Finance for Small and Medium-Sized Enterprises - DTI Home Page

Finance for Small and Medium-Sized Enterprises: A Report on the 2004 UK Survey of SME Finances
Table 12.2: Main Reason for Raising Equity from Friends, Family and Directors as
Opposed to Other Sources (Population Percentages)
Unable to raise equity from other sources 4%
To maintain control of business 20%
Low cost 16%
Least hassle 17%
No need for another source 22%
Other 4%
Don't know 17%
Comment
• 1 in 5 business-owners cited ‘to maintain
control of the business’ or ‘no
need for another source’ as the reason for the choice of investor
(cumulatively 40%).
• Less than 1 in 20 cited supply-side constraints (‘unable to raise equity from
other sources’) as the reason.
These results do little to support the notion of an ‘equity gap’ in the supply of formal
66
venture capital
to SMEs. The low take-up of venture capital would
appear to be due
to a la ck of demand, relating to business-owners’ reluctance to share control of the
business
with outside investors.
Entrepre
equity i
reject
indica v and-side rather than the supply-side. It
67 In a similar vein, data from the Global
neurship Monitor in 2003 indicates that about two-thirds of applicants for
nance are successful. 68 f Of the one-third rejected, the
main reason for
ion was the unsuitability of the business for equity finance. Again, this is
ti e of constraints lying on the dem
should, nonetheless, be emphasized that SMEF is a general survey of SME finances
so firm conclusions cannot be drawn about equity gaps (not least, because of the small
sample of equity users).
To conclude this section, we look at the average and total amounts of investments
from all sources of equity finance combined
66
Investor s may view the comparatively small amounts required by small firms as not worthwhile
given the
high fixed costs of equity investments. In particular, regardless of the size of the business,
investors
must go through extensive checks on the business and its owners before investment (due
diligence)
and monitoring after investment to ensure the business is being run effectively.
Accordingly, there have
been concerns about the presence of a gap in the supply of small levels of
equity.
This has led to recent public interventions, in formal equity markets, such as the Regional
Venture Capital Funds.
67
Interestingly, among high growth and start-up businesses, the percentage reporting that they could
not obtain equity from other sources is only 1-2%. Even allowing for the error in estimation, there is
no evidence that these businesses are any more likely to suffer from supply-side constraints than
other
types of business.
68
In 2003, GEM was based on a sample of 22,000 adults across the UK.
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