Advantage Business Angels managing director Neil Mackay asks when the big boys are going to tackle the equity gap.
Last week I looked at the problem of early stage businesses being unable to access risk money to help them develop.
I suggested we need a whole host of changes that Government might bring in, ranging from education in schools and universities to create more positive attitudes towards business and risk taking and special tax breaks.
What can the private sector do?
Given we all accept that we need far more new businesses with more innovation to combat the low-cost challenge from abroad why don't our investment institutions get involved? They are the professionals and they have access to huge amounts of capital and management resources. Yet they persist in backing only big management buy-out deals, why?
Well one reason is profitability - they believe bigger deals make more money.
The situation reminds me of a similar one that occurred at banks during the late eighties/early nineties. The technology of PCs and communications enabled banks to build very detailed pictures of the profitability of i ndividual customers, although it was really segments of customers. I remember working on such a measure for TSB Group.
The numerical answer that emerged was that young customers mostly lost money but older customers were very profitable.
For a while everybody jumped to the wrong conclusion and started to market towards older customers. It took some time for the marketers to realise and then convince the accountants that recruiting new older customers was not really possible or was so expensive as to destroy profitability completely. People were more likely to divorce than change banks and I think they still are.
So the banks returned to the market to recruit younger customers again, this time looking at lifetime profitability.
Graduate recruitment has become very sophisticated and banks are now developing programmes to recruit all segments of younger customers. They are learning how to make money out of different customer groups by treating them differently.
Now it seems to me that a similar situation will develop at our venture capitalists and other institutional investors. At some stage the number of profitable deals in the mature market will decline and fresh eyes will be brought to bear on the early stage market.
This will not be a quick or easy change. Knowing which companies might be successful is an art. We have been looking at this for a long time and although certain characteristics are important there does not appear to be a magic bit of insight that allows you to spot the winners.
There are however some techniques and strategies to give a new idea the best chance of success. They are not foolproof and they involve risk but they have real potential. I have no doubt that others working in the same market as us have also developed their own ideas on this.
How long before the big boys come in?