Funding Environment in UK

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FUNDING ENVIRONMENT IN UK

HTSFs form 6% of UK’s business population. But, due to asymmetry of information, they face greater obstacle than conventional SMEs in obtaining finance, and so deserve greater government support in overcoming them. The recent financial crisis has affected the availability of finance to HTSFs in UK adversely, which in turn has held back economic recovery.

A lot of research has been done, which demonstrates that there has been a funding gap in HTSFs in last 30 years. According to Bank of England’s report on Financing of Technology Based Small Businesses, investors are more willing to lend to established HTSFs as compared to young HTSFs. This is due to opacity of information, as the borrowers have more information about the potential and nature of their business than the lender. Also there is limited information at early stage and the assets are often intangible and knowledge based. Moreover, the entrepreneurs are not willing to disclose full information about investment opportunities in technology-based firms as others might copy it.

Venture Capitalist Finance
Venture capitalists play an important role in screening, contracting with and monitoring small businesses, which leads to reduced information opacity as the venture capitalists collect information about the business, its potential markets, collateral and management team of small business. It is due to this reason, that if an entrepreneur is rejected by a venture capitalist, his ability to seek alternative sources of finance is affected.
Venture Capitalists generally prefer to invest in larger businesses, due to transparency of information, and constant transaction costs, regardless of the size of the firms. So, this leads to an equity gap in the...

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...ic backed VC funds are restricted by EU state aid legislations and private VCs prefer investing in less risky proposals and stages. There has been insufficient private and public VC investment in UK during the last decade.

There has been emergence of two opposing views-
• There has been crowding out of private investment at early stages of funding instead of crowding in due to government intervention.
• There is requirement of government intervention to avoid market failure, but unsuccessful current public intervention, which can only be remedied with higher volume of early stage Venture Capital.

Works Cited

Farid Ullah, The Robert Gordon University David North, Middlesex University Robert Baldock, Middlesex University. (2011). The Impact of the Financial Crisis on the Financing and Growth of Technology- Based Small Firms in the United Kingdom ISBE RAKE FUND

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