Debate on the Address

My Lords, I wish to draw attention to the needs of technology industry’s small business sector and the venture capital available to it. First, I congratulate our two maiden speakers today; it is a privilege to be taking part in a debate in which we have heard two such excellent speakers and I look forward to hearing them on many future occasions. I am particularly enthusiastic because they are so keen on developing the economy and on enterprise, in which I strongly believe. I declare two interests. First, I am chairman of the RisingStars Growth Fund Ltd, a company set up some four or five years ago to promote a venture capital fund involved in starting and funding small technology companies. I am also chairman of Midas Capital Partners Ltd of Liverpool, which is five years old and number one in the cautious managed sector in the UK. We started the RisingStars fund because, having been involved in start-up businesses at Manchester University and having tried to spin out technology companies from the university and others, I was very much aware of the shortage of start-up capital. It was difficult to arrange the sort of funding that we required, but I managed to raise some £19 million from institutions in the north-west and from the RDA to create a fund, which I gave to enterprise ventures as the managers of the fund. We continue to promote further funds and have just achieved the first closing of a new fund called RisingStars 2, which will cover the whole of the north of England, whereas the first covered only the north-west. We hope to work with the eight major research universities across the north of England to provide start-up capital for the spin-out companies that will come from them. It is interesting to note that from the first fund we made 33 investments, with a total cash investment of £13,082,000 and a total of 1,541 inquiries. For RisingStars 2, which we are only just starting and for which to date we have raised just over £15 million, although it will be £30 million when completed, we have already made three investments with a cash investment of £160,000. The total number of inquiries for that fund to date is 248. That indicates that there is a very large gap between the amount of money available and the demand in the system. I have spent a lot of time in this sector because I feel strongly that wealth creation is very important. We spend much time in this Chamber hearing about how we should spend money, where everyone wants the money to go and how we should hand it out to this and that group, but we rarely mention that every pound that this Government spend has been made by a business. We should just think about that: every pound distributed by any Government has been made by a business—by a hard-working individual entrepreneur or a large business. The vast majority of our businesses are small, and all big businesses start as small businesses. But, unless we have a very positive policy of creating new companies, the proportion of wealth creation will gradually reduce. Some people might think that the figure that I am about to give is very good: 50 per cent of people employed in the north of England are paid by taxpayers’ money. They are paid by money that comes not from a business but from you and me and all the taxpayers in this country: they work for government, local government or a public body. Perhaps the Minister can give me an idea of the stage at which he considers that proportion to become unacceptable. Can we employ 60 or 100 per cent of people in that way? At what level does the balance between those who earn and those who work for government become unacceptable? I want to mention a couple of things that we have learnt during our money-raising exercise. Clearly, there is an enormous amount of money about, and there has never been more equity available for all kinds of investment opportunities, but there is no encouragement for that money to be put into the small-business sector. A number of shortages have clearly been identified. A group of people at Liverpool and Bangor universities recently carried out an investigation into the availability of venture capital, particularly for start-up technology businesses. They assumed that, considering the large number of projects and exercises operated by the Government in recent years to encourage money into the venture-capital sector, that must have done some good and more money must be available than there was a few years ago when we did not have the various activities now being operated by the Government. However, the disappointing thing was that they found exactly the opposite. Less money is now available in the system for technology start-up businesses than there was 10 years ago. The amount of investment going into the start-up sector is only one-tenth of that going into the small-business sector in the United States. Obviously, the level of investment in the US is very much higher than it is here, but it is interesting that that country appreciates the importance of the small-business and small-technology sector far more than we do. There is one issue that I should like the Government to consider and I shall be interested in the Minister’s response on it. The large amounts of money that are now available for investment and are being invested by very wealthy people in the UK are going into management buyouts, large investment deals, and taking equity and turning it into debt. All these new technologies and financial systems are being invested in large companies, but how can we move more of that to the small sector? The Government should be thinking seriously about these issues. They are not going to achieve their objective of creating financial strength in this country—which it is necessary to do if they want to keep spending money as they have been doing—unless someone earns the money. If that does not happen, we are going to miss out on an enormous opportunity. Technology is the driver that makes things happen. I have listened to noble Lords saying how we will change global warming by living differently and by giving up this and that. But that is not going to happen: it has never happened yet and it never will. If we want to solve the problem, it will be solved by technology. Society has always solved its problems with technology—from inventing the plough and starting to milk cows to the latest developments in micro-processing—and that is how we will solve global warming. We will find other ways of producing and using our energy more efficiently, but we will not do that unless we encourage the development of that new technology. Whatever Government are in power in the future, I believe they will have to do far more than we are doing now to solve these problems. There is another issue related to the investment in and development of technology companies. It is not just a question of money; we need far more effective managers of investment funds. One reason that many financiers have not made the investments that we expected of them is that some very nasty colds have been caught on the end of small venture-capital funds. That has had much to do with the poor management of those funds, although the situation is improving dramatically. The fund that we now have in the north-west has been extremely well managed, with a lot of professional people who were not there previously having been brought into it. It is important to understand the details of the business that you are investing in and to control the level of investment that you make; in other words, you do not put all the money in at once but measure it against success in the business. You need a range of quality people and managers within the venture capital company who can deal with the company’s problems as they arise. You do not just need people who go in, assess the situation and make the investment; you need people who understand the marketing and sales aspects and the financial dealings with the banks and can give technical advice that brings growth. You also need far more mentoring, which is the key to the success of this sector. That means that you need people from outside on whom you can draw. Many successful directors are not prepared to get involved in what they see as the risky end of the business—again, this has a lot to do with government regulation and our attitude to failure—because they are frightened of being involved in something that might not work. That is a very poor attitude to life. As noble Lords know, I come from a farming background and I always say that if one has never had a dead cow, one has never had a cow at all. That is true of all things in life. If one has never experienced the downside one has not done very much. People with any ability have to be prepared to take risks and understand the opportunities that they can bring. Another interesting point came from an inquiry carried out on behalf of Liverpool University and the management school at the university: the attitude towards entrepreneurs—those who want to drive their businesses—and investors. Investors seldom understand the technology—what an entrepreneur is looking for—and sometimes an entrepreneur can be very inarticulate at expressing his views, his long-term development plans and his hopes to investors. So the relationship does not click as it should for a successful business, with money on the one side and ideas and technology on the other side. The Government could do more to help entrepreneurs when they come to consider selling equity in their businesses. Someone who wants to drive a large business will not be able to keep all the equity; it is far better to have a little share of a big business than to have a big share of a little business. How those two issues work together needs to be expressed more, so that entrepreneurs and investors understand the relationship and how it works. In conclusion, I want to put across my personal conviction that it is absolutely necessary to increase our investment in new technology and in the development side of industry; we should do everything that we can as a nation to support and encourage that. The future wealth and prosperity of all our people will come from what are now very little ideas in people's minds, but over the next 40 or 50 years they will become the economic drivers that will enable his country to continue to be great.