Are we wasting our time on small business entrepreneurs?

James Harris ends his article for Real Business with, ?the plight of the small business entrepreneur is a narrative that has proved all too seductive. Whether there is any truth to it is another matter.?

In essence, he is asking the question, “Are we all wasting time worrying about ways we can get capital into our small companies?” No, we are not.

Most of James? article concentrates on the futility of coercing banks into funding small companies. Absolutely right – but in so doing he breezes past what the old 3i achieved and suggests that equity finance is for the birds. ?What companies need is working capital, which is hard to fund with equity ? entrepreneurs think it?s too expensive.? And anyway, why bother fussing about all this as, ?there is no evidence to suggest that high levels of small business financing leads to dynamic economies.?

Oh dear! Those of us who are old enough to have experienced the vintage years of 3i at first hand will remember that it spawned literally hundreds of small companies up and down the land, many of which went onto traded equity markets and raised further capital from other investors to expand their businesses. An excellent example of wealth generation for our country. 

And since when was it not a good idea to raise equity to fund working capital? The very nature of a growing small company is that it often consumes working capital. Most outward looking entrepreneurs of course know this and understand that equity capital is the safe, non-recourse way of ensuring their businesses are built on solid foundations.

The problem is that our small-cap equity markets are suffering from regulatory attack and a government that has forgotten what a powerful force for growth they can be. So the latest absurdity (obscenity?) from the FSA is that they are now (FSA Consultation Paper CP12/19) trying to prevent the public from investing in small companies through the tried and tested medium of fully listed Venture Capital Trusts, many of which have been at the heart of small company funding for the last fifteen years.

A bit over a decade ago, the ability of small companies to raise capital on our premier market, AIM, was enormously helped by limiting CGT to just ten per cent. This provided a very straightforward virtuous circle, namely low CGT encouraged investors to trade small companies, which in turn led to greater liquidity, which in turn led to more IPOs and secondary fund raisings, which in turn led to more employment, which in turn led to more taxes being generated – KISS (Keep It Simple Stupid) at its most obvious! Foolishly, those low tax days are long gone and from a CGT perspective you might as well invest in some FTSE 100 megalith.

When all is said and done, are those small entrepreneurs at the heart of a dynamic economy? Well, according to a report in the Financial Times this month large businesses? share of employment in the UK dropped from 45 to 40 per cent between 2000 and 2011, showing that multinationals are more likely to shed jobs than create them, so they had better be.

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