项目管理之科技型小企业的融资.docx

Financing of Technology-Based Small FirmsBank of EnglandFebruary 2001Domestic Finance DivisionFinancing of Technology-Based Small FirmsFebruary 2001Bank of EnglandDomestic Finance DivisionDEFINITION OF A SMALL FIRMThere is no single definition of a small firm. In this report we have drawn on a range ofsources of data and consequently have used more than one definition. Some of the mostcommonly used are set out below.Department of Trade and IndustryIn practice, Government schemes that are nominally targeted at small firms adopt a varietyof working definitions depending on their particular objectives.European Commission*The independence criterion refers to the maximum percentage that may be owned by one,or jointly owned by several enterprises not satisfying the same criteria.To qualify as an SME, both the employee and the independence criteria must be satisfied,and either the turnover or the balance sheet total criteria. A large firm is any not satisfyingthe above criteria.Companies ActA company qualifies as small or medium if it meets two of the three criteria above in any year.British Bankers AssociationFor statistical purposes, the British Bankers Association (BBA) define small businesses asthose having an annual account turnover of up to 1 million.Copies of this report are available from Bank of England Public Enquiries 020 7601 4878or the Bank of England web site www.bankofengland.co.ukFor further information please contact Victoria Cleland, 020 7601 4441 or Christopher Lewis, 020 7601 3145.iMicro firmSmall firmMedium firmTurnovernot applicablemax 7mnmax 40mnBalance sheetnot applicablemax 5mnmax 27mnEmployeesmax 10max 50max 250Independence criteria*not applicable25%25%Small companyMedium companyTurnovermax 2.8 mnmax 11.2 mnBalance sheetmax 1.4 mnmax 5.6 mnEmployeesmax 50max 250EmployeesMicro firm:09Small firm:0 49Medium firm:50 249Large firm:250+CONTENTSEXECUTIVE SUMMARY.1CHAPTER ONE: KEY CHARACTERISTICS AND FINANCING REQUIREMENTS .5CHAPTER TWO: THE VENTURE CAPITAL INDUSTRY .9CHAPTER THREE: VENTURE CAPITAL INVESTMENTS IN TBSFS: .19THE RISK-REWARD RELATIONSHIPCHAPTER FOUR: THE ATTITUDE OF INSTITUTIONAL INVESTORS .27CHAPTER FIVE: OTHER SOURCES OF FINANCE: BANKS, BUSINESS ANGELS AND .37CORPORATE INVESTORSCHAPTER SIX: PUBLIC CAPITAL MARKETS .45CHAPTER SEVEN: OFFICIAL REPORTS ON THE FINANCING OF .55TECHNOLOGY-BASED SMALL FIRMSCHAPTER EIGHT: PUBLIC SECTOR INITIATIVES .65CHAPTER NINE: IS THERE A MARKET FAILURE IN THE FINANCING OF TBSFS? .73CHAPTER TEN: CONCLUSIONS.77ANNEX: LITERATURE REVIEW.81iiEXECUTIVE SUMMARYThis report examines the financing environment for technology-based small firms (TBSFs) inthe UK. It considers, in particular, small firms operating in the communications, IT,computing, biotechnology, electronics and medical/life sciences industries. The report is afollow-up to earlier work published by the Bank of England in 1996.The key characteristics of TBSFs are that:qqqtheir value is linked primarily to longer-term growth potential derived from scientificknowledge and intellectual property;early on, they lack tangible assets which may be used as collateral;their products initially have little or no track record, are largely untested in marketsand are sometimes subject to high rates of obsolescence.This report considers whether these characteristics raise different or additional financingproblems for TBSFs, for example because of the difficulties potential finance providers mayface in assessing the technology, or because of uncertainties and risks over the likely costs ofR&D and in estimating prospective demand for a new product. In economic terms, theinformation asymmetries which characterise small business finance may apply particularlyto TBSFs at the start-up stage. Such asymmetries are associated with capital marketimperfections which may affect adversely both the quantity and price of debt and equityfinance and the potential risks. The report examines the evidence for the existence of suchfactors in the provision of finance to TBSFs.Although the banks do provide finance to TBSFs, often through specialist units, a lack ofcollateral and market presence generally makes equity finance more appropriate than debtfor small high-tech start-ups. But the substantial fixed costs, such as underwriting andadvisory fees, make it uneconomic for most SMEs, including TBSFs, to raise small amounts ofpublic equity capital. For many small firms, moreover, their lack of size and trading recordpreclude them from meeting the listing criteria of public exchanges. The first part of thereport therefore focuses on the venture capital industry, as the main potential supplier ofprivate equity finance to TBSFs.Although the UK venture capital industry is the largest and most developed in Europe, itcurrently invests little more than 5% of funds in start-ups and early-stage finance, comparedwith 20% in expansion capital and as much as 75% in MBOs/MBIs. Some 18% of BVCAinvestments in UK companies in 1999, however, were directed to the high-tech sector agreater allocation than for any other industry grouping and the proportion of these fundsallocated to start-up and early-stage finance, at 22%, compared favourably with that foraggregate investments in all sectors. But figures for average deal sizes suggest that theopportunities for small businesses, including TBSFs, to raise formal venture capital financeof much under 500,000 are fairly limited.In assessing whether the provision of finance to TBSFs, especially at the start-up stage, issubject to a form of market failure justifying public intervention, it is essential to consider indetail the risk-reward relationship from investing in small high-tech companies. The latest1WM/BVCA statistics on the performance of UK venture capital and private equity funds showthat net returns on venture capital funds raised between 1980 and 1999, measured toend-December 1999, were 33.6%, 31.1%, 27.2% and 20.0% pa over periods of one year,three years, five years and ten years respectively. The WM/BVCA report noted that thesefunds outperformed UK pension fund assets and various comparator stock market indicesover these periods (although it should be noted that the BVCA data are not directlycomparable with the FTSE indices).When broken down by financing stage, the statistics reveal that the returns on early-stagefunds over three-, five- and ten-year horizons have fallen well below the average for allventure capital funds and the principal comparators returns. Early-stage funds did, however,perform better, in both absolute and relative terms, in 1999. Large buy-out and generalistfunds have tended to outperform the average over longer periods of time.Research commissioned by the BVCA and carried out by the London Business School hassought to relate these and other returns figures to indicators of risk, measured by the spreadof returns. Comparisons are difficult, because the general lack of market prices makes itvirtually impossible to derive soundly-based price measures of riskiness. But the LBSresearch looks at factors such as the standard deviation of returns on technology andearly-stage funds and also at the empirical evidence on target IRRs sought by venturecapitalists at different stages of finance. These confirm that, over long periods of time,returns on both early-stage and high-technology UK funds have fallen short of targetsrelated to risk, while returns on later-stage and MBO funds have generally exceededtargets related to risk. Over the ten-year period to 1998, UK early-stage funds also appearto have significantly underperformed equivalent funds in the US and continental Europe.These comparisons, however, are highly dependent on start dates and comparison periods.Over the past six to seven years, both the absolute and relative performance of UKearly-stage and technology funds are considerably improved. Indeed, over the 1995-99period, early-stage UK funds have outperformed UK funds specialising in later-stage finance.The longer-term comparison reflects to a considerable degree the influence of the lastrecession in the UK, and in particular the resulting failure of large numbers of SME including TBSF start-ups in the late 1980s and early 1990s.Overall, the balance between the UK venture capital industrys involvement in early- andlater-stage financing seems broadly consistent with the longer-term risk-reward relationship.Discussions with end-investors such as pension funds and life assurance companies certainlysuggest that this is their perception. Consulting actuaries and pension fund trustees mayalso have cautioned against allocations to start-up and early-stage TBSFs on the groundsthat the prospective returns were unlikely to justify the risks. But the balance may alsoreflect economies of scale and a greater preference for larger deal sizes.The current low allocation of UK institutional money to private equity in generalremains, however, a puzzle, given that the sector as a whole has outperformed the maincomparator indices recently. As noted above, the substantial losses associated withinvestments undertaken in the late 1980s have been a factor; some institutions have saidthey are looking for more sustained strong performance before they commit a significantlygreater proportion of their portfolios to private equity. A range of other factors have alsobeen mentioned. Although views differ on their relative importance, they include: theinfluence of benchmarking; the longer-term contracts implied by start-up/early stageinvestments; the high research costs in selecting between venture capital funds to achievenecessary diversification or to manage a portfolio of assets that includes a commitment toventure capital; and regulatory or fiscal factors. On this last point, the Minimum Funding2Requirement, for example, may be encouraging UK pension funds to focus investmentsmore on assets used as benchmarks in the valuation of liabilities for solvency purposes(quoted equities and gilts), and may also be inducing companies to switch from definedbenefit to defined contribution pension schemes; both could be adverse for holdings ofunquoted equities such as venture capital. Restrictions on investments through limitedpartnerships and the high fixed costs of due diligence, which make investment managementmore expensive per unit of funds invested for TBSFs, have also been cited as factors.The regulatory obstacles to institutional investment in private equity have been consideredin detail by the Myners Review, which has made some preliminary suggestions on possiblealternatives to the MFR and has proposed changes to the treatment of limited partnershipsin the Financial Services and Markets Act. The Pre-Budget Report of 8 November 2000announced that it would consider the MFR recommendations as part of its current reviewand would implement changes to the FSMA making it easier for pension funds to invest inlimited partnerships. The Myners Review Group will publish its full findings before the2001 Budget.Other potential sources of external private equity capital for TBSFs, notably business angelsand corporate venturers, are also examined in this report. In view of the focus of the formalventure capital industry on larger and later-stage deals, business angels might help to fillany equity gap in the provision of seed, start-up and early-stage finance to TBSFs. Althoughthere is evidence of such complementarity in the US, the involvement of UK businessangels in this area is subject to much greater uncertainty. Some investigations suggestthat they allocate a much greater proportion of funds perhaps as high as 60% to start-upinvestments than do formal venture capitalists. If this is correct, and if current estimatesthat the UK has some 18,000 actual and potential business angels investing around 500mnannually are reliable, then the business angel market is potentially on a par with the formalventure capital industry in the financing of start-ups. Other studies dispute these estimatesand also find that only a small proportion of angels invest predominantly in high-techcompanies. The consensus, however, is that the potential does exist for business angelsto fill gaps in the provision of small-scale equity to SMEs in general, and TBSFs inparticular. There is certainly wider recognition of the increasingly important role ofbusiness angels, often working in partnership with formal venture capitalists.Corporate venturing may also be a significant potential source of equity finance, especiallyin high-tech sectors such as pharmaceuticals and software. This is reinforced by the growingdesire of larger companies to broaden their access to new technologies; the TBSF may alsobenefit from a new source of risk capital, new management expertise and access to the largercompanys production, marketing and distributional resources. Research at the CBI suggeststhat corporate venturing remains an activity carried out by only a relatively small proportionof UK companies, although the past year has seen increasing activity as more companiesestablish venture capital units to invest in internet or technology spin-offs.Overall, the evidence accumulated in this report suggests that some, but by no means allTBSFs in the UK may face periodic difficulties in accessing finance at the seed, start-up andearly stages. But there is no clear evidence that these difficulties are significantly greaterthan for SMEs in general. Were that the case, TBSFs might be expected to face higherdefault and failure rates than SMEs generally. The empirical evidence on this is ambiguous;indeed, some studies find that the survival record of TBSFs is actually superior to that ofsmall firms on average. The most likely explanation for the financing difficulties experiencedin the past remains the actual or at least perceived risk-reward relationship.3Several factors may be working to mitigate these financing difficulties. Firstly, as notedabove, the returns to early-stage finance in recent years have improved markedly. Inresponse, several new venture capital vehicles, with a specific focus on early-stageinvestments in high-tech sectors, have gained quotations. Although fund managers have saidthat the improved performance needs to be sustained over the next few years, some arealready raising their allocations to private equity and “classic” venture capital. Secondly, theattitude of investors in the quoted equity markets showed a substantial shift in favourof high-tech stocks between early 1998 and early 2000. Indeed, the scale of this shiftsuggests that several Internet-based companies, with short and not necessarily profitablecorporate histories, arguably attracted finance out of all proportion to their current, andprospective, performance. The substantial market correction post-March 2000 bears out thewarnings of those who doubted whether companies without historical backgrounds ofsustainable returns could continue to attract such large amounts of finance.Despite the recent correction the capitalisations achieved by many young high-techcompanies may in due course lead to higher realised IRRs for some early-stage venturecapital funds. This may help to redress the imbalance between venture capital financing ofearly- and later-stage deals, especially if it is accompanied by less buoyant returns on MBOs.A final set of factors relates to the various public sector initiatives and fiscal incentivesprovided in the UK in recent years to encourage greater investments in TBSFs. Theseinclude initiatives aimed specifically at improving the provision of small amounts of riskcapital at seed and start-up stages; two examples among many are the University ChallengeFunds and United Kingdom Business Incubation. In addition, following the implementationof many of the recommendations of the November 1998 report of the group chaired bySir Peter Williams, the fiscal regime for investment in TBSFs has improved significantly. In anumber of areas, there have therefore been significant changes since the Bankpublished its initial report in 1996.The concluding section of the Report notes that