[speaker001:] [theme music] Tonight, business angels, the private investors who've made millions by backing risk and innovation in partnership with Britain's small entrepreneurs.
[speaker002:] I think I do it because... I'm so depressed by the poor performance of professional investment managers in the city, and I hope I can do better than they can.
[speaker003:] Then challenge from the North, why tough talking Yorkshire lawyers believe they can take the city's cosy legal world by storm. And in notebook, popular at home but not abroad. Can the British television industry export more?... [bells and then organ, wedding march.]
[speaker004:] There are some unusual partnerships being struck throughout the length and breadth of the country. the success of these new relationships could affect Britain's future prosperity.
[speaker005:] We have come together to witness the marriage of business angel David pounds sterling, and small business,.
[speaker002:] Some observers believe their potential is enormous.
[speaker005:] David pound sterling, will you take to be your wife? As a way of life
[speaker002:] Of course ceremonies like this aren't real, but the rational behind them is. Rich investors eyeing up prospective business opportunities are being helped byu matchmaking agencies. They've been specially set up to try and ensure a more secure future for Britain's small companies. There are a growing number of private investors known as Business angels, and small businesses. They say the relationship is just like a marriage. Now everyone, the government, the bank of england, the C B I and others are investigating business angels as one alternative way of funding small companies. The upsurge in interest in how small businesses are funded, reflects growing concern that they've been let down by the banks, and the realization that they are the most significant source of employment as the country struggles to emerge from the recession. This company began searching for finance four years ago. Colin came up with the idea for an environmental action cartoon for children's television. They spent four hundred thousand pounds. A further quarter of a million is needed if the company is to survive. Colin feels the traditional financiers can't see the future potential of the environment concept. [cartoon voice over]
[speaker006:] I mean we're a typical case, we believe we have something that is wonderfully innovative and capable of succeeding financially in a global market place. It was very difficult to get the venture capitalists and the bankers to take it seriously. [cartoon noises] I think that's a a lamentable state of affairs, and their children, and their children's children are going to have to pay the price for the short-sightedness that's going on now in the ivory towers of the of the city, the the banking institutions and the financial institutions of the country. [cartoon music]
[speaker002:] The cartoonists are veterans of the presentation circuit. is just one of band of companies around the country, presenting their business plans to private investors. Here in Cheshire business men are nervously waiting to meet the business angels is whom hands the future of their company might rest. They're coached by experts from, one of five government sponsored projects around Britain. advise small businesses and link them up with private investors.
[speaker007:] You're different, you're dynamic, let it come across a bit more about you and you know, what a good team you are and you've cracked it. Try and relax a bit, you know, have a drink at [LAUGHTER] lunchtime even [].
[speaker001:] [clapping]
[speaker007:] And just let it come out a bit more.
[speaker002:] Arriving as ostentatiously as you'd expect from the seriously wealthy, business angels pump money into private companies in return for shares. Angels already invest between two and four billion pounds in Britain's small businesses. the potential could be up top three times as much.
[speaker006:] Hi Ron how're you doing?
[Ron:] I'm okay, look big
[speaker002:] The directors have developed a comic routine to hammer home their message.
[Ron:] property development scheme that I'm involved with, I think you should look at it.
[speaker006:] Well that's interesting, but there's a couple of ideas I'd like to run in front of you.
[Ron:] Fire away old boy, seeing as it's you.
[speaker006:] What do you know about the music industry?
[Ron:] No. High risk, no money in music Colin.
[speaker006:] I got this great group, super song, just listen to these lyrics. She loves you, yeah, yeah yeah. She loves you, yeah, yeah yeah. With a love like that you know it can't be bad. What do you think of it Ron?
[Ron:] No definitely not, that'll never sell. Whoever wrote the lyrics to that should be locked up for an affront to the English language.
[speaker001:] [clapping] [clapping]
[speaker002:] For companies like, pitching to investors has become virtually a full time job.
[Ron:] that's better. thank you ladies and gentlemen for I hope what was a little bit of humour in this long afternoon, er to make a very serious point. We've been developing
[speaker002:] They know their survival depends on how well they impress. After a long day of presentations, the angels and the businessmen finally get together in the traditional way. After all the hard work the businesses put in, were the angels impressed?
[speaker009:] Well we had eight different presentations, er i warmed, I suppose, to two of them erm was a small engineering company in the motor trade which, while it will never make a fortune will probably make a living and the people seem to need help.
[speaker002:] The angels are drawn from all sections of the community. Some are Oxbridge educated former merchant bankers, others came up from the shop floor, but they all have some things in common. They like making money, they like being involved in business, and they love a challenge.
[speaker010:] I'm a manufacturer, I like to make things, I like to hold something at the end of day and say that's something that's been created. Er at the same time I'm looking for the chemistry er the feel for those people, er the quality of those people and whether I could work with them and whether they could work with me.
[speaker002:] How Britain's small businesses are funded was discussed at a recent national conference of the institute of directors. Its director general Peter believes that they are vital to Britain's prosperity and employment prospects.
[speaker001:] There are three million companies in Britain of Which only a thousand employ more than a thousand employees. We all know that job creation comes form the small and medium company sector. It is perhaps not totally coincidental that there are three million unemployed and three million companies and er You could do the arithmetic about what would happen if every company took on one person. Some thing has to be
[speaker002:] The I O D surveyed three hundred small companies, the results, exclusively revealed to the money programme, show a severe funding shortage for business start ups. Problems too for companies expanding. There's a lack of funding for schemes between fifty and two hundred and fifty thousand pounds, or even half a million.
[speaker001:] People sometimes think that capitalism means stock markets and and and and share holders and what have you. But the most pure expression of capital capitalism is the the harnessing of private money to start private businesses, and a main concern of the institute of course, is that there is such a shortage potentially of capital, in the system, to do that.
[speaker002:] This tranquil country scene is close to the Cotswold home of Sir John, a Harvards business graduate, he's one of Britain's most successful business angels. Twelve years ago he invested twenty three thousand pounds in a small local company. It's now worth two and a half million. [machinery noise] The company Sir John bought a fifty percent share in was, it's an engineering firm that produces mechanical devices that help to clear storage silos. In its first year turnover was a modest forty thousand pounds, it's now twelve million. But the success story might never have happened if the entrepreneur with the idea, Ivan, had taken the advice of his bank.
[speaker003:] Yeah. Did a little business plan, cash flow forecasts and all that kind of stuff, er basic but erm, in hindsight still quite presentable I th I think. And I took it to my bank manager who I'd been with for God knows, all my life, so nearly twenty years, and er he just laughed me straight out of the room. Straight off. D don b don't be silly, go and get a job, you know. Er h he didn't even look at it.
[speaker002:] What do you feel about banks, do you think they know enough about business when it comes down to it.
[speaker003:] Oh. I hope my bank manager isn't watching this. No I think they know nothing at all about business. I think they erm kid themselves on that they do because they understand figures and money and that isn't business.
[speaker002:] Is this an are where you agree, er Sir John or not not? Yes I I do I think the bank's big mistake is their obsession with security cover erm and I think they ought to develop some expertise in judgement of people's management and entrepreneurial abilities. And in recognizing the potential of a good business. The Midland bank is one of Britain's biggest. In the eighties, banks fell over themselves to lend money. Last year bad debts cost a million pounds a day. Midland's Chief executive Brain acknowledges the problem.
[speaker004:] We are risk averse at the moment because we have suffered as you rightly say er so much from bad debts during the recession. Er but in certainly in the case of our bank, er we are most anxious to at least get people in through the door and see if we can find solutions to their problems, find ways of er developing smaller businesses, erm hopefully to reduce the massive unemployment figure that we have in this country. [music]
[speaker002:] A restaurant in fashionable Mayfair.
[speaker001:] Is everything alright? It's absolutely excellent?
[speaker002:] A public relations company is entertaining its clients. There's an old saying that there's not such thing as a free lunch, but this is about as close as you can get. No money changes hands here. But there's still a bill to be settle.
[speaker001:] Thank you very much Sir, did you enjoy your meal? It was absolutely excellent.
[speaker002:] The company pays using a barter card. It's an updated version of the ancient trade of swapping goods. This is where that trade is organized, the barter exchange in central London.
[speaker001:] Erm we've got various requests for mobile phones. We need a restaurant for erm a working breakfast. Zurich, flights to Zurich. Yes we've got er erm eight economy flights. We're after four colour printers.
[speaker002:] The organize the exchange of goods. Many companies have spare capacity. Bartering enables them to swap it for other things they need without paying. Easing cash flow problems facing companies financed by bank overdraft. This is a problem that the Institute of Directors has outlined in its survey. Seventy one percent of companies go directly to banks as there first source of financed. But what concerns the I O D is the type of funding the get. Sixty four percent of small businesses are on either overdrafts or short term loans. That, says the I O D, makes them vulnerable to economic down turns.
[speaker001:] The key issue that emerges is that many private companies don't actually want what they ought to have, which is more long term loans and more private equity, and less overdrafts and their short term loans. I I think to an extent the bank have in helped small businesses to make this mistake. It has been much easier to give an overdraft than to go through the whole process of studying a plan for the business and coming up with longer term loan financing. Okay Steve can you talk me through the part of Manchester visit in the afternoon.
[speaker002:] the government is so concerned about the financing of small businesses that Anthony economic secretary to the treasury, is in charge of a working party examining the issue. He's concerned that banking attitudes may be holding up the recovery.
[speaker004:] I do believe that one of the best ways we're going to benefit from the new circumstances I hope of economic stability of low inflation and low taxation, will be to ensure that the provision of capital is made by the principle institutions, namely the banks and the investing institutions. So I expect to see er improvements in confidence backed by greater provision and I like to see that directed at the venture capital, risk capital, long term capital. Rather than the in and out sort of capital which I think is reflected so much by overdraft financing.
[speaker002:] This man, John, is the managing director of Reading based electronics firm,. He's got good reason to thank the Midland bank. Now he makes a point of keeping in touch with his local branch.
[speaker005:] We're concentrating on the security market place, and we've acquired I think three
[speaker002:] When his company was in trouble, the bank swapped his debt for shares.
[speaker001:] We are quite keen to look at equity options, debt equity swaps er perhaps talk a to the government about an extension of the business expansion scheme, specifically into manufacturing industry er and generally look for innovative solutions, persuade to customers to take loans out instead of overdrafts. Er fix their interest rates over a longer term period. That's not always attractive cos initially that's more expensive for them, but er they ha they have to er come to us with an open mind as well.
[speaker002:] Back at the board of directors are meeting. For Sir John and Ivan bank funding isn't on the agenda. But Sir John is as interested in how the company's money is spent as any bank manager. why are you using an agency rather than advertising in name?
[speaker003:] Cos you've got to pay the agent a fee for finding it for you.
[speaker002:] As both company chairman and business angel, Sir John plays an active role. He and Ivan are equal partners.
[speaker003:] The fifty percent share holding has worked well, because what it means no one person can impose their will, no one has control, you have to resolve problems by agreement, resolve disagreements without coming to blows.
[speaker002:] Angels don't always work miracles, this deserted farm house was where Mike n hoped to build a successful cider business. Revisiting it for the first time, he recalls his high hopes when an angel with marketing skills appeared. But Mike was forced to sell out when the angel wasn't up to the job.
[speaker006:] Even though we had explained to him in a small business initially, he was going to be the salesman, he was going to be the marketing director, he was going to be everything. It still hadn't really filtered through to him until he was actually on the ground working, and he just really couldn't cope with that.
[speaker002:] The business that Mike began has now transferred to new premises, it no longer makes cider but apple juice. The new owner is Lawrence, he shares Mike 's reservations about business angels.
[speaker007:] A business relies on a driving personality taking it forward, and the confusion about getting somebody on board who is working with you in the business and who is putting money board, is that they feel to some extent, proprietorial to that business, and you can find that that will result in those individuals who have done that tearing apart the business because they are trying to go in different directions.
[speaker002:] At the moment there are a number of publications such as Link, Capital Exchange, venture Capital Report, which try to put investors and companies in touch with each other. The government and the banks are considering setting up a national data system of business angels, it would probably have to be government funded.
[speaker001:] Who who are your
[speaker002:] The organization with the longest track record in matching angels to companies is the publisher of venture capital report. B C R executive, Hamish, is sceptical about the banks' sudden endorsement of angels.
[Ron:] In terms of their they the core business, they are reliant on on on medium size businesses, so they need to ensure that in the future that there will be businesses there er t er to be their clients, so I think er it's a sort of enlightened self interest. And er as they're not in the business of providing risk capital, they have to find er some poor mug or opportunist to do so, and I think this is why increased attention is being focused on on business angels as a source.
[speaker002:] Are the banks simply though, trying to shift responsibility so you think, erm I I I think that the the sceptic in me would would say that they are trying to abnegate a certain amount of of responsibility.
[speaker001:] I think their is a problem with the first two or three years of a business' life. It's the most difficult time, it's full of frustrations, they're growing, er they need finance that they haven't quite thought about, there are surprises during that period. So there undoubtedly a temptation to think, well let's not bother about that, let's pick them up when they are two years old and they've survived this particularly hazardous first period. But in my view that's quite nonsensical. What we ha If we don't support them during that period, how on earth do we get them to be two years old?
[speaker002:] Barclays bank has carried out its own research into small business. David says funding problems have been over emphasized. The real issue he says is skills.
[speaker009:] Well our research has shown that something like eighty percent of all small business's don't undertake any formal training within their first three years of operation and more than sixty percent do not do any formal business planning or look further ahead than one month from today. The effect is that the survival rate of small businesses is significantly adversely affected by this.
[speaker010:] Nobody's called in? Okay.
[speaker002:] Mike now travels the country as a consultant to small companies. The lessons he's learnt he did so the hard way. He agrees that skills inside small companies have to improve.
[speaker010:] The man is very good at making widgets, he makes widgets, but he doesn't tell his bank that he's doing well. The bank automatically thinks he's doing badly because they don't hear anything from him. So it's a matter of keeping the bank advised the whole time.
[speaker002:] Perhaps Mike business would have survived with a tax incentive to put money in. The idea appeals to his clients. Research by Barclays bank suggest companies do favour tax breaks.
[speaker010:] One idea that were quite attracted to er would be the formation of a business TESSA. This could operate rather like a personal TESSA and would be a er tax free savings account, which would allow a small business to save for a perhaps a major piece of machinery in a tax free environment.
[speaker002:] The I O D also believe that there must be tax incentives to invest in Britain's small businesses, but they'd like to see them extended to include the general public.
[speaker001:] We can all go and invest in PEPs, we can all go and invest in pension plans and all of that gets taken by the institutions and put into the stock market. What we need is is equal incentives to take our money and put that money into private companies. So I we would like to see erm tax incentives for investment in the equity of unquoted companies and we'd also like to see gains tax incentives for the realization of those investments a when when they pay it off.
[speaker002:] But tax breaks are outside the remit of the governments working party. Not surprising considering government's fifty billion pound public borrowing requirement.
[speaker001:] If you're urging the case for tax breaks again, then I think that's all too easy and tha that is not what I am advertising or seeking representations for. Of course there will be calls for that. I want to look much more generally at the supply side, at the provision of capital. The liquidity of capital. This is much more about the structural provision of finance, it is about the understanding by financial institution of the businesses they back. I think you'll like this place actually er
[speaker002:] Whilst there's a lot of talk about how to help small businesses, the angels and their advisors are out there doing it. This company of ex Roll Royce workers has had five offers of finance and is in the enviable position of choosing the partner that suits them. On the back of their expected thirty thousand pound cash injection they've already taken on extra staff. For this successful local experiment to have national implications there has to be a fundamental shift in attitudes.
[speaker001:] The small companies themselves have got to understand what they need to grow is long term financing and that's cash in the business. For the finance community, what they've got to do, too, is take a longer term view about projects and give the companies an opportunity to to grow and ride the pitfalls and the the peaks and troughs. [wedding music]
[speaker002:] If the marriage between small businesses and financiers is to have a happy ending, the couple need more than a guiding hand from a few enthusiasts dedicated to their cause. The business angels can't do it all themselves. They need the support of the government. The banks too must get involved and everyone needs to work together because if the marriage proves to be a barren one it will affect the wealth of the nation for generations to come. [music]