News Release
The Financing Of Technology-Based Small Firms
28 October 1996
The Bank of England today published the findings of its research into the problems technology-based small firms experience in raising finance, particularly at the start-up stage. The report analyses the sources of finance for technology-based firms in the UK and in a number of overseas countries. It also includes the results of sixty case studies of technology-based firms produced by the Bank's regional agents.
The report explains that, by comparison with the United States, a smaller proportion of technology-based industrial development in the United Kingdom has resulted from small firms. Only 6% of loans made under the Small Firms Loan Guarantee Scheme go to technology-based firms. While the UK venture capital industry is by far the most developed in Europe, only 23% of total investments are made in technology-based firms; in the US, 65% of all venture capital goes to the technology sector. And in 1995 only 2.2% of total venture capital flows in the UK (£47.6 million) went to such firms in their early stages of development.
Business Angels are also less active in the United Kingdom than in the US, where 'informal' venture capital is some five times as large as formal venture capital.
The Bank describes some of the barriers to finance which seem to hinder the development of technology-based small firms. They include:
- finance providers' lack of familiarity with the technologies concerned;
- the high costs of due diligence and monitoring relative to the size of the investment involved; and
- the lack of management, and particularly financial management expertise in early stage technology firms.
The report also, however, highlights a number of positive developments:
- the contribution of a number of specialist seed capital firms with dedicated funds;
- the introduction of innovation and technology counsellors in the Business Link network;
- government-sponsored sectoral initiatives like Biotechnology Means Business; and
- increasing technology transfer out of universities into smaller firms.
The Bank believes that more can be done to build on the potential offered by these positive developments, and to overcome the barriers identified. It makes eighteen recommendations, including:
- increasing the profile of Business Links and other support agencies in assisting early stage technology-based firms;
- using successful 'serial entrepreneurs' to pass on their expertise and enthusiasm;
- establishing a UK corporate venturing group to promote collaboration between large and small firms;
- exploring the potential for developing informal venture capital (Business Angels);
- greater use of business incubation schemes, on the lines recommended by the Enterprise Panel;
- enhancing the management skills of technology entrepreneurs;
- creating a clearing house for proposals that have not yet succeeded in getting finance through the seed capital sector;
- encouraging the banks to develop packaged finance for technology-based firms;
- further developing the SMART/SPUR grant schemes offered by the DTI; and
- assessing the potential for a Small Business Investment Company scheme along the lines of that in the United States.
Introducing the report, Howard Davies, Deputy Governor of the Bank of England said:
"Technological innovation, and financial innovation are two of the UK's competitive strengths. Unfortunately, they do not always come together as they might, to produce well financed technology-based small firms. We hope that the recommendations here - which we propose for further debate - will help to generate more. We plan to mount a conference early next year, in collaboration with the Royal Society and the CBI, to take the debate forward."
Note for Editors
The Bank of England's report was foreshadowed in the Government's Third Competitiveness White Paper 'Competitiveness: Creating The Enterprise Centre of Europe' published in 1996. The Competitiveness Division of the Cabinet Office has contributed some of the material in the report, in particular on international comparisons in Chapter 5.
The third of the Bank's three core purposes, described in its 1996 Annual Report, is "seeking to ensure the effectiveness of the UK's financial services: the UK needs a financial system that offers opportunities for firms of all sizes to have access to capital ...". The research for this report has been carried out by the Business Finance Division of the Bank of England, within that context.
If you would like a copy of the report please e-mail enquiries@bankofengland.co.uk with your address.
