for early stage and growth companies, and are now global gold standards. Whoever enters power next week would be well advised to maintain EIS and SEIS.
The next government should also be wary of any interventions that stymie the rise of crowdfunding – one of a number of important sources of finance that have sprung up since the crash to fill the void left as traditional sources dried up. While other forms of finance still dwarf it, research by Nesta last year revealed that equity-based crowdfunding had reached £84m, up 201 per cent year-on-year. We are leading Europe in our adoption of this new model. Crowdfunding turns the world of equity finance upside down, and it’s living up to the hype.
Equity-based crowdfunding does not lend itself to every type of raise. Reward-based crowdfunding – whereby “investors” are given a reward rather than equity – may be more appropriate for some. And just consider trying to pitch to the crowd for new funds for a manufacturing component.
Entrepreneurs considering raising through the crowd should also be aware that, though a successful raise is proof that there is belief in your business, you can’t call upon the crowd to guide you in the same way as you might an experienced, active investor. The crowd may deliver the cash, but the right equity partner can open doors.
There has never been a better time to start a business in the UK, and our vibrant equity markets are proof of this. Dynamic competition is driving new deals and raising standards. The challenge for venture and private equity investors and crowdfunders alike remains finding the right companies to back. But that’s par for the course: good investments will always be in high demand.
Nadim Meer is a private equity partner at Mishcon de Reya.