Chapter 16 • Small businesses
l The business will obtain a listing on the Stock Exchange. This may be a possibility,
particularly in view of the existence of the Alternative Investment Market and
PLUS (see below), but it is still only businesses towards the larger end of the small
business sector that will be able to follow this route.
l The business is sold to another one or to a management buy-out or buy-in team.Since none of these can be regarded as likely possibilities, particularly for very
small businesses, finding equity backing is a real problem. In the end, for most small
businesses, the personal savings of their founders and ploughed-back profits are the
only significant sources of equity finance.Venture capital
Venture capitalis the name given to equity finance provided to support new, expand-
ing and entrepreneurial businesses. Venture capitalists usually prefer to take a close
interest in the business concerned. This could involve taking part in decisions made
by the business. Much venture capital comes from funds contributed to by a number
of smaller investors, in many cases taking advantage of the tax incentives available to
providers of equity finance through such funds.
Venture capitalists tend to be attracted to fast-expanding, often high-tech, busi-
nesses. They look for high returns, perhaps 25 to 35 per cent p.a., a relatively short-term
involvement (up to five years) and an exit route. They tend to take equity holdings of
up to 40 per cent of the equity, typically involving investments of more than £1 million.
According to Library House, the research organisation cited by Tyler (2006), during
2006 there were 1,511 venture capital investments, with more than half for £2 million
or less. Of this sub-£2m group the vast majority were for between £250,000 and £2 mil-
lion. Despite the valuable role played by venture capital, only a small minority of
small businesses use it. Nevertheless, venture capital is massively more prevalent in
the UK than in the rest of the EU.Business angels
Whereas venture capital is provided by organisations that specialise in such invest-
ments, business angelsare typically individual investors who are prepared to make
investments, usually equity investments, in small businesses. There are estimated to
be about 40,000 business angels active in the UK. Most investments made by business
angels seem to be of amounts between £10,000 and £750,000. According to the Bank
of England (2003), three-quarters of the investments made are of amounts less than
£50,000. Typically, business angels tend to take between 10 per cent and 40 per cent
of the equity. They seek to take a close interest in the business. A National Business
Angels Network (see the section on relevant websites at the end of the chapter) has
been established in the UK. It seeks to put potential angels in contact with businesses
needing finance. The investors who appear in the BBC television programme Dragons’
Denare business angels.The Alternative Investment Market
The Alternative Investment Market (AIM) was established in June 1995 by the
London Stock Exchange for small, young and growing businesses. Many of these are‘
‘