Dragons are angels for small businesses

EQUITY investment in small businesses may not sound glamorous, but it is the basis for one of the most popular programmes on television today.

The dragons in the title of BBC’s Dragons’ Den are actually more widely known as business angels.

These are business people willing to invest their money and expertise in a small company in exchange for an equity stake.

And with banks more reluctant to lend money, it is becoming an increasingly popular way of doing business.

It is something that even the public sector has seized upon, with Finance for Business North-East established by regional development agency One North East, hoping to match local businesses with investors.

One of the BBC dragons Duncan Bannatyne, who runs his business empire from Darlington, invested £100,000 in Tony Earnshaw’s company UK Commercial Cleaning Services when the young entrepreneur appeared on the programme.

Mr Earnshaw was 19 when he established the company in Washington, Wearside, six years ago with £300, growing it to a £1.5m-turnover business, that is being franchised across the UK.

He said he felt an investor would take more of a personal interest in his company than a bank, which was simply wanting to ensure a loan was repaid.

He said: “If someone has invested their own money, they are going to make sure the company does not fail and have a personal approach to the business.”

He also believed that, for someone to be able to invest in a business, it showed they had previously done well themselves to be able to afford to do so.

Mr Earnshaw said: “With an investor you get two birds with one stone – someone with an ability for business who has done well and, secondly, a bit of money that will allow you to grow the business at a faster pace.”

Mr Earnshaw also said he felt having an outside investor helped small companies to become more disciplined in the way they worked.

He said: “I have become more disciplined personally – it is not just my money in the business and you have agreed targets to hit. I have someone else making sure I follow the agreed business plan.”

Hugh Morgan Williams, chairman of North-East Access to Finance, agreed that the benefits of having equity investors were not only financial.

He said: “They bring two things. They don’t just bring money, but the expertise they have accumulated in running businesses.”

He continued: “I think investment does give discipline. I only have to look back into my own business in the early Nineties.

“We carried out monthly management meetings and compiled monthly reports, whereas before we did it quarterly.

“It does give a discipline to the business and helps to spot problems arising before they become real problems and will lead to greater success.”

North-East Access to Finance is the legacy fund supervising the returns on investments by the £125m Finance for Business North-East super fund – formerly called Jeremie – which was launched earlier this year, and which reinvests them in other businesses.

The £125m fund, a mixture of private and public money and the first of its type in England, will provide not only loans but also equity investments to 850 smaller firms in the region over a five-year period.

It will target business startups, technology-based companies and growing smaller businesses.

The private investment of £62.5m comes from the European Investment Bank, alongside public funds from the European Union of £42.25m, and £18.25m from regional development agency One North East.

One of its aims is to bring business angels on board through its Angel Match Fund, worth £7.5m.

The fund manager may itself try to put a company coming to the fund in touch with a business angel, the company may ask the fund to find one, or business angels can approach the fund themselves, looking for suitable companies to invest in.

Whatever the approach, Mr Morgan Williams pointed out that the funds were not just handing out money.

He said: “They are not grants, we are giving out investment and want a return.”

But he said he believed that providing smaller North-East companies with finance was vital to the region’s growth at a time when banks were more reluctant to lend money.

He said: “They are incredibly important to the North-East economy. They comprise about 95 per cent of private sector businesses in the North-East.”

“Bank finance is much more difficult to obtain and the cost of bank finance will be huge, as well as the security the companies have to put up to get the money.

“It is true to say companies in the past have tended to rely on bank borrowing when they would have been better having equity solutions, so the new funds are designed to help.

“We have £125m to invest over five years and at the same time you have a reduction in bank support, so the pressure on these funds will be quite significant.

“When banks make a loan it is not a gift. I don’t think people will return to the banks in the way they used to – some businesses have gone bust as a result of the banks wanting their money back.”

Mr Morgan Williams said he believed that if the North-East fund was successful, it would become an international template for other such schemes around the world.

He said: “It is the first region in Europe to do this kind of thing, so I think we will attract a lot of attention to see how it goes and will be seen as a kind of role model going forward.

Other areas of the world will be copying what we do.”

Dragons’ Den has provided examples of where someone will give a bigger equity stake in their business in exchange for a particular Dragon’s expertise in that field, showing it is not just about the money.

But Mr Morgan Williams said he believed there was one area of equity raising where the North-East could definitely improve.

He said: “In the North-East, we don’t have enough business angels. If you go to Scotland, there is more of a business angels culture – that is something we need to encourage here.”