Cuts will increase the importance of business angels

Big cuts are on the horizon for regional business development

Chancellor George Osborne’s announcement that the Business Department will bear the brunt of £6 billion cuts, could well signal difficult times to come for those businesses seeking regional development aid…

But help could be at hand if business angel numbers expand. As Labour’s ‘big government’ philosophy is unravelled by new kids on the block George Osborne and David Laws, this could affect new business enterprises who rely on development agencies and associated bodies to get them on the first rung of the ladder.

The aim of RDAs is to help create businesses through the fostering of entrepreneurship and growth in their respective regions. However,  according to a report by the Tapayers’ Alliance  success has been limited and, if figures between 1992 and 1996 are anything to go by,  over the course of 14 years the rate of business creation has fallen overall.

This is hardly surprising. Most businesses in the start-up phase will require support which includes money and advice. The former is often in short supply and only given out according to strict criteria and whether the sector is fashionable. Money is one thing, there will be other sources of funding available to the entrepreneur, but with businesses in for example emerging creative industries, access to expert advice  and money may well be in short supply in some areas.

It is understandable then that with this kind of limited success and with £6 billion of spending cuts to find, that the business development department is high on the list of the government’s targets for cuts ─ £836 million worth to be exact.

With cutbacks to a public sector service that was already struggling to deliver, The input of people like business angels will become vital in the years to come as those who are starting up businesses exhaust the goodwill of friends and family and search for support elsewhere. With cutbacks in development funding, and business lending from the UK’s banks still in short supply, business angels will be increasingly called upon to play the role of advisors as well as investors, which many do already.

The growth in the number of organised regional business angel networks in the UK in recent years goes some way towards plugging the gap in advice and funding while help from elsewhere is in short supply. However, with many appealing for more members there is clearly a shortfall in the number of business angels.

Without the valuable support angel investors can provide in terms of expertise those starting up businesses or those looking to take them to the next level may find themselves starved of advice and cash in some cases and forced to explore innovative ways to grow their business. Alternatively they could well be left to feel their way in the dark or, worse still, a promising idea may not be developed into a profitable business.

Enterprise and business is among the key drivers of growth in the UK economy. While government departments have lacked the required agility to support new ideas in rapidly developing sectors in recent years, such drastic cuts in funding could still see those businesses who would have benefited from some kind of government support left high and dry. It is clear that the new UK government’s strategy is to strike some kind of balance which won’t upset all of the people, but a possible imbalance in support for new business will need to be addressed.

Most entrepreneurs will have the instinct to succeed in what they do regardless of changes in government policy, but it would be unrealistic to expect business angels to suddenly ride to the rescue if the axe falls on government help. Firstly, there is an even greater burden of risk to carry, particularly in the current economic climate and there will be less chance of an early profitable exit than in recent years. A big consideration when most angel investors will be looking for a profit inside 3 years.

The number of business angels in the UK is tiny in comparison to the USA where we have just heard that new business creation hit a 14-year peak in 2009 according to The Kauffman Index of Entrepreneurial Activity. This was despite the worst recession in living memory and goes a long way towards revealing US appetite for enterprise.

We may well see a growth in the number of business angels in the UK who are passionate about supporting business creation. We might also see opposition to the decision to put the business development department on the chopping block, but as statistics in the US have proved, even in the worst of times there are more than enough people ready to take a risk.

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